Derivatives transactions (forwards, swaps, futures or options on financial instruments, currencies, interest rates, commodities, etc.) between two parties are usually documented under a master agreement supplemented for each transaction by a confirmation.
Two types of master agreements are used in France for derivatives: that of the French Banking Federation (Fédération bancaire française - FBF), the most common when both parties are French, and that of the International Swaps and Derivatives Association (ISDA), the most widely used worldwide and therefore the typical choice when one of the parties is not French. Until recently, an ISDA master agreement could only be governed by the laws of England & Wales, the state of New York, or Japan, which means that the English law version was by far the most frequently used in Europe.
English courts have a great deal of experience with disputes relating to ISDA master agreements governed by English law and their decisions are currently directly enforceable across the European Union (EU) and the European Economic Area (EEA). European regulations (Regulation No. 1215/2012 of 12 December 2012) indeed stipulates that judgments given in a Member State are recognised in all Member States without the need for any special procedure. After securing a ruling in England, a party to an ISDA master agreement governed by English law can therefore quickly size the assets of a defaulting counterparty, regardless of the EU or EEA countries where these assets are located.
The UK's exit from the EU in March 2019 will change this. Since “Brexit means Brexit”, the United Kingdom will become a third country and, should no agreement be reached on the matter with the EU, rulings from UK courts will no longer be automatically recognised by the rest of Europe. Other procedures will have to be followed in each country where a party wishes to obtain recognition of a ruling made in the UK. In France, an enforcement order (exequatur) will need to be obtained. While it is unlikely that such a procedure would challenge or reverse the decision taken by the UK courts, the mere fact it is needed causes extra work and delays, which entails risks that are difficult to bear in transactions where the underlying volatility is significant.
ISDA published in July 2018 a new "ISDA Master Agreement (French Law)". Governed by French law, its content is extremely close to the content of the English law version, which should facilitate its adoption. It is available in French, English and a dual-language version. An ISDA master agreement governed by Irish law, targeted more towards common law countries, has also been published by ISDA.
French counterparties are therefore now able to benefit from the comprehensiveness of the ISDA master agreement while retaining French law. Even when they are not French, two parties will also benefit from using the French law version so that court rulings be automatically recognised across Europe. For credit institutions, the use of the French law master agreement will also avoid the need to insert "bail-in" recognition clauses made mandatory by the BRRD Directive when a contract is governed by a third country’s laws, which the UK will be after Brexit.
The French law version of the ISDA master agreement is a very useful tool that can now be used by all interested parties to govern their derivatives transactions: let's use it!
