MEMORANDUM OF LAW FOR THE INTERNATIONAL SWAPS AND DERIVATIVES ASSOCIATION, INC. Validity and Enforceability under English Law of Close-out Netting under the 2002, 1992 and 1987 ISDA Master Agreements 23 June 2017 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 (associated office), Rome, São Paulo, Seoul, Shanghai, Singapore, Sydney, Tokyo, Warsaw, Washington, D.C. and Yangon. ICM:25359519.13 [This page left intentionally blank.] TABLE OF CONTENTS I. INTRODUCTION ........................................................................................................................................... 1 II. SUMMARY OF CONCLUSIONS ............................................................................................................. 13 III. CLOSE-OUT NETTING UNDER THE ISDA MASTER AGREEMENT ........................................... 14 IV. CLOSE-OUT NETTING FOR MULTIBRANCH PARTIES ................................................................ 39 V. ENFORCEABILITY IN THE ABSENCE OF INSOLVENCY PROCEEDINGS ................................ 60 VI. KEY DIFFERENCES BETWEEN THE 1992 AGREEMENT AND 2002 AGREEMENT ................ 63 VII. THE 1987 AGREEMENT ........................................................................................................................ 64 VIII. THE 2001 ISDA CROSS-AGREEMENT BRIDGE ............................................................................ 66 IX. THE 2002 ISDA ENERGY BRIDGE ....................................................................................................... 67 X. THE ISDA CLOSE-OUT AMOUNT PROTOCOL ................................................................................. 68 XI. THE JUNE 2014 AMENDMENT TO THE ISDA MASTER AGREEMENT IN RELATION TO SECTION 2(a)(iii) ...................................................................................................................................... 69 XII. PENDING DEVELOPMENTS ............................................................................................................... 70 APPENDIX A: CERTAIN TRANSACTIONS UNDER THE ISDA MASTER AGREEMENT................. 74 APPENDIX B: CERTAIN COUNTERPARTY TYPES ................................................................................. 80 APPENDIX C: EXCLUDED ENGLISH COMPANIES ................................................................................. 85 APPENDIX D: ARTICLES 23 AND 25 OF THE WINDING UP DIRECTIVE .......................................... 86 APPENDIX E: RECOURSE TO THE ASSETS OF A TRUST ..................................................................... 91 ANNEX 1: ENGLISH BANK ............................................................................................................................ 94 ANNEX 2: ENGLISH INVESTMENT FIRM ............................................................................................... 118 ANNEX 3: ENGLISH BUILDING SOCIETY............................................................................................... 123 ANNEX 4: BANKING GROUP COMPANIES AND BANK HOLDING COMPANIES .......................... 131 ANNEX 5: TRUSTEE OF AN ENGLISH TRUST ....................................................................................... 136 ANNEX 6: FRIENDLY SOCIETY ................................................................................................................. 144 ANNEX 7: C/CB SOCIETY ............................................................................................................................ 147 ANNEX 8: STATUTORY CORPORATION ................................................................................................. 149 ANNEX 9: CHARTERED CORPORATION ................................................................................................ 152 ANNEX 10: ENGLISH INSURANCE COMPANY ...................................................................................... 155 ANNEX 11: STANDARD CHARTERED BANK .......................................................................................... 176 ANNEX 12: ENGLISH CHARITY – TRUSTEE OF AN ENGLISH CHARITABLE TRUST ................ 180 ANNEX 13: ENGLISH CHARITY – OTHER FORMS OF ENGLISH CHARITY .................................. 182 ANNEX 14: TRUSTEE OF AN ENGLISH PENSION FUND ..................................................................... 184 ANNEX 15: ENGLISH INVESTMENT FUND – OPEN-ENDED INVESTMENT COMPANY ............. 197 ANNEX 16: ENGLISH INVESTMENT FUND – TRUSTEE OF AN AUTHORISED UNIT TRUST .... 202 ANNEX 17: ENGLISH PARTNERSHIP ....................................................................................................... 205 ANNEX 18: BANK OF ENGLAND ................................................................................................................ 210 ANNEX 19: THE UNITED KINGDOM ACTING THROUGH HER MAJESTY'S TREASURY .......... 212 I. INTRODUCTION 1. Overview and scope of issues covered by this memorandum This memorandum of law considers the validity and enforceability under English law1 of close-out netting of privately negotiated 2 derivatives transactions (each, a Transaction) entered into under an agreement between two parties based on one of the following standard form master agreements published by the International Swaps and Derivatives Association, Inc. (ISDA): (a) the ISDA 2002 Master Agreement (the 2002 Agreement); (b) the 1992 ISDA Master Agreement (Multicurrency – Cross Border) (the 1992 Agreement);3 and (c) the 1987 ISDA Interest Rate and Currency Exchange Agreement (the 1987 Agreement).4 References below to "the ISDA Master Agreement" or "an ISDA Master Agreement" apply equally, unless context otherwise requires, to the 2002 Agreement, the 1992 Agreement and the 1987 Agreement. Where a distinction between the forms of ISDA Master Agreement is relevant to the analysis, we refer expressly to the relevant form of ISDA Master Agreement. In addition, you have asked us specifically to comment on certain differences between the 1992 Agreement and the 2002 Agreement, which we do in part VI of this memorandum. In part VII of this memorandum we summarise specific issues raised by the 1987 Agreement. In particular, we consider the validity and enforceability of the close-out netting provisions of the ISDA Master Agreement against each type of entity (each a Counterparty) specified in part I.3 below in the event of insolvency proceedings in England in relation to that type of Counterparty. We also consider the validity and enforceability of the ISDA Master Agreement under English law in the absence of insolvency proceedings in relation to either party. We refer to the update request email sent on 9 September 2016 attaching the instruction letter (together, the Instruction Letter) setting out the terms on which we are asked to advise. The issues that you have asked us to address are set out below in italics, followed in each case by our analysis and conclusions. A capitalised term used in this memorandum without definition has, unless the context indicates otherwise, the meaning given to that term in the ISDA Master Agreement. 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 Also sometimes referred to as "over-the-counter" or "OTC" derivatives transactions 3 In 1992 ISDA also published the 1992 ISDA Master Agreement (Single Currency – Local Jurisdiction), designed for use between parties each of whom is operating from the same jurisdiction and transacting exclusively in the currency of that jurisdiction. For convenience, we deal expressly in this memorandum only with the much more widely used 1992 Agreement, designed for cross-border and multicurrency transactions, however our conclusions in relation to the 1992 Agreement apply mutatis mutandis to the single currency form. 4 In 1987 ISDA also published the 1987 ISDA Interest Rate Swap Agreement, designed for use only with US Dollar interest rate swap and similar transactions. For convenience, we deal expressly in this memorandum only with the more widely used 1987 Agreement, designed for cross-border and multicurrency transactions, however our conclusions in relation to the 1987 Agreement apply mutatis mutandis to the US Dollar form. This memorandum (other than in Part XII in which we describe certain