08 January 2018

Brexit and the ISDA Master Agreement

ISDA Chief Executive Officer Scott O'Malia offers informal comments on important OTC derivatives issues that will be affected by the British departure from the European bloc, reflecting ISDA's long-held commitment to making the market safer and more efficient.

If an agreement is reached between the EU and UK that preserves certain aspects of the current legal framework – for example, the automatic recognition of court judgements – then possibly not much. If there’s no agreement, then that automatic recognition between the EU and UK would fall away post-Brexit. Some firms in the EU and European economic area (EEA) may want to retain the convenience of automatic recognition across the EU/EEA by using the jurisdiction of an EU/EEA country.

Counterparties may also want to retain specific benefits of EU legislation – for example, protections under certain EU national insolvency laws that require use of an EU member-state-law agreement in order to receive those protections.

Virtually all of the ISDA Master Agreements entered into between counterparties based in the EU or EEA are governed by English law. Counterparties typically also submit to the jurisdiction of the English courts. Because the UK is part of the EU and EEA, it means any English court judgement is automatically recognized and enforced across those member states. Without some type of deal that replicates the effects of EU/EEA membership, English law would become a third-country law after Brexit. One of the consequences is that English court judgements would not be automatically recognized in EU/EEA countries.

This doesn’t mean an English court judgement won’t be recognized and enforced by an EU court after Brexit, and it doesn’t mean an English law agreement becomes less ‘valid’ or that EU/EEA counterparties won’t be able to continue to use English law Master Agreements. It does potentially mean more expense, more uncertainty and more red tape.

Consequently, some EU/EEA counterparties may want to retain that automatic recognition and enforcement when trading with each other. There are other reasons why entities may want to carry on trading under EU/EEA law agreements. For instance, EU/EEA credit institutions are required to insert contractual recognition of bail-in into third-country law governed contracts under Article 55 of the EU Bank Recovery and Resolution Directive – and without some type of deal, this would include English law governed ISDA Master Agreements after Brexit. This wouldn’t be an issue for agreements governed by the law of an EU/EEA member state.

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