Derivatives industry selects Irish law amid Brexit uncertainty

Trillions of euro worth of swap contracts can now be agreed under Irish law

Dublin’s IFSC, a likely benefactor of today’s move by the ISDA. Photograph: Bryan O’Brien

Dublin’s IFSC, a likely benefactor of today’s move by the ISDA. Photograph: Bryan O’Brien

 

The Republic is one of the jurisdictions in which disputes arising out of trillions of euro of swaps contracts can be dealt with in a move the global derivatives industry said was to “provide options” for users amid Brexit uncertainties.

The International Swaps and Derivatives Association (ISDA) said on Tuesday it had published new Irish and French law versions of the “master agreement”.

That agreement is used for most international financial derivatives contracts – crucial to the functioning of the modern economy as they allow businesses manage various risks and costs.

A financial derivative is a contract between two parties linked to the future value or status of an underlying asset, such as bonds, equities or currencies. Banks, for example, use derivatives to manage their interest-rate risks so they can offer more loans and better rates to consumers.

“English law may become a third-country law after the UK withdraws from the EU, which means English court decisions would no longer be automatically recognised and enforced across the EU and European Economic Area,” the ISDA said in a statement.

Master agreements

However, the company’s general counsel, Katherine Tew Darras, said English law master agreements would not become “any less valid in the EU post-Brexit, irrespective of the outcome of the Brexit negotiations”.

“This is all about providing choice to the market and allowing counterparties to choose the option that best suits their needs,” she added.

The Republic, which operates a common-law system like Britain, is among a handful of countries competing for firms moving operations as a result of Brexit and has already drawn banking, insurance and funds industry jobs away from London.

While it’s unclear what volume of disputes would reach the Irish courts, it’s understood that court capacity was one of the ISDA’s considerations in choosing Irish law for use in its master agreements.

“This is a tremendous vote of confidence not just in Ireland but in Irish law and in the Irish courts system,” said David Stanton, Minister of State at the Department of Justice and Equality, who added that it could significantly boost potential new business for Irish firms.

It is expected that in addition to boosting business for corporate law firms in Dublin, it could add to the International Financial Services Centre’s attraction as a base for global financial activities.

ISDA is best-known here for its role in deciding in 2011 that a number of the State’s lenders, including Bank of Ireland and AIB, had “credit events” at the height of the financial crisis as they inflicted losses on their junior bondholders.

This triggered payouts on insurance derivatives, known as credit default swaps by way of settlement auctions. A credit event is financial industry jargon for a default on payment, breach of bond covenants or other event that casts doubt on a bond issuer’s ability to service its debt. – Additional reporting: Reuters