In the past, international derivatives transactions, for instance relating to stock options or future swaps, have in general been documented under framework agreements, in particular the so-called ISDA 1992 and 2002 Master Agreements. The templates of such agreements traditionally contained choice-of-law clauses providing for English or New York law and, in accordance therewith, jurisdiction clauses conferring exclusive jurisdiction to the courts of England or New York. Due to this practice, these courts have gained a high reputation for their experience in the field of disputes arising out of derivatives transactions. Hence, parties to such transactions did not have strong incentives to consider other means of dispute resolution. In short, banks and other financial institutions have in the past favoured litigation over arbitration regarding derivatives transactions.
Changing Market Reality
However, over the recent years, the conditions of the market have changed significantly. One aspect worth emphasizing is the growing diversity of counterparties, and in connection therewith, of jurisdictions involved. Today, derivatives transactions often involve parties which are seated in emerging market jurisdictions in South America, Russia and the Commonwealth of Independent States (CIS), the Middle East and other parts of Asia. This fact raises, in particular, enforcement issues in certain jurisdictions where it may be difficult – if not impossible – to enforce a judgment of a foreign state court. Therefore, the template clauses providing for dispute resolution by state courts became less attractive to parties of derivatives transactions. Last but not least, banks have changed their attitude towards dispute resolution during the recession and crisis in the last decade when more and more financial contracts were breached, debts became toxic and cross-border dispute resolution became more important than ever.
The ISDA Arbitration Guide 2013
In response to this trend, the International Swaps and Derivatives Association (ISDA) developed the idea of providing template arbitration clauses, tailored to the widely used ISDA Master Agreements (i.e. template agreements provided by the ISDA to its members, who are among the most important participants of the derivatives market), in support of the requirements of such “broader” market conditions. On such basis, the ISDA has published the so-called 2013 ISDA Arbitration Guide. This guidebook sets out the key features of international arbitration and includes a range of model arbitration clauses with a view to be used for the adaption of the existing ISDA Master Agreements. Thereby, the following institutional rules (and seats of arbitration) are recommended, which have been selected (while not being intended to exclude other rules and/or seats of arbitration) on the basis of an extensive members’ consultation with a diverse group of market participants who use the ISDA Master Agreement:
- ICC Rules (London, New York or Paris seat)
- LCIA Rules (London seat)
- ICDR Rules (New York seat)
- HKIAC Rules (Hong Kong seat)
- SIAC Rules (Singapore seat)
- Swiss Rules (Zurich or Geneva seat)
- P.R.I.M.E. Finance Rules (London, New York or The Hague seat)
The ISDA recently recommending arbitration clauses for its Master Agreements, along with publishing a specific guidebook providing for background information for prospective market participants using such arbitration clauses in their agreements, clearly illustrates the emerged trend in derivatives trading towards arbitration as an alternative way of dispute resolution. It is very likely that the ISDA Arbitration Guide 2013 will strengthen the acceptance of arbitration as a means to resolve disputes arising out of derivatives transactions by banks and other financial institutions.