Any complex financial product involves thorough negotiation between parties as to the underlying terms and conditions. Derivative products are no exception to this. In fact, considering the complexity of the underlying trade transactions, a trade organization called International Swaps and Derivatives Association (ISDA), headquartered in New York, has published master agreements for Over the Counter (OTC) Derivative Transactions that contains standard terms and conditions applicable for all derivative transactions between two parties. The version of the master agreement, issued by the ISDA, that is currently in use is the ‘2002 ISDA Master Agreement’.
While there are many material decisions to be made with regard to establishing the terms of an ISDA Master Agreement between the counterparties, in our experience as a process agent, we assist counterparties to ISDA Master Agreements with the section noted below which requires that a process agent be named as an important CP (condition precedent) required at the time of signing the ISDA Master Agreement.
Section 13 of the 2002 ISDA Master Agreement: Governing Law and Jurisdiction:
This section of the ISDA Master Agreement deals with the governing law for the transaction. It is a general practice for the counterparties to opt for either English law or New York law as the governing law. The election of English law or New York law is given effect in the Schedule to the ISDA Master Agreement and this is a critical decision that is made while negotiating the transactions. Typically, it is unusual to apply any other system of law as the chosen governing law for ISDA transactions.
One has to bear in mind that submission to English courts may be non-exclusive if proceedings involve a Convention Court (due to applicability of 1968 Brussels Convention[1] or the 1988 Lugano Convention[2]). “The recent case of SwissMarine Corporation Ltd v OW Supply & Trading A/S (in bankruptcy) [2015] EWHC 1571 (Comm) reached some interesting conclusions as to how the jurisdiction clause in the 2002 ISDA Master Agreement operates when the English Court's jurisdiction is chosen”[3].
One of the other matters addressed in Section 13 of the 2002 ISDA Master Agreement that needs to be included in the Schedule to the ISDA Master Agreement is the address for service of process. If either of the counterparties does not have an office in the jurisdiction of the chosen governing law, they will be required to name an agent for service of process having an address in the chosen jurisdiction. The role of the process agent is described in one of our recent articles What is a Process Agent and Why Do You Need One?
In order to commence a suit in the U.S., U.K. and many other jurisdictions, it is often necessary to serve papers to start proceedings correctly in such jurisdiction. For example, in the U.K., under English Civil Procedure Rules, if the defaulting party does not have an address within the United Kingdom, the procedure for serving these papers can be lengthy and complicated, with proof of service particularly difficult in some circumstances. Also, it is an accepted norm that a service of process is valid only when it is served by hand-delivered mail, airmail, registered or certified mail. All other electronic means of serving may not be valid means of serving process in a given country even though the parties may have consented to it.
Choosing a Process Agent for Your Derivative Transactions:
Important considerations to bear in mind when choosing your agent for service of process for ISDA transactions include:
- Knowledge and understanding – Does your process agent understand the nature of ISDA transactions and their obligations thereunder? While only mature financial players opt for these financial instruments, the body of knowledge for these products is limited to perhaps two or three decades of legal precedents. It is important that your process agent understands the sophistication of these transactions and is prepared to handle any legal process received thereunder with utmost care and caution.
- Efficiency – An experienced process agent would know that the counterparties are likely to reach out to them when they have long finalized the ISDA Master/ Schedules and are about to commence trading. It is, therefore, imperative that the agent can take on the job immediately, so that the counterparties don’t lose out on their ‘timing’ of the transactions.
- Robust database – While appointing any process agent can certainly ‘tick the box’ of the conditions precedent to be complied with, does it mean that the counterparties don’t need to worry about any service of process received on their behalf? Certainly not! The counterparties have to ensure that the process agent has a robust database that identifies correct transactions wherein a service has been received and understands their obligations thereunder.
- Customized support and rational pricing structure - Derivatives transactions are usually set up for an indefinite term until either party decides to terminate them or there is a default thereunder. A process agent needs to consider the element of ‘indeterminate term’ in its pricing policy. Also, the process agent needs to know that all ISDA documentation between two counterparties constitutes one single transaction.
- Ability to assist you with registering for a Legal Entity Identifier (also called an International Entity Identifier), if required - An LEI is a 20-digit alpha numeric code that is part of a global reference data system, uniquely identifying every legal entity or structure, in any jurisdiction, that is party to a financial transaction. Many financial regulatory bodies in the EU, U.S. and U.K. require LEI registration. The professional service provider that acts as your process agent may also be able to assist with searching, registering and maintaining LEIs on behalf of the parties.
Derivatives: Good or Bad?
Warren Buffett once called derivatives “financial weapons of mass destruction” and there are many in the business world who might agree with him. However, there are some who claim these words were taken out of context and that Buffet used derivatives “on a large scale, and he’s made billions of dollars doing so.”[4]
Perhaps the view held by famed short-seller, James Chanos, President of Kynikos Associates, is more realistic and accurate. He said, “Derivatives in and of themselves are not evil. There's nothing evil about how they're traded, how they're accounted for, and how they're financed, like any other financial instrument, if done properly.”[5]
For anyone working on derivatives transaction, watch out for that required condition precedent (CP) pertaining to appointment of process agent. Let it not delay your transaction.
[1] See http://us.practicallaw.com/0-205-5104
[2] See http://uk.practicallaw.com/3-205-5193?service=dispute
[3] See http://www.fieldfisher.com/publications/2015/07/derivatives-update-the-2002-isda-master-agreements-jurisdiction-clause-1
[4] See http://finance.yahoo.com/news/how-buffett-used--financial-weapons-of-mass-destruction--to-make-billions-of-dollars-175922498.html
[5] See http://www.businessinsider.com/interview-with-jim-chanos-on-dubai-greece-derivatives-2010-4
This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.
