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Katherine Tew Darras, ISDA general counsel and Alban Caillemer du Ferrage, co-chair of Jones Day's global Banking & Finance practice, French counsel to ISDA and member of the P.R.I.M.E. Finance Panel of Experts discuss ISDA’s plans to draft new documentation for derivatives transactions that will conform with French and Irish law and allow disputes to take place in an EU court post-Brexit.
Katherine Tew Darras (KTD): A major impetus is uncertainty over what Brexit will mean for the English law Master Agreement. An overwhelming majority of the ISDA Master Agreements entered into between counterparties based in the EU/EEA are currently governed by English law. Counterparties typically also submit to the jurisdiction of the English courts. Because the UK is part of the EU and EEA, it means any English court judgement is automatically recognised and enforced across those member states. Without some type of deal that replicates the effects of EU/EEA membership, English law would become a third-country law after Brexit. One of the consequences is that English court judgements would not be automatically recognised in EU/EEA countries. That doesn’t mean an English court judgement won’t ultimately be recognised and enforced by an EU court after Brexit, but it does potentially mean more expense, more uncertainty and more red tape. Some firms in the EU/EEA may therefore want to retain the convenience of automatic recognition across the EU/EEA by opting for an EU law Master Agreement. Counterparties may also want to retain specific benefits of EU legislation.
Alban Caillemer du Ferrage (ACF): Indeed, English court judgments will be treated in the same way that any decision of a non-EU court (including US ones). This would also lead to uncertainties as to the conformity of the decision to international policy rules of the relevant jurisdiction where enforcement/exequatur are sought, which will need to be assessed and confirmed by a local court or judge.
KTD: The ISDA working groups opted to consider French and Irish law because they are representative of the two European law systems—civil and common law. Both legal systems also provide for a local law framework that facilitates ISDA protocols, and allows for sufficient protection of wholesale transactions, including collateral arrangements and sound close-out netting legislation.
ACF: French law offers robust and favourable netting and collateral regimes which protect multilateral netting. Such regimes are supported by a stable case law providing for the consistent application and confirmation of the efficiency of those regimes and by liberal and modern decisions on disclosure and duty to inform. French contract law has been recently modernised and is supported by strong characterisation rules developed by case law giving primacy to parties' intention. French consumer law is confined to individuals.
This legal framework should be put into perspective with the modern judicial framework of the international chambers within the Paris Commercial Court and the Paris Court of Appeal, which are designed to hear cases relating to international trade, including, without limitation, cases relating to transactions on financial instruments and master agreements. Such chambers are composed of expert judges and benefit from specific tailor-made procedural rules (which include pleadings and evidence to be provided in English).
KTD: The final form of Brexit hasn’t been agreed, but based on our current understanding, the potential loss of mutual recognition of court judgements is the primary impact.
ACF: Brexit would also entail an important repapering of all contracts subject to English law as the United Kingdom would become a third country to the Union. As an illustration of one of those such repapering issues, in order to conform to BRRD, Union counterparties to an English law governed agreement may need to include a provision with respect to the contractual recognition of bail-in (Article 55 of BRRD) and with respect to the contractual recognition of stays (Articles 68 through 71 of BRRD). In addition, Brexit would also raise issues relating to authorisation and to the provision of investment services in the Union of counterparties based in the United Kingdom. Discussions are under way in order to limit the conflict-of-law rules with respect to netting arrangements set out in Article 25 of the Winding-Up Directive to the Member State law of the contract. Should English law govern the netting agreement, the conditions to oppose netting to the credit institution established in the Union would be governed by the lex fori and not by the law of the contract.
KTD: As the final form of Brexit isn’t agreed, it’s not possible to say. Post-Brexit, there will be reasons to continue to use an English law Master Agreement, and there will be reasons to opt for an EU law agreement. ISDA wants to be able to provide the necessary tools for members and to prepare for all eventualities.
ACF: Our draft of the 2002 ISDA Master Agreement shows a limited number of changes would need to be made to ensure the proper functioning and the validity of the 2002 ISDA Master Agreement under French law. Most importantly, no changes are required to be made to the heart of the close-out netting mechanism of the ISDA Master Agreement. In accordance with the single agreement principle, we believe that French law ISDA Master Agreement would perfectly work alongside with ISDA Definitions and ISDA Confirmation templates. Our draft French law ISDA Master Agreement will come along with all the legal opinions required by the regulators. Our anticipation is that counterparties which are used to the ISDA contractual architecture for twenty years and familiar with its negotiation could maintain their existing set up and procedures. In particular, schedule and usual amendments templates developed by each counterparty should remain as they are without any changes required by the use of a French law ISDA Master Agreement.
Interviewed by Emma Millington.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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Emma is head of the Banking and Finance team and the Finance Group at LexisNexis®UK.
Emma has wide-ranging experience in derivatives and capital markets with a particular emphasis on credit derivatives and structured products. Emma qualified as a solicitor with Allen & Overy LLP, working in the derivatives and structured finance teams in both their London and Paris offices before gaining experience with Deutsche Bank AG (advising the foreign exchange prime brokerage desk) and Crédit Agricole CIB (advising the fixed income and derivatives desk) before joining LexisNexis®.
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