The new Cross Product Master Agreement ("CPMA") was officially released at a recent symposium hosted by the Federal Reserve Bank of New York, together with a corresponding Schedule and Guidance Notes. As stated in the Guidance Notes, the CPMA was developed through the efforts of a group of financial market trade associations as a tool for managing counterparty risk across different financial product types and widely used industry master agreements toward the goal of reducing financial system risk.
The CPMA recognizes that market participants have developed and currently utilize a number of standardized or customized master agreements to document financial transactions entered into in particular markets or with respect to particular products. The CPMA effectively functions as a "master-master" agreement, allowing the parties to designate any number of master agreements, either currently existing or subsequently entered into, between such parties (as well as financial transactions not subject to master agreements if so desired) to be "covered" by the CPMA. The CPMA in its present form, however, can only be applied to transactions between the same counterparties and cannot be applied to cover transactions between their affiliates.
The CPMA supplements, and in certain respects amends, the terms of the covered agreements but, except as expressly provided, does not otherwise affect the contractual rights of the parties thereto. The CPMA includes a Schedule, which allows the parties to select and specify the manner in which a number of the CPMA's provisions will be applied to their transactions and, thus, enables parties to better tailor the CPMA to address their particular needs.
Among the more significant provisions of the CPMA are:
- Cross-Default Clause. The CPMA has the effect of subjecting each of the covered agreements to a cross-default provision. Thus, if a party has the right to terminate all transactions under one covered agreement upon the occurrence of an event of default as specified in that covered agreement, it may elect in writing to close out all transactions under all other agreements designated in the Schedule as being subject to the CPMA. In this respect, the CPMA is intended to address risks that may result from discrepancies in events of default and notice provisions as among individual master agreements.
- Netting Provisions. Generally, the close out of a single master agreement will permit the termination of all transactions under such agreement, the valuation of the parties' respective positions under a base currency, the liquidation and application of any margin or collateral supporting such positions, and the set-off of each such amount against the other, resulting in a single net "Settlement Amount" owed by one party to the other. If a party is entitled and elects to close out all masters covered by the CPMA, the calculation and determination of the Settlement Amount owed under each master agreement would still proceed in accordance with the terms of such agreement, but instead of actually paying the respective Settlement Amount owing under each of the covered agreements as and when determined, payment of those amounts would be deferred and set off in a continuing process until all covered agreements have been closed out and a single "Final Net Settlement Amount" due from one party to the other has been determined.
Cadwalader attorneys commented on the CPMA in its developmental phase, and are available to discuss the CPMA in greater detail. Please contact a member of the Firm for further information. *