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 Wednesday 22 July 2015

Things to consider with Multibranch Parties.


With a few rare exceptions, in the context of ISDA Master Agreements, a Multibranch Party is a bank with branches.

When entering into an ISDA Master Agreement with a bank you may be asked to do so on a single branch basis (e.g. Frankfurt only) or on a multibranch basis (e.g. Frankfurt, London, New York and Tokyo) meaning that each branch may separately do deals under the same Agreement.

The bank concerned will be listed as one of the parties to the Agreement and the branches through which it wants to trade will be stated in Part 4(d) of the Schedule.

If the bank is only seeking to execute trades through one branch then the counterparty name will include reference to the branch (e.g. XYZ Bank, London Branch).

There are a few key points to consider where branches are involved:

1. The choice of branches

In the past some banks adopted a “portmanteau” approach to branch choices. I can recall one bank proposing 21 of its branches for trading purposes. This was far too many and included such places as Labuan and Tonga. There was no way the bank I was working in would trade with such branches.

It is therefore important to limit branches to ones where a number of trades will be done rather than proposing those where trading may only occur “once in a blue moon” if at all. It is also crucial to perform a legal analysis of each branch quoted in Part 4(d).  They should be checked to see that a “clean” legal opinion is held (ISDA commissioned or otherwise) confirming that close-out netting is effective in that branch’s jurisdiction.   This is because if a local liquidator sought to ringfence a bankrupt local branch’s assets, you might have a stronger legal position than if you did have this assurance.

Some banks will seek to include “catch all” wording stating that any branch can enter into Transactions under the Agreement if stated in a Confirmation.  I would reject this type of request.  While it may be convenient not to have to update the Schedule if a new branch is added or you are looking to extend trading to additional branches, legal and tax analysis must be undertaken by the appropriate department(s) before entering into Transactions with new branches. Traders must not be allowed to trade with any branch and rely on a Confirmation without this analysis being done and the name of the branch agreed and noted formally in trading and credit records.

2. Recourse to Head Office

Section 10(a) of the ISDA Master Agreement states that both parties may have recourse to each other’s Head Office regardless of the credit or political risk of branches through which they are trading should a payment be missed under a Transaction.

This represents a payment or performance guarantee to their counterparty.

Parties must choose in Part 4(c) of the Schedule if they want Section 10(a) to apply.  If it applies, a deal with a branch = a deal with its Head Office.

This representation is also considered repeated by a party on each date a deal is done.  However, under the 2002 ISDA Master Agreement, there is one exception.  Where during an Illegality or Force Majeure Event Waiting Period, a branch’s payment or delivery obligations are suspended, the other party has no recourse to that branch’s head office until that Waiting Period expires.

If your counterparty does not want Section 10(a) to apply to the Agreement it means it wants to shift the political risk of dealing with its branch on to you.  This may not matter if the branches are all in mainstream financial centres but I think this is a matter for the credit and legal departments if it would involve exotic locations or jurisdictions unfavourable to close-out netting. 15-20 years ago a number of major banks tried to negotiate this but ultimately failed because parties value the protection offered by Section 10(a).

The credit effect of disapplying Section 10(a) is that the parties would have to evaluate each other’s branches as they would a local bank in the country concerned. In practical terms they would probably not be able to access financial information on a branch to perform a sound financial analysis of it.

However, if you do decide to have an ISDA Master Agreement with a single bank branch, you should still apply 10(a) so as to have recourse to that bank’s head office.

3) Netting of Payments

Section 2(c) relates to netting of payments in the normal course of business and aims to reduce settlement risk.  The parties elect in Part 4(i) whether single transaction payment netting applies (i.e. payments due on the same date in the same currency and in relation to the same single Transaction) or Multiple Transaction Payment Netting applies (i.e. payments due on the same date in the same currency and in relation to the multiple Transactions).

The parties need to consider what they can operationally handle. It is possible to applying payment netting separately to each pairing of a party’s Offices.

Conclusion

Even in the world of retail banking, although customers may have a great affection for their local branch and staff, overall in respect of their money they are looking beyond that to the strength of their bank as a whole. The same principle applies, mutatis mutandis, with Multibranch Parties and Section 10(a) of the ISDA Master Agreement.

Posted by Paul Harding


Tagged: ISDA negotiation ISDA OTC derivatives

Category: ISDA negotiation


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