International Financial Law
Netting carries tremendous implications for organizations that desire to operate in unsanctioned markets. And, as observed in the current case study, the Italian Bank is finding it difficult to control the operations of the day due to the complexities experienced in the Taipanbodia financial market. However, Satay and Rendang (SR), a local retailer in the market, decides to take on the risk of netting to ensure that the bank sets up an office (Lee, 2016). The issue is the enforceability of the ISDA laws in the country, which govern risk about over-the-counter transactions, which in most cases deal with forex and currency exchange. The lack of enforceability dictates certain legal and financial risks that the Italian bank Banco Pesto et Tortellini (BPT) will have to endure. They include the fact that the market will be closed off from price fluctuations, allowing for more accessible speculation.
Any bank desires to keep tabs on the exchange rates to ensure that it does not have losses from forex transactions. The easier the bank knows how the currency is faring in the market makes capable the organization of adapting to the situations that develop. Secondly, the bank will lack insurance or hedging against price movement in the market (Lee, 2014). Since Taipanbodia does not enforce the ISDA laws, it will make it harder for the bank to minimize the risk encountered through loss. Furthermore, the country’s currency may be fragile and change with minimal changes in the market, which desire proper insurance programs. Third, the bank will find it harder to access assets and new inhabited markets that boost profitability and market share of the bank. It is essential to ensure that a business grows, and if there is a chance of monopoly power, the organization should take it, which will not happen in this case.
To solve the enforceability of ISDA laws, the company SR decides to take on the risk to ensure that the Italian bank BPT can comfortably handle the dynamics and challenges of the new market. However, the country is faced with numerous natural calamities that render the banking service incapable of handling online transactions, and some of them may not go through in the agreed period (Lee, 2014). It is, therefore, the function of SR to come up with a plan that negates the risk from the bank. Cash payments during natural calamities will have to take place, which will be paid in Frankfurt, a long way from South East Asia, where the company is located. SR will have to develop a bank account with BPT to ensure that it pays for the forex transactions in the country during the time of uncertainty and natural calamities.
The risk of ensuring that the intermediary delivers the money on time is a challenging task to put on one company’s shoulders. The bank should hedge and insure its business against natural calamities that may occur in the country. There is a big chance that the country will have moments of uncertainty during a financial year, and it is essential to ensure that they are well prepared for the event (Johnson, 2021). Apart from ensuring that SR has deposited with the Italian bank and insuring against the risks that might occur in the country, the bank needs to ensure that they have qualified weather practitioners in the area. The bank should forecast loss before it happens to ensure that they can arrange their operations in time before the loss. The game’s secret is adapting, planning, and actively preparing for loss, which will allow the business to grow and exist without worrying about natural calamities.
In some cases, the intermediary SR may be sanctioned by the government for making payments to foreign banks. The bank has a clause in the ISDA that allows it to terminate the relationship between the organizations and the country. The Illegality Termination Event is a clause that allows BPT to withdraw from the market, allowing it to take up all its assets and funds from the area (Datoo & Clack, 2020). Furthermore, the bank must ensure that it records the place value of the forex exchanges and take on liability according to the exchange rates at the time. It will ensure that the bank does not take more than it should, and SR may be left in a position where they can actively continue with business without financial losses incurred in the market.
The clause also adds recommendations that ensure that the bank can salvage its assets or continue operating in the market despite the sanctions. The bank may choose another organization in the market that is not currently involved in the sanctioned event and use it to pay the bank in Frankfurt in SR positions. SR can pay another organization that will pay BPT since it is not sanctioned at the time, which will enable the bank to continue operations in the market (Johnson, 2021). The bank also has two more stipulations under the ISDA laws that allow it to take on different events depending on their influence on its profitability. The bank may decide to close off all transactions taking place or decide to halt some of the affected transactions. In this way, the bank is more flexible in taking what they need and what they don’t and can take effective measures as they see fit.
If the country of Taipanbodia decides to enforce netting in the country, and the bank BPT wants out of the market, it can use the close-out amounts calculated differently from the market prices. The legal document sets precedence for force majeure events where the non-affected party has the right to determine the price, which should be done in good faith and accordance with all the laws aligned to the issue (Datoo & Clack, 2020). The affected party should use the mid-market prices and not the current prices to ensure that there is hedging against the risk of change and improve transparency and accountability.
Furthermore, it allows the other party to know how much they might get back from the close-out beforehand and make preparations. The mid-market price is adjusted using the creditworthiness of each of the parties in the closure to ensure that the correct account is taken into perspective (Lee, 2016). However, if the affected party is inclined to force closure through the act of force majeure, then if the party decides not to pay, it will not be a breach of contract or an act of default. The clause ensures that SR can ensure that they can get their finances in order before committing to the closure. However, the revenue being generated from the business will cease.
Datoo, A., & Clack, C. D. (2020). Smart close-out close-out netting. arXiv preprint arXiv:2011.07379.
Johnson, C. A. (2021). Sovereign Immunity in Repo and Derivative Documentation: When to Worry-What to Do. Futures and Derivatives Law Report, 41(4), 21-20.
Lee, A. (2014). Isda: margin rules for uncleared swaps need more time. International Financial Law Review.
Lee, H. B. (2016). The English courts’ view of financial derivatives.