Derivatives Disputes: ISDA revises Arbitration Guide, expanding the model arbitration clauses

The International Swaps and Derivatives Association (ISDA) has revised its Guide to Arbitration (the Guide).  First published in 2013, after considerable stakeholder consultation, the Guide includes an explanatory memorandum which provides an overview of arbitration for parties to derivatives transactions, and includes a broad choice of model arbitration clauses (and guidance notes) for use with both the ISDA 1992 Master Agreement and the ISDA 2002 Master Agreement.  The model clauses can be included in new Master Agreements or can be included when amending an ISDA Master Agreement.

The new version of the Guide is best described as an enhancement, rather than a wholesale revision.  It reflects developments in the field of arbitration since the Guide was first launched in 2013, such as the increasing availability of emergency arbitration, and the possibility of early dismissal of claims and defences.  The Guide also now features model arbitration clauses for various additional institutions, including the German Arbitration Institute (DIS) Rules clause to which Herbert Smith Freehills contributed (see here for further information).

As discussed below, arbitration offers a number of procedural features which may be attractive to parties to derivative transactions.  Further, there are certain considerations relevant in derivatives disputes in particular which the parties may wish to bear in mind when including an arbitration clause in their contractual documents.

As the International Chamber of Commerce (ICC) confirmed in a report on Financial Institutions and International Arbitration, arbitration has been steadily growing as a chosen method of dispute resolution in derivatives contracts, particularly as the participants entering the market of traded derivatives become more diverse (see here for further information).  ISDA’s continued support for arbitration is likely to encourage parties in the derivatives market to consider arbitration for their transactions and to facilitate the inclusion of workable arbitration clauses in ISDA Master Agreements and related contracts.

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ISDA Arbitration Guide – one year on

One year on since the International Swaps and Derivatives Association (“ISDA“) published its 2013 Arbitration Guide, the ISDA Arbitration Committee recently met in London to discuss the reception to the Guide, and to consider any proposals for amendment or expansion.

The Guide was published in September 2013 following an extensive consultation process involving all levels of ISDA’s global membership. Along with an overview of arbitration, the Guide contains model arbitration clauses for use with the ISDA 2002 Master Agreement and the ISDA 1992 Master Agreement (Multicurrency – Cross Border), the market leading standard form agreements for documenting over-the-counter derivatives transactions. The model clauses are designed to be included in the Schedule to new Master Agreements, but are also readily adaptable for use when amending an existing Master Agreement to provide for arbitration.

Herbert Smith Freehills has been involved throughout the consultation process and attended the Arbitration Committee meeting on 1 December 2014. It was clear from participants at the meeting that the publication of the Guide was received positively by both market practitioners and arbitration specialists, and that it remains of interest to a wide audience. This reception is consistent with the growing appeal of arbitration in the derivatives markets (and the broader financial services sector) over the past four years, a sector that has traditionally favoured English or New York court jurisdiction. A fair amount of anecdotal use of the Guide has also been reported, particularly within emerging markets, although there are no hard statistics on the uptake to date.

Proposals for amendments to the Guide focussed on providing more bespoke information on arbitration specifically tailored to the derivatives market, including:

  • a greater emphasis on the prospects for parties to protect derivatives investments though investment arbitration, in view of the decision in Deutsche Bank AG v Democratic Socialist Republic of Sri Lanka (ICSID Case No. ARB/09/2) which found that a hedging agreement qualified as an ‘investment’ for the purposes of the Germany-Sri Lanka bilateral investment treaty and the ICSID Convention;
  • addressing the derivatives market’s apparent desire to appeal awards within the arbitration process, mentioning, for example, the AAA-ICDR’s optional appellate rules;
  • further explanation of optional arbitration clauses;
  • further explanation of the different urgency measures available under the various arbitral rules, including the option to appoint an emergency arbitrator, where applicable; and
  • explanation of the differences between arbitral institutions in terms of the specialisation of arbitrators available for appointment under their rules.

The Arbitration Committee also considered suggestions from ISDA Members to extend further the current suite of arbitration clauses offered in the Guide, including the use of Frankfurt, Stockholm or the Dubai International Finance Centre as seats.

The Guide already provides for a number of different combinations of arbitral rules/institution and seats of arbitration, reflecting the preferences of ISDA Members during the previous consultation process, including the ICC Rules (London, New York or Paris seat), LCIA Rules (London seat), AAA-ICDR Rules (New York seat), HKIAC Rules (Hong Kong seat), SIAC Rules (Singapore seat), Swiss Chambers’ Arbitration Institution Rules (Zurich or Geneva seat), and PRIME Finance Rules (London, New York or The Hague seat).

ISDA is committed to keeping the Guide, including the current combinations of rules and seats, under review, and is open to receiving further input from ISDA Members in this regard.

To discuss ISDA’s Arbitration Guide or use of arbitration in financial markets contracts, please contact Nicholas Peacock, Partner, Dominic Kennelly, Associate, Emily Blanshard, Associate, or your usual Herbert Smith Freehills contact.

Nicholas Peacock
Nicholas Peacock
Partner
+44 20 7466 2803
Emily Blanshard
Emily Blanshard
Associate
+44 20 7466 2833

Dominic Kennelly
Dominic Kennelly
Associate
+44 20 7466 7597

ISDA releases Arbitration Guide

On 9 September 2013, the International Swaps and Derivatives Association (ISDA) published its long-awaited Arbitration Guide. The Guide comprises an explanatory memorandum which provides an overview of arbitration, together with model arbitration clauses (and guidance notes) for use with the ISDA 2002 Master Agreement and ISDA 1992 Master Agreement (Multicurrency – Cross Border). The model clauses are designed to be included in the Schedule to new Master Agreements, but are readily adaptable for use when amending an existing Maser Agreement to provide for arbitration.

The model clauses provide for a number of different combinations of arbitral rules/institution and seat of arbitration, including the ICC Rules (London, New York or Paris seat), LCIA Rules (London seat), AAA-ICDR Rules (New York seat), HKIAC Rules (Hong Kong seat), SIAC Rules (Singapore seat), Swiss Chambers’ Arbitration Institution Rules (Zurich or Geneva seat), and PRIME Finance Rules (London, New York or The Hague seat). In each case, the governing law of the Master Agreement will be either English or New York law.

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ISDA’s Financial Law Reform Committee meets in Singapore to discuss model arbitration clauses

Following the release by the International Swaps and Derivatives Association (“ISDA“) of various draft model arbitration clauses for use with the 1992 and 2002 versions of the ISDA Master Agreement together with an introductory note on arbitration (see link to previous post here), ISDA’s Financial Law Reform Committee (“FLRC“) recently met in Singapore to discuss the proposals.

The FLRC meeting forms part of the wider ISDA consultation process on the use of arbitration as a means of resolving disputes in the OTC derivatives sector. Traditionally, market participants have favoured New York or English court jurisdiction. However, in light of the increasing prevalence of cross-border transactions involving emerging markets jurisdictions, the perceived advantages of arbitration – most notably the availability of enforcement mechanisms for arbitration awards under the New York Convention – have been favourably noted by market participants and have driven ISDA’s consultation process.

The consultation is ongoing, closing on 31 May 2013, and comments are welcome. The FLRC will be meeting on 18 June 2013 at ISDA’s offices in London to discuss the feedback received.

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