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

The future of financial services arbitration

Recent years have seen rapid growth in the use of arbitration as a means of resolving disputes in the financial services sector, an area where English or New York court jurisdiction has traditionally been favoured by market participants.  This trend has been driven by the perceived advantages of arbitration, notably the superior enforcement mechanisms for arbitration awards (as compared to court judgments) under the New York Convention.  This is of particular importance given the increasing prevalence of cross-border finance transactions involving emerging markets jurisdictions, where arbitration awards are often more readily enforceable than foreign court judgments.  The availability of a neutral forum, and the ability to choose arbitrators with specialist expertise, are also important advantages for some parties in the financial services sector.

The growing popularity of arbitration as a dispute resolution option for finance transactions is reflected in the consultation by the International Swaps and Derivatives Association (ISDA) on the use of arbitration under its Master Agreements, which began in January 2011 and has now concluded.  It is also reflected in the establishment of the Panel of Recognised International Market Experts in Finance (P.R.I.M.E. Finance), a specialist arbitration forum targeting complex financial disputes.  P.R.I.M.E. Finance celebrated its first anniversary earlier this year, and reports significant progress since opening its doors for business in January 2012.

In this blog, we review both developments and their impact on the arbitration landscape. A version of this blog was first published on 23 August 2013 in the Global Arbitration Review.

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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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ISDA issues model arbitration clauses for use with Master Agreements

The International Swaps and Derivatives Association (“ISDA“) has released a number of model arbitration clauses for use with the ISDA 2002 Master Agreement and ISDA 1992 Master Agreement (Multicurrency – Cross Border), which are the market leading standard form agreements for documenting derivatives transactions. This development follows an extensive consultation process amongst ISDA’s members that started in January 2011.

The model clauses, together with guidance notes on arbitration, have been issued to ISDA’s members for further comment. The deadline for comments is 31 May 2013. Herbert Smith Freehills will be providing comments on the model clauses as part of the consultation process; please contact us if you would like to discuss ISDA’s proposals or would like to feed in any comments. ISDA plans to hold a number of follow-up meetings before finalising the model clauses and publishing them for use.

The model clauses have been drafted on the basis that they will be included in the Schedule to a Master Agreement. As such, they are principally intended for use when entering into new Master Agreements, although they are readily adaptable for use when amending an existing Master Agreement so as to provide for arbitration.

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Consultation underway on the use of arbitration under the ISDA Master Agreements

The International Swaps and Derivatives Association (“ISDA“) is undertaking a consultation on the use of arbitration under the ISDA Master Agreements, the market leading standard form agreements for documenting swaps and other derivative transactions.

As ISDA’s consultation documents point out, recent years have seen an increase in the use of arbitration as a means of resolving disputes in the financial sector, an area where English or New York court jurisdiction has traditionally been favoured by market participants.  This trend is driven by globalisation and the increasing prevalence of cross-border finance transactions, particularly those involving emerging markets jurisdictions.  It is also driven by the perceived advantages of arbitration, most notably the availability of enforcement mechanisms for arbitration awards under the New York Convention that, for the most part, are superior to the enforcement options available for court judgments.

The period for submission of written responses closed in December 2011, and ISDA recently (in June 2012) hosted a meeting in Singapore as part of the consultation process.  We understand that further meetings will be held in the coming months.  The outcome of the consultation therefore remains to be seen.  However, it appears likely that ISDA will at least proceed to offer one or more model arbitration clauses for use with the ISDA Master Agreements.  In any case, disputes relating to the derivatives markets (and the financial sector more generally) are likely to be an increasingly prominent feature of the arbitration landscape in years to come.

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PRIME Finance: a new dispute resolution option for the financial sector

A new financial dispute resolution body, the Panel of Recognised International Market Experts in Finance (“PRIME Finance“), had its official launch in The Hague last month. Its aim is to provide a bespoke forum for the resolution of complex financial disputes. These would include cases relating to derivatives, swaps, wholesale financial market trading and other financial products.

The initiative coincides with a consultation process by the International Swaps and Derivatives Association (“ISDA“) as to the inclusion of arbitration as a dispute resolution option in its standard form contract. PRIME Finance is one of the arbitration options currently being considered. It also reflects the increasing use of arbitration clauses in these agreements, particularly where emerging markets are involved.  In such cases, the superior enforcement mechanism for arbitration awards under the New York Convention compared with court judgments from (e.g. the London High Court) is crucial.

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