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Memorandum of Law for the International Swaps and Derivatives Association, Inc

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Memorandum of Law for the International Swaps and Derivatives Association, Inc MEMORANDUM OF LAW FOR THE INTERNATIONAL SWAPS AND DERIVATIVES ASSOCIATION, INC. Collateral Provider Insolvency: Validity and Enforceability under English Law of Collateral Arrangements under the ISDA Credit Support Documents 13 November 2018 Allen & Overy LLP One Bishops Square London E1 6AD United Kingdom Tel +44 (0)20 3088 0000 Fax +44 (0)20 3088 0088 Allen & Overy LLP is a limited liability partnership registered in England and Wales with registered number OC306763. It is authorised and regulated by the Solicitors Regulation Authority of England and Wales. The term partner is used to refer to a member of Allen & Overy LLP or an employee or consultant with equivalent standing and qualifications. A list of the members of Allen & Overy LLP and of the non-members who are designated as partners is open to inspection at its registered office, One Bishops Square, London E1 6AD. Allen & Overy LLP or an affiliated undertaking has an office in each of: Abu Dhabi, Amsterdam, Antwerp, Bangkok, Barcelona, Beijing, Belfast, Bratislava, Brussels, Bucharest (associated office), Budapest, Casablanca, Doha, Dubai, Düsseldorf, Frankfurt, Hamburg, Hanoi, Ho Chi Minh City, Hong Kong, Istanbul, Jakarta (associated office), Johannesburg, London, Luxembourg, Madrid, Milan, Moscow, Munich, New York, Paris, Perth, Prague, Riyadh (cooperation office), Rome, São Paulo, Seoul, Shanghai, Singapore, Sydney, Tokyo, Warsaw, Washington, D.C. and Yangon. ICM:28162951.19 [This page left intentionally blank.] TABLE OF CONTENTS I. INTRODUCTION ..................................................................................................................... 3 II. FINANCIAL COLLATERAL ARRANGEMENTS ............................................................... 20 III. SECURITY INTEREST – NON-IM SECURITY DOCUMENTS ......................................... 48 IV. SECURITY INTEREST – IM SECURITY DOCUMENTS ................................................... 93 V. SECURITY INTEREST – CLEARING SYSTEM IM DOCUMENTS ................................ 107 VI. TITLE TRANSFER ............................................................................................................... 112 VII. ENFORCEABILITY IN THE ABSENCE OF INSOLVENCY PROCEEDINGS ............... 122 VIII. CLOSE-OUT AMOUNT PROTOCOL ................................................................................. 126 IX. COLLATERAL AGREEMENT NEGATIVE INTEREST PROTOCOL ............................. 126 X. INDEPENDENT AMOUNT (IA) PROVISIONS ................................................................. 127 XI. PENDING DEVELOPMENTS ............................................................................................. 127 XII. RELIANCE ............................................................................................................................ 134 EXHIBIT 1 - DEFINITIONS USED IN THIS MEMORANDUM .................................................... 135 APPENDIX A - CERTAIN TRANSACTIONS UNDER THE ISDA MASTER AGREEMENT .... 139 APPENDIX B - CERTAIN COUNTERPARTY TYPES .................................................................. 145 APPENDIX C - EXCLUDED ENGLISH COMPANIES .................................................................. 150 APPENDIX D - RECOURSE TO THE ASSETS OF A TRUST ....................................................... 151 ANNEX 1 - BANKS ........................................................................................................................... 154 ANNEX 2 - ENGLISH INVESTMENT FIRM .................................................................................. 184 ANNEX 3 - ENGLISH BUILDING SOCIETY ................................................................................. 189 ANNEX 4 - BANKING GROUP COMPANIES AND BANK HOLDING COMPANIES .............. 199 ANNEX 5 - TRUSTEE OF AN ENGLISH TRUST .......................................................................... 205 ANNEX 6 - FRIENDLY SOCIETY ................................................................................................... 217 ANNEX 7 - C/CB SOCIETY ............................................................................................................. 220 ANNEX 8 - STATUTORY CORPORATION ................................................................................... 223 ANNEX 9 - CHARTERED CORPORATION ................................................................................... 226 ANNEX 10 - ENGLISH INSURANCE COMPANY ........................................................................ 230 ANNEX 11 - STANDARD CHARTERED BANK ........................................................................... 250 ANNEX 12 - ENGLISH CHARITY – TRUSTEE OF AN ENGLISH CHARITABLE TRUST ...... 254 ANNEX 13 - ENGLISH CHARITY – OTHER FORMS OF ENGLISH CHARITY ........................ 256 ANNEX 14 - TRUSTEE OF AN ENGLISH PENSION FUND ........................................................ 258 ANNEX 15 - ENGLISH INVESTMENT FUND – OPEN-ENDED INVESTMENT COMPANY .. 270 ANNEX 16 - ENGLISH INVESTMENT FUND – TRUSTEE OF AN AUTHORISED UNIT TRUST ......................................................................................................................... 275 ANNEX 17 - ENGLISH PARTNERSHIP ......................................................................................... 279 ANNEX 18 - BANK OF ENGLAND ................................................................................................. 286 ANNEX 19 - THE UNITED KINGDOM ACTING THROUGH HER MAJESTY'S TREASURY . 288 2 I. INTRODUCTION 1. Overview and scope of issues covered by this memorandum In this memorandum we consider the validity and enforceability under English law1 of a collateral or margin arrangement2 entered into in connection with an agreement between two parties based on the ISDA Master Agreement (as defined in Exhibit 1). In Exhibit 1 to this memorandum we set out various definitions that are used in this memorandum. A capitalised term used and not defined in Exhibit 1 or elsewhere in this memorandum has the meaning given to that term in the ISDA Master Agreement or the relevant Credit Support Document, according to context. In this memorandum we assume that each collateral arrangement entered into in connection with an ISDA Master Agreement is documented under one3 of the following standard form documents: (a) the 1994 NY Annex4; (b) the VM NY Annex; (c) the IM NY Annex; (d) the 1995 Deed; (e) the IM Deed; (f) the 1995 Transfer Annex; and (g) the VM Transfer Annex. In addition, you have asked us to advise in relation to initial margin arrangements in connection with an ISDA Master Agreement documented pursuant to the Clearing System IM Documents. We refer to the update request email that you sent to us on 16 July 2018 attaching the instruction letter headed "Collateral Provider Insolvency" (July 2018 version). The issues that you have asked us to address are set out below in italics, followed in each case by our analysis 1 England and Wales form a single legal jurisdiction. In this memorandum, a reference to "English law" is a reference to the law of England and Wales (other than legislation passed by the Welsh Assembly) and, unless context indicates otherwise, a reference to "England" is a reference to the legal jurisdiction of England and Wales. 2 "Collateral arrangement" and "margin arrangement" are commercial terms, used interchangeably in the market. In this memorandum, we use the term "collateral arrangement", which appears to be the more commonly used term. We also use the term "financial collateral arrangement", but note that this term has a specific meaning under UK legislation, as explained in Part II below. 3 There are various situations in which more than one Credit Support Document might be used in connection with an ISDA Master Agreement between two parties. One example would be where the parties have entered into an IM NY Annex in relation to initial margin and a VM NY Annex in relation to variation margin in connection with an ISDA Master Agreement. As a general rule, the fact that more than one Credit Support Document has been entered into in connection with an ISDA Master Agreement does not affect our conclusions as to each Credit Support Document provided, of course, that the ISDA Master Agreement, each Credit Support Document and the Confirmation for each relevant Transaction are, collectively, drafted sufficiently clearly so that there is no ambiguity as to which party is acting in which role (Collateral Provider or Collateral Taker) in relation to each item of Collateral and in relation to each Transaction. We assume for the purposes of this memorandum that that is the case. 4 The 1994 NY Annex is drafted on the premise that Eligible Credit Support is denominated in United States Dollar (USD) and the Termination Currency of the relevant ISDA Master Agreement is USD. If the parties expand the scope of Eligible Credit Support beyond Cash and USD denominated securities, we assume appropriate amendments are made to the 1994 NY Annex to allow the Collateral to be valued. 3 and conclusions. In particular, we consider certain issues in our responses to questions 16 to 18 (in Parts III, IV and V in respect of the Security Documents) and to questions 26 and 27 (in Part VI in respect of the Transfer Annexes) in the event of insolvency proceedings in England in relation to an English Company. This memorandum (other than Part XI in which we describe certain pending developments which we are aware may occur in the future) is limited to matters of English law as in effect
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