January 8, 2018 / 4:04 PM / a year ago

Global derivatives industry rolls out Brexit back-up plan

LONDON (Reuters) - The global derivatives industry has begun work on fundamental changes to cope with a “hard” Brexit by allowing any disputes involving trillions of euros of swaps contracts to be resolved under French and Irish law.

An EU flag and Union flag are seen flying together during an anti-Brexit protest near the Houses of Parliament in London, Britain, December 8, 2017. REUTERS/Toby Melville

The International Association of Swaps and Derivatives Association (ISDA) writes the “master agreement” used as a template for hundreds of thousands of swap contracts bought by companies to hedge against adverse moves in borrowing costs and currencies.

The current agreement allows users to refer disputes to courts in Japan, New York or England.

Nearly all market participants in Europe opt for English courts, but ISDA said it was unclear if this could continue for European Union counterparties after Britain leaves the bloc in just over a year’s time.

“At this point, we don’t have enough information to say for sure,” ISDA said in a blog on its website on Monday.

“In response, ISDA is drafting French and Irish law-governed Master Agreements as additional governing law options, along with French and Irish court jurisdiction clauses,” it added.

“This is all about preparing for an uncertain future.”

An ISDA spokesman said there would be a consultation with members on any changes, and no date has been fixed for launching broadened agreements.

Much will hinge on what sort of trade deal Britain negotiates with the EU.

However, some market participants may want to switch to French or Irish law to be certain of safeguards under certain EU national insolvency laws that require use of an EU member state-law agreement to trigger those protections, ISDA said.

While sticking with English law does not necessarily mean a swaps contract becomes less valid, it does potentially mean more expense, more uncertainty and more red tape, ISDA said.

It could add years to resolving a dispute, ISDA added.

“That’s why ISDA is looking to add the new European governing law and jurisdiction options, in addition to existing English, Japanese and New York law choices,” ISDA said.

French law is representative of a civil legal system, while Irish law is a common law system like Britain.

“We are also looking into the possibility of designating the courts of an EU27 member state for English law agreements,” it added.

Reporting by Huw Jones; Editing by Adrian Croft

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