Financial Law UK
The Master Agreement of the International Swaps and Derivatives Association (ISDA) under English law regulates over-the-counter transactions of derivative nature among two parties. Derivative transactions include currency and commodity swaps and options of equity excluding the rate of interests and defaulting of credits Mastering the ISDA master agreements (1992 and 2002). The deal has to be signed by two parties, both the counterparty and the dealer. ISDA has high liquidation and integrity (ISDA Master Agreement, 2021).
A Japanese global financial institution, Samurai & Ronin (SR), enters an ISDA agreement with Taipanbodia bank Sukothai and Ayuthya (SAA). SR is the dealer in this case, while SAA is the counterparty. All the branches of SR and SAA operate under the signed ISDA agreement in section 10. SR’s institution in Mumbai faces a terrorist attack impounding its electronic transactions. Cappadocia bans payments in foreign currency, incapacitating SR payments to SAA in Singapore currency swaps. The terms of the ISDA agreement signed between the two parties include currency swaps. Since the Cappadocian government has banned foreign currency swaps in Cappadocia yet, SR was supposed to transact a currency swap with SAA in Singapore. However, New York red-listed SAA to transact in US dollars. SR is operating under the ISDA agreement; currency swaps are part of the terms of the agreement. SR has to decide whether to move forward with the US dollar currency swap on behalf of SAA since they cannot transact in US dollars. SR could also consider using its offices in Tokyo or Singapore to deliver the currency swap rather than risking a lawsuit in Cappadocia for violating the ban on foreign currency transactions. SR and SAA have offices in Singapore; SR must move the currency swap of US dollars expected in five days to their Singapore office since SAA cannot transact in US dollars and SR cannot transact in Cappadocia Bender S, Negotiating Skills for the ISDA Master Agreement. Section 10 of the ISDA Master Agreement indicates that the parties in the agreement can do the transactions outside any of the mentioned branches. SR should move forward the transactions to their Singapore branch as the CSA part of the ISDA Master Agreement allows for collateral. CSA provides terms for early termination, a decision that SR can consider. The currency swap expected in five days is a transaction protected by the ISDA Master Agreement; therefore, either party is bind by contract to execute their end of the agreement. The Non-Deliverable Forwards (NDFs) – agreed rate of exchange and spot price exchange and currency derivatives transactions had considered the forex and currency alternatives components of the ISDA. The two parties settle the difference between the spot price and the contracted NDFs price. These options should make the US dollar currency swap deal between SR and SAA fall into place considering the sanctions by Cappadocia. In this regard, SR has to view all the options to act according to the ISDA agreement signed with SAA. SR has to proceed with the US dollar currency swap deal and implement the NFDs’ agreed protocols; this could happen in their Singapore office. The swap deal cannot occur in SR’s Mumbai office because the terrorist attack interfered with the electronic system.
The Taipodian Central Bank makes an insolvency law to protect Tiapodia’s banks. The emergency law protects banks from surviving the effects of COVID-19; this includes netting – determining which party owes in an agreement. Netting involves a settlement or offsets value that is due to be exchanged among the dealer and the counterparty. Netting has applications in intercompany transactions, currency trading, among others, ‘How Netting Is Used to Offset Funds in Securities Trading and Bankruptcy’ (Investopedia, 2021). The Taipanbodia emergency insolvency legislation has lifted the enforceability of netting. SR can use the netting restriction measure to manage their risks; they could explore other partnership deals considering SAA’s strength to perform its obligation. During the emergency insolvency law period, SR can save time and costs associated with substantial monthly transactions with SAA. Since SR transacts across borders, its flows will decrease, limiting the number of foreign commerce, especially with SAA in Taipodia. SAA should use the insolvency law to recover from their hard-hit financial instability. SAA will reduce its risk on credits of foreign transactions which are not settled from a total amount to a net one on a daily account or the grounds of a gross position, varying from the adopted net mode. SR should use the netting measure to make schedules of payment simple, streamline reconciliation of invoices between companies, putting in place reconciliations of accounting ledgers quarterly. SAA should use the period to resolve accounting mistakes such as the transaction made with the Russian Investment Fund.
The Credit Support Annex (CSA) provides for collateral in the ISDA Master Agreement. CSA also provides for the early termination of a contract (International Swaps and Derivatives Association 1999). If SAA were to default under the ISDA Master Agreement, SR would have to provide collateral and move to early termination of the contract. In case of contract termination, SR will be exposed to enforce any remedies and rights available in the agreement. SAA will be required to transfer all collateral posted and amount of interests to SR. In a situation where one party cannot transfer assigned collateral or amount of interest. SR may set off the amount to be paid, observing what SAA is supposed to pay; SR can withhold any remaining payment to SAA up to the incurred collateral until transferred to SR. A CSA regulates collateral (credit support) on derivative transactions. The amount to be delivered is the amount of credit support, and it is more than collateral posted that SAA holds.
The European Market Infrastructure Regulation (EMIR) directs that all standard over-the-counter derivatives are traded on electronic mediums or an exchange, and central counterparties should clear them ‘Risk Management And The European Market Infrastructure Regulation (EMIR)’ (2013) 21. An interest swap in a derivative contract refers to when two parties agree to exchange the flow of interest’s payments in the future for the other. The applicability of EMIR in the interest swap between SR and SAA has numerous implications. All over-the-counter derivative transactions to be processed through central counterparties (CCPs), reported to trade repositories will record traded derivatives, and all over-the-counter derivatives, non-cleared products will be directed to improved management of risk requirements. The bank is the environment for its deals of operational positions in the OTC market, swaps, or options. The bank also acts as a link between the forex market and funds. The entire responsibility of giving and receiving collateral funds lies with the depositary bank, and they should restitute and supervise. If the interest swap deal occurs, the borrower SR will be more flexible. SR source of funding will be separate from the rate of interest risk. SR will be able to secure funds to operate and create a swap structure to implement specified obligations.
Harding P, Mastering The ISDA Master Agreements (1992 And 2002) (Financial Times Prentice Hall 2010)
‘How Netting Is Used To Offset Funds In Securities Trading And Bankruptcy’ (Investopedia, 2021) <https://www.investopedia.com/terms/n/netting.asp> accessed 30 April 2021
‘ISDA Master Agreement’ (Investopedia, 2021) <https://www.investopedia.com/terms/i/isda-master-agreement.asp> accessed 30 April 2021
Bender S, Negotiating Skills For The ISDA Master Agreement (Financial Times/Prentice Hall 2011)
User’s Guide To The ISDA Credit Support Documents Under English Law (International Swaps and Derivatives Association 1999).
Diana Stiller, Christian Dammert and Peter Joehnk, ‘Risk Management And The European Market Infrastructure Regulation (EMIR)’ (2013) 21 Research Papers Faculty of Materials Science and Technology Slovak University of Technology.