Derivatives transactions are generally conducted orally or electronically and the contract between the parties is concluded on that date. Proof of the terms of the transaction is contained in a confirmation (also known as a business advice or contract note), usually a short letter, fax or email. The form of the confirmation is defined in the framework contract and a limited period of time is generally allowed for any objection or change in confirmation after receipt. Confirmations are generally very short (excluding complex transactions) and contain little more than dates, amounts and prices. Confirmations are exchanged to minimize the possibility of litigation over the terms of a transaction. This uniform approach to the agreement is an integral part of the structure and part of the network-based protection offered by the framework agreement. The fact that all transactions are the sole contract enhances the ability to close these transactions and obtain a one-time net amount payable in the event of default. The most important thing is to remember that the ISDA executive contract is a clearing agreement and that all transactions are interdependent. Therefore, a default in a transaction counts by default among all transactions. Point 1 (c) describes the concept of a single agreement and is of paramount importance as it forms the basis for network closures. When a standard event occurs, all transactions are completed without exception.
The concept of out-of-gap clearing prevents a liquidator from making “cherry pickings,” i.e. making payments on profitable transactions for his bankrupt client and refusing to do so in the case of an unprofitable customer. The mastery agreement is the central document around which the rest of the ISDA documentation structure is cultivated. The pre-printed framework contract is never amended, with the exception of the addition of the names of the parties, but is adapted to the master agreement by the use of the calendar, a document containing options, additions and changes to the framework contract. The parties try to limit this responsibility by including “unconfident” representations in their agreements, so that each party does not rely on the other and makes its own independent decisions.