Derivatives—capacity and authority
Derivatives—capacity and authority

The following Banking & Finance guidance note provides comprehensive and up to date legal information covering:

  • Derivatives—capacity and authority
  • Derivatives—capacity
  • Restitution
  • Different entities
  • United Kingdom companies
  • Overseas companies
  • Partnerships
  • Corporations created by statute or royal charter
  • Local authorities
  • Universities
  • more

It is not only banks and financial institutions that enter into derivative transactions. The types of entities seeking to enter into derivative transactions can vary widely from, for example, a company to a university. This raises the issue of the party's capacity to enter into derivative transactions. The legal issues relating to capacity in the context of derivatives are complex and require careful consideration. Parties will be concerned to ensure that the entity with which they are dealing (their counterparty) has capacity to enter into the derivative transaction because the consequences of lack of capacity may be that the contract is declared void from the outset as a result of it being ultra vires.

This Practice Note explains:

  1. the key issues to note when considering an entity's capacity to enter into a derivatives transaction from a general perspective

  2. the key points to consider when looking at a signatory's authority to sign derivatives documentation, and

  3. issues surrounding the most common types of counterparties where capacity and authority might be an issue

Derivatives—capacity

Issues over a party's capacity to enter into a derivatives transaction typically arise when one party is out-of-the-money. For example, the party who is out-of-the-money might raise the issue of its own lack of capacity as grounds for a claim that it is not bound by the transaction and