USE OF ARBITRATION IN THE BANKING AND FINANCE SECTOR (PART 1): LCIA STATISTICS SHOW GROWTH

The LCIA has released its Annual Casework Report for 2021, showing that disputes in the Banking and Finance sector represented the LCIA’s biggest industry sector in 2021, overtaking Energy and Resources disputes. The 2021 Report shows that 26% of disputes registered with the LCIA in 2021 relate to the sector. The LCIA saw a corresponding increase in loan agreements and other loan facilities agreements in LCIA arbitrations, up from 16% in 2020 to 21% in 2021. Although the headline statistic for the sector were bolstered by a group of 27 related cases (making up 32% of all the banking and finance cases at the LCIA in 2021)  as discussed further below, the LCIA’s figures are in line with a softening of the attitude of finance clients towards arbitration.

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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’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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PRIME Finance issues model arbitration clauses for use with ISDA Master Agreements

The Panel of Recognised International Market Experts in Finance (“PRIME Finance“) recently issued a number of model arbitration clauses for use with the International Swaps and Derivatives Association (“ISDA“) Master Agreements, the market leading standard form agreements for documenting derivatives transactions. PRIME Finance, which was launched in January 2012, aims to provide a bespoke forum for the resolution of complex financial disputes.

The draft clauses have been issued to PRIME’s panel of experts for review and comment. There are two draft clauses at this stage. One is governed by English law and provides for arbitration in London, while the other is a New York law governed clause providing for arbitration in New York. Both clauses are framed as amendments to the relevant ISDA Master Agreement.

This development coincides with a consultation being undertaken by ISDA on the use of arbitration under the ISDA Master Agreements. ISDA is expected to release a number of model form arbitration clauses of its own later this year for use in conjunction with the Master Agreements. ISDA has previously indicated that arbitration under the PRIME Finance arbitration rules is one of the options under consideration, but has stressed that it is neutral as to the various arbitral institutions on offer. It is therefore expected that ISDA’s model clauses will cover a number of the major arbitral institutions and venues, including arbitration under the LCIA, ICC, HKIAC, SIAC and AAA/ICDR rules.

For more information, please see our previous blog posts on the ISDA Consultation and the launch of PRIME Finance. Alternatively, please contact your usual Herbert Smith Freehills contact, Nicholas Peacock, Partner, or Dominic Kennelly, Associate, London.

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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