The Situation: A few weeks after publishing the 2002 ISDA Master Agreement (French law), the International Swaps and Derivatives Association ("ISDA") complemented the set of French law documentation with the publication of the Credit Support Annex (French law), the 2016 Credit Support Annex for Variation Margin (VM) (French law), and the supporting French law legal opinion.
The Result: Users now benefit from a complete set to document and collateralize their derivative transactions, including in compliance with applicable variation margin requirements. The 2002 ISDA Master Agreement (French law) and the title transfer collateral documentation are all supported by legal opinions confirming the enforceability of this documentation.
Looking Ahead: Initial margin collateral documentation will follow shortly.
On December 13, 2018, ISDA published the 2016 Credit Support Annex for Variation Margin (French law) and the Credit Support Annex (French law) to collateralize derivatives transactions.
A few weeks prior, ISDA published a civil law master agreement, the ISDA Master Agreement (French law); a common law master agreement, the ISDA Master Agreement (Irish law); and their respective supporting legal opinions. This action took into account the withdrawal of the United Kingdom from the European Union and was designed to offer market users the ability to benefit from the automatic recognition and enforcement of EU court judgments.
Acknowledging the inconvenience for parties to use different laws to govern the close-out netting of their transactions, on the one hand, and the collateralization of these same transactions, on the other hand, parties may wish to align the law applicable to their master agreement with the law applicable to their existing collateral documentation, to ensure that a transaction is subject to the same law for both the transaction itself and its collateralization.
Title Transfer Collateral Documentation
Under ISDA standard English law documentation, title transfer collateral is documented under the 1995 ISDA Credit Support Annex and the 2016 Credit Support Annex for Variation Margin (VM). Those documents are intended to secure the mark-to-market of derivative transactions. The 1995 Credit Support Annex was created to document the exchange of collateral by providing for a calculation methodology of the "margin" to be exchanged between the counterparties, the transfer timing, a dispute resolution procedure, and the transfer of interests and distributions. In the context of the entry into force of the Commission Delegated Regulation (EU) 2016/2251 requirements on variation margin, ISDA published the 2016 Credit Support Annex for Variation Margin (VM), which updated the 1995 Credit Support Annex to comply with these variation margin requirements.
Both new French law CSAs are replicating exactly this structure. But both documents are primarily drafted for use with a 2002 ISDA Master Agreement (French law). Users should consult their legal advisers if they wish to keep using their English law Credit Support Annex and/or 2016 Credit Support Annex for Variation Margin while using the new 2002 ISDA Master Agreement (French law).
Users now benefit from a complete set of documents to use French law for the documentation and collateralization of their OTC derivative transactions. Users should consult their legal advisers if they wish to keep using their English law Credit Support Annex and/or 2016 Credit Support Annex for Variation Margin while using the new 2002 ISDA Master Agreement (French law).
Users and negotiators already familiar with the Credit Support Annex (English law) and the 2016 Credit Support Annex for Variation Margin (English law) should find no changes with the documentation they are used to negotiating and should not have to change their existing procedures, negotiation guidelines, and teams.
The number of changes from the English law forms is very limited, and the changes are intended to conform these documents to French law. Changes from the English law forms include:
- Those necessary to have the exchange of collateral covered by the French collateral regime: (i) explicit reference to the parties' intention to have the transfer of collateral created under this Annex covered by the financial collateral directive regime; (ii) deletion of any reference to the fact that the credit support arrangement set out in the Annex constitutes a transaction; and (iii) adding a provision to provide that any breach of the Annex will be a failure to pay (failure to provide eligible credit support or equivalent credit support) or a breach of agreement (any other breach of the Annex's provisions);
- Deletion of references to 1992 ISDA Master Agreement terms such as reference market-maker, market quotation/loss;
- "Exposure" definition (Paragraph 10): The reference to the "conditions precedent" of Section 2(a)(iii) has been changed to a reference to the suspension of the performance of the obligations under the Agreement, in order to be consistent with the provisions of Section 2(a)(iii) of the French law ISDA Master Agreement; and
- Prevailing language clause in bilingual versions.
An additional change made to the 2016 VM CSA only:
- "OTC Derivative" definition (Paragraph 11): The existing definition carved out of the scope of the definition of "OTC Derivative" a list of derivatives benefitting from the transitional exemption under the Commission-delegated regulation. As this transitional exemption has expired for some of those derivatives, the definition now simply refers to OTC Derivatives subject to the variation margin requirements, without providing any list.
The publication of initial margin collateral documentation subject to French law will follow shortly.
Legal Opinion on Validity and Enforceability of French Law Title Transfer Collateral Documentation
The 2018 legal opinion for France regarding the validity and enforceability under French law of Collateral Arrangements under the ISDA Credit Support Documents (Collateral Provider Insolvency) was issued on December 13 by Jones Day. It confirms that the provisions of the ISDA 1995 Credit Support Annex governed by French law and the 2016 Credit Support Annex for Variation Margin governed by French law are valid, binding, and enforceable under French law.
ISDA will collect from its official counsel legal opinions related to the new documentation in all jurisdictions covered by the collateral legal opinions that ISDA commissioned.
Three Key Takeaways
- Parties may wish to align the law applicable to their master agreement with the law applicable to their existing collateral documentation, to ensure that a transaction is subject to the same law for both the transaction itself and its collateralization.
- The number of changes from the English law forms is very limited, and the changes are intended to conform these documents to French law.
- To ease the transition of their English law existing collateral documentation to French law, Jones Day has prepared a standard amendment agreement (available on request) that incorporates necessary changes to be brought to the Credit Support Annex and 2016 Credit Support Annex for Variation Margin to conform to French law. Such amendment agreement might serve as a basis for a future protocol.