Robert A. Robertson and Gerardo Perez‐Giusti
The purpose of this paper is to provide an introduction to benefits of using over‐the‐counter (OTC) derivatives when implementing an investment strategy. The paper aims to examine…
Abstract
Purpose
The purpose of this paper is to provide an introduction to benefits of using over‐the‐counter (OTC) derivatives when implementing an investment strategy. The paper aims to examine the basic legal structure of OTC derivative transactions and the International Swaps and Derivatives Association (ISDA) agreements used to document such transactions. The paper also aims to offer advice to institutional investors on steps they can take during the negotiation of ISDA agreements to reduce associated counterparty, termination and liquidity risk.
Design/methodology/approach
The paper outlines the typical structure of OTC derivative trades; summarizes the documents used to establish a trading relationship, and outlines key considerations for institutional investors during the negotiation of ISDA agreements.
Findings
An institutional investor should carefully review and negotiate ISDA documents to properly implement OTC derivative trades that conform to the investor's overall business operations and investment strategy.
Practical implications
While achieving the benefits of OTC derivative trades, an institutional investor also can negotiate agreements to reduce risks associated with these transactions.
Originality/value
The paper provides practical guidance from experienced securities and derivatives lawyers.