KEY POINTS Feature To mitigate the Brexit risk, ISDA released two new Master Agreements (one in Irish Law and one in French Law). French Law was chosen as it is perceived to be an efficient legal system within the civil law tradition. French Law is entirely compatible with current OTC market practice. Although a French ISDA could be subject to more gap-filling than an English ISDA, this introduces flexibility particularly given that ISDA contracts are necessarily incomplete. Interpretation under French Law should lead to a similar result as current English judicial practice, albeit achieved via a special branch of the French law of interpretation. Both the English and French jurisdictions lack a set of principles, rules or interpretative techniques specifically designed for standardised terms furnished by third parties. Author Alexis Downe The choice of French Law for the new ISDA Master Agreement: Part 1 Brexit and its consequences has led ISDA to release new contracts as the UK will lose international business contracts, especially the benefits of being inside the European Union. Two new ISDA Master Agreements derivatives. can now be used: one in Irish Law and one in French Law. The aim of this article is to examine why ISDA decided to publish new Master Agreements and why French Law IMPACT OF BREXIT IN THE OTC was selected. DERIVATIVES MARKET Brexit has many consequences for the OTC derivatives market, the financial markets and THE OTC DERIVATIVES MARKET lawyers on the validity and enforceability of the UK as a whole. The derivatives market has grown the documentation. First, when exiting the European THE CHOICE OF FRENCH LAW FOR THE NEW ISDA MASTER AGREEMENT: PART 1 PART MASTER THE NEW AGREEMENT: FOR ISDA LAW OF FRENCH THE CHOICE nconsiderably since 1972 to almost ISDA documentation is made up of Union, the UK will lose all the benefits of $15bn gross in 2016. A derivative is a type the Master Agreement and the ancillary passporting. Furthermore, by combining of product (materialised via a financial documents such as the Credit Support Arts 3(a)(iv) and 5(a)(iv) of the 2002 ISDA contract) that is derived from another Documentation (that includes many Master Agreement, loss of the European financial product, an index, a thing or a value annexes for variation margin, etc). accreditation (passporting rights) is an event (underlying asset). Derivative transactions can A derivative trade will usually be materialised allowing the counterparty to terminate range from simple or plain vanilla operations through a Master Agreement, a Schedule, the contract early. Alternatively, loss of (eg currency swaps) to more complex ones Confirmations, Definitions booklets accreditation could be seen as an illegality for (eg swaption straddles). One main distinction (eg Municipal Counterparty Definitions or new contracts entered into after Brexit. is between derivative operations that are Commodity Derivatives Definitions) and a Second, parties to an English contract will realised via regulated exchanges such as Credit Support Annex. It must be noted that need to modify them to make them conform Multilateral Trading Facility or Organised the Master Agreement plays a pivotal role. to fundamental requirements of European Trading Facility (Eurolist, MATIF, MONEP It is the framework agreement, ie a unique Law if (or when) the UK becomes a Third etc that often concern options and forwards) umbrella whose terms will apply to every Country to the Union. For example, parties and Over The Counter (OTC) derivatives operation signed by the parties. Derivative to an English Law contract (such as an ISDA) where transactions are more complex, documentation includes provisions regarding will need to add bail-in clauses (Art 55 of the bespoke and flexible. the financial aspects of the transaction Bank Recovery and Resolution Directive) and The OTC market is partially and (which are in the Confirmations that recognition of stays (Arts 68-71 of the Bank increasingly regulated since the subprime incorporate Definitions, specify economic Recovery and Resolution Directive). There crisis (for instance clearing obligations) terms of each transaction etc) and provisions are other matters to consider such as the but mainly rests on contract law and self- determining the general, legal, credit and disappearance of LIBOR which has prompted regulation via the documentation used. trading relationship of the parties (in the ISDA to release Benchmark Supplements Globally, the most often used documentation Master Agreement). and launch consultations on how to calculate is produced by ISDA. Founded in 1985, Traditionally the ISDA Master fallbacks based on Risk Free Rates. ISDA is an organisation comprising of Agreement came with a choice of law clause Thirdly and most importantly, the UK various participants to the OTC market and giving the parties the option to elect either will lose the benefit of automatic recognition produces the standardised documentation English or New York law. Whilst New York and immediate enforcement of judgments of used by the market. The organisation also law is often selected for American operations, one member state in another member state. promotes and ensures the certainty of its English law is usually selected in the rest of Indeed, by exiting the European Union, templates by obtaining opinions from local the world. It is indeed extremely popular in the Recast Brussels I, the Lugano and the 658 November 2019 Butterworths Journal of International Banking and Financial Law THE CHOICE OF FRENCH LAW FOR THE NEW ISDA MASTER AGREEMENT: PART 1 PART MASTER THE NEW AGREEMENT: FOR ISDA LAW OF FRENCH THE CHOICE Feature Hague conventions (the latter only works for opinions as none exist on the release two new Master Agreements exclusive jurisdiction clauses and thus not the combination of law A with a choice that would be submitted to the law of a 2002 ISDA, but ISDA have released a guide of jurisdiction B. member state of the European Union. with conforming model clauses: 2018 ISDA Second, parties could decide to keep Choice of Court and Governing Law Guide) English law but resolve disputes using DRAFTING THE FRENCH LAW ISDA will no longer apply to the UK. arbitration (eg ICC or P.R.I.M.E MASTER AGREEMENT This means that parties to an English Finance). Arbitration awards do benefit The starting point for the two new Master Law contract will need to rely on exequatur from a special recognition and enforce- Agreements is the 2002 model (as ISDA is procedures (which exist and are used, ment mechanism (New York Convention still trying to encourage market participants namely for US judgments). Exequatur 1958) but are limited in case of insolven- to switch to the 2002 ISDA). In the Irish will necessarily be longer, pricier, and this cy of the parties as awards are declara- Master Agreement, only cls 13a and 13b could be devastating if your counterparty tory. This means that the counterparty have changed, ie the ones pertaining to is approaching insolvency. Furthermore, would still need to join the general the choice of law. The French contract such delays would be contrary to the logic insolvency proceedings and specific registers slightly more differences from of financial contracts that often rely on proceedings for collateral in foreign the English one, but still resembles the financial collateral because it is quick and jurisdictions. original 2002 ISDA Master Agreement effective (hence the Financial Collateral Third, market participants could in almost every aspect. Directive of 2002). This would no longer be restructure their contracts. Indeed, While most changes are superficial the case as the enforcement of such collateral some parties are concluding duplication or terminological, some express major would require an exequatur judgment both agreements, ie reproducing their English differences between English and French law. in the country of the insolvent party’s real ISDA via an entity within the Europe- For instance, the flawed asset theory (that a or incorporated seat and also in the country an Union to benefit from a European cash deposit with a bank is only repayable if where the collateral is situated. Exequatur presence. Other parties are concluding a previous condition is fulfilled) is unlikely procedures currently take three to six months novation agreements (on the basis of to be valid and enforceable in French Law on average. However, given the breadth of models furnished by ISDA) which aim (Art 1170 of the French Civil Code). Instead use of English law in international trade, to maintain the accreditation benefit of of conditioning the very existence of the after Brexit European Union courts could the host country’s entity. obligation of a party to the performance of quickly become overwhelmed by requests Fourth, to mitigate the Brexit risk, the reciprocal obligations by the counterparty, which will increase the average time such a parties could decide to adopt one of the French Master Agreement just conditions procedure takes. the new contracts published by ISDA. the performance of said obligation. The Indeed, the organisation decided to drafting incorporates the ISDA Metavante SOLUTIONS TO THE BREXIT RISK release a new common law Master amendment to s 2(a)(iii) that aimed to avoid Several solutions can be used to mitigate the Agreement and a new civil law Master the possibility of suspending indefinitely the Brexit risk highlighted above. Agreement. It must be emphasised performance of the contract by the non- First, use Rome I to choose the that ISDA documentation is a risk- defaulting party, as recognised in Lomas v governing Law as Rome I is not exclusive management tool that relies on the JFB Firth Rixson Inc [2010] EWHC 3372 to member states. This means that the validity and enforceability of the (Ch). This grants the parties a contractual UK could re-join after Brexit (the same contract. This depends heavily on the law right that is different from the defence for could be done for the Lugano convention governing the contract.