A multilateral development bank is an international financial institution chartered by two or more countries for the purpose of encouraging economic development in developing countries. Because of the special status of multilateral development banks, there are various issues for market participants to consider when entering into derivatives with these entities. We illustrate these with a case study below.
Asian Infrastructure Investment Bank
Asian Infrastructure Investment Bank (“AIIB”) is an international organisation headquartered in Beijing, the People’s Republic of China with a mission on investing in sustainable infrastructure and other productive sectors in Asia and beyond. Since its inception in 2016, AIIB has been issuing global bonds in the international financial markets, and it has also entered into derivatives transactions with global financial institutions for risk management purposes.
Given AIIB’s domicile is in Mainland China, the enforceability of any claims against AIIB and its assets is a matter for Mainland Chinese law. Hence it is imperative that potential counterparties examine various key aspects of AIIB and the transactions under Mainland Chinese law including the following.
Legal status and capacity
The constitutional document of AIIB is the Articles of Agreement of the Asian Infrastructure Investment Bank (the “AIIB Articles”). Chapter IX of the AIIB Articles provides that AIIB shall have full juridical personality, and have the full legal capacity to contract, to institute and respond to legal proceedings. AIIB is also required to use its resources and facilities exclusively to implement the purposes and functions prescribed in the AIIB Articles. It is on this basis that the AIIB has the requisite capacity to enter into financial contracts including derivatives.
Given the perceived difficulty in closing out against a Chinese counterparty, a question has rightly been raised as to the enforceability of close-out netting against AIIB. To answer this question, it is necessary to consider how contractual provisions (including those related to close-out netting) would be affected and interpreted under the ISDA Master Agreement as well as to assess the application of the Chinese Bankruptcy Law and bankruptcy proceedings to AIIB.
In connection with its derivative transactions, AIIB has also routinely entered into collateral arrangements with various counterparties. The enforceability of such collateral arrangements will depend on a number of factors including the type of assets used (cash or securities, in which currencies) and the location of such collateral (typically outside China). It is not uncommon for collateral to be provided by AIIB under title transfer arrangements (such as the ISDA Credit Support Annex governed by English law), in which case the counterparty will acquire the legal title to the collateral assets and should not have to be concerned with limitations or delay in any enforcement proceeding on AIIB.
New Development Bank
In addition to AIIB, the New Development Bank ("NDB") is another multilateral development bank having its headquarters located in China (in this case, Shanghai). NDB has a narrower membership, covering the five nations commonly referred to as BRICS (Brazil, Russia, India, China, and South Africa). Interestingly however, NDB has also been active in recent years transacting in derivatives and other financial master agreements with market participants, and a number of the issues identified above equally apply to NDB.