BSFP and the counterparty have agreed to enter into this agreement instead of negotiating a timetable for the 1992 Isda Framework Form (Multicurrency – Cross Border) (the “ISDA Form Framework Contract”). The framework agreement allows the parties to calculate their financial risk from OTC transactions on a net basis, i.e. a party calculates the difference between what it owes to a counterparty under a framework agreement and what the counterparty owes it under the same agreement. This applies only to the 1992 Framework Agreement. The 2002 Framework Agreement abolished the first and second methods. In practice, the first method was very rarely chosen, as its use required the financial institutions concerned to report their gross and non-net risk under the framework agreement. The 2002 framework agreement also replaced the distinction between market listing and loss with a single concept, the “close-out amount”. This is determined in relation to each transaction that has been concluded and is, overall, the profit or loss that would result from the conclusion of an equivalent transaction at the time of early termination. The sum of the amounts in the financial statements and unpaid amounts is called the “early cancellation amount”. This is the net amount to be paid from one party to another in respect of completed transactions. What is remarkable in the calculation of the closing amount is the following: (i) There is no requirement: in “Market Quotation”, in the form of 1992, to use leading traders (reference market-makers) for quotations, and there is no mathematical formula such as the arithmetic mean after ejection of high and low quotations; (ii) both indicative and fixed prices are expressly authorised by the determining party, (iii) as for “Loss” on the 1992 form, losses and costs or profits may be taken into account when hedging transactions cease or reintroduce and (iv) the solvency of the determining party may be taken into account when collecting prices. This concept of an individual contract is an integral part of the structure and part of the compensation-based protection offered by the Framework Agreement. The fact that all transactions are the only contract enhances the ability to enter into those transactions and obtain a single net amount to be paid in the event of default.
The framework contract is quite long and the negotiation process can be laborious, but once a framework contract is signed, the documentation of future transactions between the parties will be reduced to a brief confirmation of the essential terms of the transaction. The Framework Agreement also helps to reduce litigation by providing significant resources that define its terms and declare the intent of the treaty, thus preventing the commencement of disputes and providing a neutral resource for the interpretation of standard contractual terms. Finally, the framework contract significantly helps the parties to manage risks and loans. In 1987, ISDA prepared three documents: (i) a standard framework contract for the United States. Dollar interest rate swaps; (ii) a standard framework contract for interest rate and currency swaps denominated in several currencies (collectively referred to as the `1987 ISDA framework contract`); and (iii) definitions of interest rates and currencies. The “Global Agreement” provision of the 2002 form has been extended by the provision in the 1992 form to include (i) an explicit acknowledgement that no warranties (except those provided for in the framework contract or referred to) and (ii) an explicit waiver of all rights and remedies in this regard (with the exception of fraud). You and we have agreed to enter into this agreement instead of negotiating a schedule for the 1992 Isda Framework Form (Multicurrency – Cross Border) (the “ISDA Form Framework Agreement”), but rather an ISDA Form Framework Contract is deemed to be executed by you and us on the day we entered into the Transaction. . .
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