The contractualization of derivatives

The International Swaps and Derivatives Association (ISDA) is a major player in the world of finance, bringing together the main players in OTC markets. Based in New York, ISDA aims to harmonize international contractual practices for derivative products by creating a standardized framework contract [1]in order to ensure the legal certainty of these transactions. British law is applicable to this agreement, but now seems to be in question since the announcement of Brexit in June 2016.

The application of British law to the ISDA framework contract

The application of British law is not surprising since the “common law”, a particularly flexible legal system based on custom and case law, differs very widely from the “civil law” applied mainly in Europe and in particular in France. The flexibility of the common law has been the driving force behind this system, which allows it to cover all types of financial transactions. The second factor that influenced the choice of English law is economic, so it is necessary to remember that London remains the world’s leading financial centre before New York even after the vote in favour of Brexit[2]. This predominance of the common law is confirmed by the recognition of English court decisions in the Member States under European law. However, the release of the UK in Europe seems to be redistributing the cards.

The questioning of the English law applicable following Brexit

The ISDA master agreement governed by British law provides that the English courts have jurisdiction to settle a dispute relating to the contractual clauses stipulated. Once the UK has left the European Union, it will be considered a third country[3], which implies that a counterparty established in a Member State of the European Union who wishes to have a court decision taken by an English court recognised by its domestic law must be subject to an exequatur procedure. Exequatur is a procedure making a judicial decision or arbitral award made abroad [4] enforceable on French territory. The provisions applicable to the exequatur procedure vary according to the country of origin of the decision invoked. Thus, it can be seen that this new requirement resulting from the UK’s exit from the European Union neutralizes the flexibility of the “common law” appreciated until now by ISDA. The association therefore raises the question of choosing to apply French law to the ISDA framework contract.

Alternatives under study by ISDA

Working groups on this issue have already been created by ISDA to assess the issues and changes to be expected following the approach to the implementation of Brexit[5]. French and Irish law are listed for the amendment of the applicable law of ISDA contracts. Similarly, the creation of a Court representing 27 Member States with jurisdiction over disputes relating to ISDA framework contracts governed by British law. This would facilitate the enforcement of court decisions taken on the basis of a contractual breach of an ISDA framework contract.
[1] ISDA Master Agreement

[2] “Financial centre : London in the lead, Frankfurt jumps,” Guillaume Benoit, les Echos, 11/09/2017

[3] Not a member of the European Union

[4] Terence Richoux, Court Counsel

[5] https://isda.derivativiews.org/2018/01/08/brexit-and-the-isda-master-agreement/