UK Law and Practice Contributed by: Carolyn Jackson, Nathaniel Lalone, Christopher Collins and Ciara McBrien, Katten Muchin Rosenman UK LLP (Katten)
4. Documentation Issues 4.1 Trading Documentation 4.1.1 Industry Standards and Master Agreements Uncleared OTC Derivatives Uncleared OTC derivatives are commonly governed by the standard agreements published by the Interna - tional Swaps and Derivatives Association, Inc. (ISDA), regardless of product type or counterparty, and are generally governed by either English or New York law. As part of ISDA’s aim to streamline derivatives docu - mentation, it has developed a standardised frame - work of documentation for derivatives transactions. Such documents include: • the 1992 and 2002 master agreements – a pre - printed framework document comprised of boiler - plate provisions; • the schedule to the master agreement – amends the terms of the master agreement as agreed by the parties; • the credit support document – an optional docu - ment that offers each party security against the other party’s credit risk, either in the form of: (a) a credit support annex (CSA); or (b) a credit support deed (CSD); and • the confirmation – sets out the economic terms of an individual trade. The master agreement, schedule, CSA (if any), and all confirmations form one single contract. The CSD (if any) is a standalone document. Cleared OTC Derivatives Cleared OTC derivatives can also be documented under standard ISDA documentation. However, fre - quently, a Futures Industry Association (FIA)–ISDA Cleared Derivatives Execution Agreement is used instead of negotiating a full ISDA. Additionally, an FIA–ISDA Cleared Derivatives Addendum is generally used to document the relationship between a clearing member and its client. However, there can be practical differences between the documentation process for cleared and uncleared OTC derivatives. For example, the cleared OTC derivatives documentation process is generally heavily dependent on automated informa - tion technology processes. Additionally, the terms of
cleared OTC derivatives documents must conform to the relevant clearing house’s contract specifications. ETDs The parties involved in ETDs do not execute bilat - eral derivatives documentation, such as the standard ISDA documentation, but are subject to the rules of the underlying exchange. ETDs are generally governed by standard documenta - tion in line with the exchange’s contract specifications, as applied through the exchange’s rules. If a party to an ETD is not itself a member of the exchange, it will be required by its clearing firm and/or brokerage firm to negotiate a clearing/brokerage agreement, which is generally bespoke to each such firm. 4.1.2 Margins ISDA has produced standard credit support docu - ments that take the form of either a CSA or a CSD. Generally, the governing law of the credit support doc - ument matches the governing law of the ISDA master agreement (although this is not mandatory). VM In 2016, ISDA introduced a new CSA for VM that is used for documenting the posting of VM under English law (2016 VM CSA). The 2016 VM CSA forms part of a suite of credit support documents introduced to aid compliance with margin requirements for derivatives that are not subject to mandatory clearing under UK EMIR and comparable legislation in other major finan - cial jurisdictions. The 2016 VM CSA revises the 1995 ISDA CSA (Bilat - eral Form–Transfer) (1995 CSA) to allow parties to determine VM arrangements that meet the regulatory requirements for uncleared derivatives (ie, UMRs) that entered into force in March 2017. The structure of the 2016 VM CSA remains consistent with the 1995 CSA. The updates in the 2016 VM CSA relate solely to VM. ISDA has also published a 2016 VM CSA under New York law. ISDA has also published the 2016 Variation Margin Protocol to help market participants comply with the VM requirements of the UMRs. This enables market
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