ISDA Agreement Negotiation Using Artificial Intelligence

The International Swaps and Derivatives Association (ISDA) agreement is a longstanding contract between two parties that governs future swaps and derivatives transactions. These detailed agreements should be sound and equitable—as the contract, not the stock exchange, governs Over-The-Counter (OTC) transactions

Last updated in 2002, the 28-page, 14-section ISDA Master Agreement template outlines the contractual relationship terms. Since unique variables apply to each transaction, a fully-executed agreement involves significant intervention as well as considerable sections of unstructured content that could expose parties to contentious disputes and liability.

Advances in machine learning and natural language processing have enabled legal teams handling ISDA agreements to streamline their review and negotiation processes with the help of AI. By utilizing an AI-powered contract negotiation platform, legal departments can now leverage cutting-edge technology to negotiate these complex agreements.

NOTE: While the core master agreement is standardized and is not typically heavily negotiated (if it is negotiated at all), a variety of schedules and annexes that attach to the master agreement are negotiated by the parties for a given transaction. For simplicity sake, references in this article to an ISDA agreement include these annexes and schedules.

ISDA Agreement Negotiation Takes Time

ISDA agreements have traditionally required human reviewers to assess contracts, note key points where contract language diverges, and attend to any errors before a trade is executed. Since ISDA agreements are dense agreements, legal teams can routinely spend several hours reviewing them. For a large bank that processes hundreds of thousands of these agreements each year, standardizing the review process can result in greater efficiencies and significant cost savings.   

Points of Negotiation in the ISDA Agreement

While the idea of “standard terms” in an ISDA agreement may sometimes seem like a misnomer, agreements often share essential aspects. Key components include the following:  

• Specified Entities - Does the agreement include all affiliates, specific affiliates, or none?
• Termination Events - What level of decline in Net Asset Value (NAV) triggers termination? Is termination defined by aggregate NAV or per share NAV?
• Grace Periods - If a default occurs, what kind of grace period is available? 
• Cross Default - Can defaults under other agreements also trigger ISDA default? 
• Threshold Amount - What is the trigger amount that allows the non-defaulting party to terminate all transactions? Is it measured as a fixed sum or a percentage of shareholder equity?
• Collateral - Is counterparty risk reduced through collateral? What types of collateral are acceptable? Can collateral be reused? 

These essential aspects of ISDA agreements often become negotiation sticking points that can require months of back-and-forth revisions to resolve. By attending to these aspects of ISDA agreements early, legal teams can reduce obstacles and accelerate the negotiation process. Alternatively, when parties attempt to cut corners during their review to save time and secure better terms, they often make mistakes that can create unwanted risk or, if caught before execution, drag out the negotiation process over weeks or even months. 

Common Mistakes in Drafting ISDA Agreements

Listed below are some common ISDA agreement pitfalls: 

• Trading before the ISDA agreement has been finalized: Once the trade has been initiated, parties have little leverage to negotiate terms. 
• Failure to deliver documents: From incumbency certificates and tax forms to annual statements and legal opinions, the failure to move paperwork in a timely fashion can delay internal auditing, restrict trades with new counterparties, and threaten crucial protections.
• Lean staffing: It can be difficult (and costly) to secure highly-skilled senior reviewers. As a result, many OTC derivative dealers operate with “lean and mean” staffing. Time constraints and competing projects can cause reviewers to focus on the “squeaky wheel” at the expense of other agreements and strategic business tasks. 

While these problems are endemic to traditional review practices, recent innovations in legal tech have emerged that can help automate and accelerate the review and negotiation process.

ISDA Agreements that Leverage AI Represent the Future

Implementing AI technology is surprisingly simple. Your legal department likely houses a large repository of ISDA agreements, as well as an ISDA Master. Once these agreements have been used to train an AI-powered contract negotiation platform, initiating the review and negotiation process for a new ISDA agreement is as easy as uploading or emailing the agreement for AI review.

After examining the data for anomalies, errors, and omissions, the AI recognizes potential negotiation obstacles; problem areas are redlined or flagged for human review. Additionally, leading-edge AI harnesses the power of machine learning and natural language processing to provide intelligent suggestions, rewrite clauses, and offer contextually-adapted inline insertions. 

Here’s what you can expect from AI-powered ISDA agreement negotiation:

• Agreement Scanning - Extract contractual terms, clauses, and provisions using natural language processing and machine learning techniques to identify clauses that require revisions.  
• Agreement Rewriting - In addition to flagging errors and omissions, the AI can revise agreement errors and provide missing information. By “remembering” particularly effective agreements, as well as specific language that has been approved with the least amount of negotiations, the AI can optimize your agreements for approval.  
• Approval - While legal teams may initially elect to consider each AI suggestion, they may ultimately prefer to bypass human review for routine agreements. 

The utilization of AI technologies in contract negotiation simplifies contract lifecycle management and represents a paradigm shift in legal tech. Contracts—like ISDA agreements—that once required weeks or months to negotiate can now be completed in days.