With the G7 conference in the news, it seems timely to address the looming spectre of Brexit for derivatives traders and finance professionals. Millions of derivatives contracts impacting trillions of dollars are poised to be impacted by potential legal conflicts arising out of the UK’s split from the EU. It is in this context that, on February 28, the International Swaps and Derivatives Association (ISDA) published the 2018 ISDA Choice of Court and Governing Law Guide.
The guide and its reception
This new guide—along with the standardized clauses it provides—is ISDA’s response to the growth and globalization of the derivatives market beyond the previous primary trading hubs of New York and London. It is also a response to legal concerns associated with Brexit, particularly for those wanting to continue trading their derivatives via London. With this guidance, ISDA is trying to help the market and legal teams reduce costs or risks for all participants who choose to adopt these standardized clauses.
Nevertheless, the guide’s release seems to have gone largely unnoticed by the industry. This can easily be forgiven for several reasons: the sheer number of immediate regulatory demands; the weight or complexity of trying to meet MIFID II reporting or Uncleared Margin Reform challenges; the lack of clarity regarding what the final Brexit will mean for the derivatives industry; larger concerns regarding CCP’s and growing systemic risks; or even just because Brexit would only happen post February 2019. Whatever the reason, though, it’s important to be aware of ISDA’s guidance with Brexit on the horizon.
The importance of jurisdiction choices
The standard clauses provided by ISDA allow trading counterparties to make the court jurisdiction exclusive to either the English courts or the courts of the State of New York and the United States District Court located in the Borough of Manhattan in New York City, depending on the Governing Law selected for that Master agreement. Alternatively, counterparties can choose unilaterally to make the Master Agreement non-exclusive, which will allow both parties flexibility to sue in other courts as long as they take jurisdiction under their applicable rules. This choice can be made at the time of executing the ISDA Master Agreement or, if the existing agreement is amended, upon the date of the Amendment.
The main benefit for counterparties choosing exclusive language is that they can limit their risk by forcing legal procedures through courts where there is solid precedence, predictable application of the law, and common awareness of the applicable rules. Effectively they are limiting government or jurisdictional risk that can exist or can be created (State institutions vs. Global Banking institutions) from inconsistent judgments in different national courts. It is also likely to reduce the potential costs of multiple parallel proceedings.
A non-exclusive clause is more likely to preserve a party’s ability (flexibility) to sue their counterparty in several jurisdictions if necessary. This allows them to bring proceedings against their counterparty where they hold assets, which otherwise would not have been accessible if English or New York court judgments are not enforceable due to local law provisions.
This is important in the context of Brexit. While the UK remains in the EU, English law judgments are enforceable in all other EU Member States (as well as Mexico and Singapore) via The Hague Convention. When the UK leaves the EU, market participants wanting to reduce risks and uncertainty can add the exclusive clause, whereas those that want the ability to ensure EU regime rule adherence can opt for non-exclusive and include the additional jurisdictions, while still trading under English Law in London. That provides significant market solutions to legal and risk issues that might arise during any transition. Further, if the UK chooses to independently ratify The Hague Convention post-Brexit, it may aid in the enforcement of English judgments in the EU.
ISDA are also expanding the scope of the previous 1992/2002 ISDA MA jurisdiction clauses beyond just interpretation and operation of contracts to include matters such as non-contractual rights and obligations arising from, out of, or relating to, the ISDA Master Agreements.
OpenText Perceptiv identifies hundreds of critical data points across volumes of contracts, including jurisdiction
How OpenText can help
Does your organization understand all the legally enforceable relationships you have with your trading counterparties? With the uncertainty of Brexit looming, the first step is to understand your data and risk exposure, particularly with regard to choice of jurisdiction.
OpenText™ Perceptiv can efficiently extract hundreds of critical data points across tens of thousands of historical relationship agreements and deliver them with powerful analytics to help your organization make decisions quickly, for compliance, collateral optimization, and pricing. This is a kind of guidance that derivatives traders sorely need, regardless of the final outcome of Brexit. Learn more about how Perceptiv can help you understand your risk and exposure for Brexit.