Smoothing out the rough hedges

The English courts have long grappled with the question of whether a derivative transaction amounts to a hedging transaction – a “hedge” – or a speculative transaction.

The issue has frequently arisen in the context of challenges to the capacity of a party to enter into the derivative transaction – whether the transaction was ultra or intra vires.

More recently, the issue has arisen in the context of mis-selling cases relating to interest rate hedging products and loans with linked or embedded interest rate swaps, for example, in the context of whether the bank counterparty has made a representation to the effect that the relevant financial product amounted to a “true hedge” or a “good hedge”.

However, the English courts’ conception of what a hedge is has developed over time, and the English judiciary has not always agreed on what the features of a hedge are or whether an objective, subjective or hybrid test should be applied when deciding whether or not a transaction is a hedge.

This article by Simon Clarke at Herbert Smith Freehills will examine the courts’ approach to these issues before assessing the legal relevance of the question. Click here to read the article.


Filed Under: JIBFL

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