Contracts as regulation: the ISDA Master Agreement

This article proposes a rule of contractual interpretation for regulatory contracts defined as contracts 1) used by a large number of market participants, 2) subject to limitations on deviation, and 3) designed with market problems (such as negative externalities) in addition to transactional problems (such as transaction costs) in mind. The rule states that the outcome of the interpretation of regulatory contracts must not be inconsistent with the objectives of the regulatory framework applicable to the market in which the contract is used. The article suggests that the reliance on that rule is normatively justified in cases where the regulatory objectives are clearly defined and particularly when the alternative outcome is to void the contract or its provision. By adopting the regulatory rule for contract interpretation, courts can preserve the autonomy of private regulatory regimes created through contracts without sacrificing public policy objectives. Several examples of the application of the rule to the interpretation of selected provisions of the ISDA Master Agreement and the ISDA Credit Definitions are discussed.