Splitting of Contractual Statute In Standard Master Agreements in the Over-the-Counter Derivatives Market

Abstract

The article considers the splitting of the law governing clause as a phenomenon to a certain extent spread in international private law based on the example of standard documentation for derivatives (derivative financial instruments) elaborated by International Swaps and Derivatives Association (ISDA) and other industry organizations including the European Banking Federation (EBF) and Foreign Exchange Committee (FXC). The said documentation is complex in character and is comprised of various elements including the master agreement, schedule thereto, confirmations and credit support annexes (deeds) addressing the transfers of financial collateral. These elements of documentation comprise the single contractual arrangement between the parties by virtue of the single agreement principle. The law applicable to the master agreement and therefore to the single agreement as a whole is determined in the While using the standard documentation two basic scenarios are possible. However, whenever the credit support annexes (deeds) are used the parties may invoke depecage as the law applicable to these instruments may be different from the law chosen with respect to the single agreement. In line with the prevailing approach to the said phenomenon in the legal doctrine and the main sources of private international law, depecage is acceptable on the condition that no discrepancies arise, especially in case when two distinct legal systems are applied to the same issue. At first glance, payments under derivative transactions and credit support instrument are separated from one another, although in the presence of an event of default and subsequent early termination of transactions under a master agreement contradictions may theoretically arise. To overcome the contradictions the parties to those contracts are recommended to advise legal opinions on the issues of netting and collateral available to the members of ISDA, EBF and FXC.