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DERIVATIVES

Documentation Summary for Derivatives Transactions

Description:

Most privately negotiated, over the counter derivative (“OTC”) transactions are documented using a form of contract, known as a “Master Agreement” ( the “MA”). While several forms of MA have been developed, the most commonly accepted form is the MA published by the International Swaps and Derivatives Association, Inc. (“ISDA”). ISDA is an internationally recognized trade association representing participants in OTC derivatives business. There are two forms of MA published by ISDA that are commonly used:

• The 1992 Multi-Currency Cross Border Master Agreement; and
• The 2002 Master Agreement

Since it is expected that the 2002 MA will become marked standard and most key industry participants are using this form, ATB Financial will be using the 2002 MA. Further, although very similar to the 1992 MA, the 2002 MA is generally viewed as an improvement over the 1992 MA.
Before entering into a derivatives transaction, ATB Financial will provide you with a complete set of derivative documentation for review. This package will generally include the MA (including Schedule), OTC Derivatives Disclosure Statement, Authorized Traders List, Authorizing Resolution, Certificate, Certificate of Incumbency and Settlement Instructions. We will briefly discuss each of these documents below.

1) Master Agreement

a) Master Agreement (MA) proper is pre printed standardized form developed by ISDA, used “as-is” containing standard terms and conditions generally accepted by the industry. Although this is rather lengthy document, the advantage of using a pre-printed standardized form is the time, cost and effort saved in not having to review extensive documentation prepared by another party.

The MA presents the most common credit, legal and operating terms and conditions that could apply to transactions between parties. Although the MA is a specialized form of agreement, it is not entirely unique or as intimating as it may initially seem, it’s structure and components are similar to other financial documentation. For example, each derivative transaction creates a credit relationship between the parties, the terms of which need to be documented just as would the terms of a traditional loan. Therefore, many of the provisions found in the MA are similar to those found in a conventional credit agreement (such as representations and warranties, covenants, events of default, address for notice). However, because market conditions for derivatives can fluctuate, unlike a load, the credit exposure is two way and often unknown at the time of the inception of the derivative transaction. Therefore, the MA contains numerous provisions that are mutual (i.e. apply to both you and ATB Financial).

Generally speaking, the MA and related documentation are designed, among other things, to document all derivative transactions between the parties under a single master agreement. Unless amendments to the MA are necessary, there will likely only be one MA entered into between you and ATB Financial, regardless of the number of transactions we may do together and when they are done.

One of the principal functions of the MA is to neutralize the effect of a default by a party. The MA accomplishes this by providing that all transactions are entered into on the basis that the MA, Schedule and all Confirmations form a single agreement between the parties, notwithstanding that the transactions may be otherwise unrelated and entered into at different times. The MA also provides that on termination, all transactions between the parties are “netted” so that only a single amount is owed by one party to the other in respect of terminated transactions. Further, the MA contains certain conditions precedent to parties making payments so the other party’s rights are not flawed.

b) Schedule is a document, which attaches to the standard pre-printed MA and is used to choose whether and how certain optional provisions in the MA will apply and to make any necessary amendments to the MA. The Schedule is divided into the following parts:

Part 1 - Termination Provisions
Part 2 - Tax Representations
Part 3 - Agreement to Deliver Documents
Part 4 - Miscellaneous
Part 5 - Other Provisions
Part 6 - FX Transactions and Currency Options; and
Part 7 - Commodity Provisions

In Part 3 of the Schedule, any additional documents required by the parties are specified as well as the time for delivery of those documents. These often include such things as a resolution, certificate of incumbency, legal opinion and copies of constating documents ( for e.g. certificate of incorporation) each of which are discussed in more detail below.

c) Confirmation is the document , which contains the “economic” terms of each transaction which may be entered into between you and ATB Financial (such as rate or price, maturity, amount). It is negotiated on a transaction-by-transaction basis. Unlike the MA and Schedule which are executed prior to entering into any transaction with ATB Financial and coves all types of transactions entered into between you and ATB Financial, a Confirmation is generally exchanged at the time each transaction is entered into and will apply to a single transaction only. We have not enclosed a Confirmation but can provide to you a sample upon request.

2) OTC Derivatives Disclosure Statement

In the Schedule, ATB Financial requests a representation from you that you have read and understand the OTC Derivatives Disclosure Statement; however it is not necessary to execute and return this document to ATB Financial. Since OTC derivatives, such as those documented under MA, contain a number of risks, it is becoming market practices to include some form of disclosure statement either at the account opening stage or with the documentation as it outlines some the risk factors relative to the OTC transactions.

3) Legal Opinion

To satisfy ATB Financial, among other things, that you are validly existing and have the power and authority to enter into the MA, ATB Financial may request that an opinion from your legal advisors be provided. The form of opinion is also attached to the Schedule as an Exhibit.

4) Authorized Traders List

For some clients, the people who are authorized to sign documentation (such as the MA, Schedule or Conformations) differ from those authorized to trade the transaction. By providing this document you are indicating to ATB Financial who it can conduct trades with on your behalf.

5) Authorizing Resolution

This document confirms that you have the authority to enter into the MA and derivatives transactions and that you and your Board of Directors recognize the risks associated with derivatives and the use of derivatives. It is not always necessary for you to complete this form as you may already have your own form of resolution that ATB Financial may also accept.

6) Certificate and Certificate of Incumbency

ATB Financial may request either a certified copy of your constating documents of the Certificate. The Certificate of Incumbency is used to provide ATB Financial with evidence that the signatures on the MA and Confirmations are of persons authorized to execute the agreement.

7) Settlement Instructions

When you enter into a transaction with ATB Financial, there will likely be payments due to you or from you. Under the MA, the payments are to be made in account specified in the Confirmation or otherwise pursuant to the MA. If a Confirmation is sent to you by ATB Financial, it will contain an account details section which generally provides that the account for payment is “as per standard settlement instructions separately exchanged”. The Settlement Instructions are used to advise ATB Financial from which account payments will be made. You may change the account for payments at any time in accordance with the terms and conditions of the MA.

This information contained in this document is presented only as a brief overview of what documents are required by ATB Financial to facilitate financial derivatives transaction. It is not intended to provide any legal or financial advice. OTC derivatives, such as those documented under ISDA MA, contain a number of risks. If you are not already familiar with those risks, you should consider them carefully before undertaking any OTC derivative. All information provided should be evaluated by you independently with appropriate advisors to assist you in understanding the risks involved.

Documentation Checklist

To speak to our local traders directly, please contact:
	Rob Laird, Director	Rob Van Horne, Managing Director
	403-974-3582	403-974-3582
	403-815-1911	403-519-3950
	Deborah Polny, Assistant General Counsel	Rimas Siulys, Managing Director Market Risk
	780-408-7320	780-408-1960
	Derivative Settlements
	780-408-6456