The International Swaps and Derivatives Association (“ISDA”) is undertaking a consultation on the use of arbitration under the ISDA Master Agreement. The first in a series of meetings was held in Singapore on 15 June 2012 to discuss options for inclusion of a model arbitration clause in the Master Agreement. Attendees are reported to have considered various proposals for potential arbitral seats and rules for the model arbitration clause.

As it is anticipated that further meetings will be held in the coming months in London and New York, no decisions have been reached. Based on the above discussions, it appears likely that ISDA will allow for the inclusion of one or more model arbitration clauses in its Master Agreement.

ISDA has identified three main areas of concern with regard to using arbitration for ISDA matters: (1) defective and poorly drafted arbitration clauses; (2) lack of arbitrators familiar with derivatives; and (3) lack of jurisprudence concerning ISDA. Each of these subjects is considered in turn below.

Arbitration Clauses

ISDA has noted that unnecessary difficulties have arisen from the inclusion of defective and poorly drafted arbitration clauses in ISDA and other agreements. Accordingly, ISDA has proposed that it publish one or more model arbitration clauses for use with the ISDA Master Agreement. It has sought members’ views on whether this is worthwhile and, if so:

  1. Which arbitral seat(s) and institution(s) should be included. Namely, the following options were the reported frontrunners:
  • ICC arbitration, with a London or New York seat;
  • LCIA arbitration, with a London seat;
  • HKIAC or SIAC arbitration, with a Hong Kong or Singapore seat (respectively);
  • UNCITRAL or PRIME Finance rules, with a London or New York seat; and
  • AAA/ICDR arbitration rules, with a New York or Miami seat.
  1. Whether its model clauses should include an “optional” arbitration clause that gives one or both parties (but typically just the finance parties) the right to choose between arbitration and litigation once a dispute has actually arisen. The issues surrounding this type of clause have recently been highlighted by the decision in Sony Ericsson v. Russian Telephone Company where the Russian Supreme Arbitration Court ruled that unilateral jurisdiction clauses were invalid and by the decision of the French Cour de Cassation also invalidating such clauses [see note on page 1 of this publication]; and
  2. Whether the model clause(s) should provide for the use of “fast-track” arbitration procedures.

Arbitrators’ Qualifications

ISDA has noted that there is a dearth of arbitrators with substantial experience in derivatives. As such, ISDA has asked its members for suggestions on how this deficiency could be remedied. ISDA has pointed out, however, that in subsequent years, arbitrators are likely to become increasingly familiar with derivatives as disputes of this nature are becoming more common.

Developing Jurisprudence on ISDA Master Agreements

ISDA has also noted that one of the benefits of arbitration is privacy. However, ISDA has raised concerns that given the lack of jurisprudence on derivative-related issues, arbitration may hinder the development of important case law on the interpretation of ISDA Master Agreements. Thus, ISDA has asked its members for their opinions on how this problem could be addressed in a way that does not detract from the benefits of arbitration. One potential solution discussed involves the release of awards, in redacted form, that address important issues for the ISDA community.

Conclusion

It remains to be seen what effect the New York and London consultation meetings will have on the Singapore discussions. Hopefully, the outcome of the next two meetings will provide ISDA members with a clear view of what the intended changes to the ISDA Master Agreement will be.