Isda unveils master 'give-up' agreement for prime brokers and dealers

The New York-based International Swaps and Derivatives Association has created a master agreement for a hedge fund to ‘give-up’ its positions with a dealer and assign them to a prime broker.

Released yesterday, the agreement attempts to standardise the process and terms under which the transfer occurs.

The agreement can be tailored to cover interest rate swaps, caps, floors, swaptions, cross currency swaps, credit derivatives transactions, foreign exchange transactions, and currency options transactions.

However, one key point that is not standardised is the trading limit, or the maximum amount of exposure the broker is willing to take on. In order to determine whether a trade is acceptable, the prime broker can check whether the hedge fund has reached its limit. If it has, then most likely the prime broker will not enter into an Isda ‘give-up’ agreement. “We intentionally decided not to standardise a formula for the trading limits. It is very counterparty specific,” says Kimberly Summe, general counsel for Isda .

The argument is that certain prime brokers calculate trading limits based on product specifications, while others determine the limits based on historical relationships. For example, Deutsche Bank or Goldman Sachs as a prime broker may set a limit of $100 million for a certain hedge fund because they have worked with them for many years, but for a new relationship it may want to set a lower limit. Because of these idiosyncrasies, the prime broker must describe the formula on how it calculates each hedge fund's trading limit in a separate section of the agreement.

Under the agreement, the prime broker is also under no obligation to tell the dealer whether it accepts the transfer when a problem transaction occurs and if it fails to accept a deal.