Washington International Law Journal


The reverberations of Enron’s financial collapse were heard on an international scale. Indeed, Enron Australia’s liquidation set off a flood of concern and speculation about the International Swaps and Derivatives Association’s (“ISDA”) model documentation for derivative transactions. A December 2003 opinion of the Supreme Court of New South Wales exposed a flaw in the ISDA 1992 Master Agreement. Two provisions of the agreement operate in tandem, creating a result which operates contrary to the clear meaning of the terms. This volatile interaction of the provisions effectively shifts the risk from the parties to the swap contract to the creditors of the defaulting party. This unexpected result poses a real concern for the creditors of parties to swap or derivative instruments governed by the 1992 Master Agreement. The ISDA has articulated policy goals to maintain market stability and efficiency. As the drafter of the model agreements, the ISDA has an ethical obligation to ensure that the terms of the agreement operate according to their clear meaning. Otherwise, the parties can best address the Agreement’s deficiencies by taking notice and contracting around them.

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