How Do ISDA Master Agreements Mitigate Counterparty Risk in OTC Derivatives, Even with Non-Custodial Trading?

ISDA Master Agreements (International Swaps and Derivatives Association) provide a standardized legal framework for OTC derivatives transactions. They establish common terms, define events of default, and outline procedures for netting and close-out.

Even in non-custodial trading, the agreement governs the relationship between the two counterparties, providing legal certainty and mechanisms for risk mitigation like collateral posting requirements and the ability to net obligations upon default.