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 Wednesday 27 July 2016

Brexit and the ISDA Master Agreements


In 2002 Donald Rumsfeld, George W. Bush’s Secretary of Defense said:

As we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns - the ones we don’t know we don’t know. 

This statement seems particularly apt when we consider Brexit and OTC derivatives documentation like the ISDA Master Agreements.

Currently we do not know the precise form Brexit will take nor exactly when Article 50 of the Lisbon Treaty will be triggered to start the EU’s negotiation process. Nevertheless it is still useful to consider some of the areas in the ISDA Master Agreements where difficulties could arise. Of course, when a Brexit agreement is reached such provisions will need to be reviewed more closely.

The matters discussed below should be regarded as a preliminary overview of issues that might arise.

Provisions meriting consideration in existing ISDA Master Agreements

These are:

  • Standard and bespoke Events of Default.
  • Standard and bespoke Termination Events.
  • Governing law.
  • Withholding tax provisions potentially subject to change.
  • Cross references to specific EU Regulations or countries.

Events of Default

Both the International Monetary Fund and the Bank of England continue to warn that Brexit could have a material adverse effect on the UK economy.

The1992 and 2002 ISDA Master Agreement’s standard Events of Default are broadly drafted but amendments to them in the Schedule and any existing bespoke Events of Default should be reviewed and noted particularly where they anticipate a Brexit type event. Particular care is needed where the ISDA Master Agreement is linked to a loan agreement containing a Brexit Event of Default which could cross default into the ISDA Master Agreement.

Termination Events

Lawyers consider that the Illegality and Force Majeure Event Termination Events in the ISDA Master Agreements are not triggered by Brexit on what we know at present.

There are many bespoke Termination Events in ISDA Schedules and these should be carefully reviewed again for any events which anticipate a Brexit style scenario.

Here credit rating triggers may be general or could specifically extend to a Brexit type event. Finding any of these is very important. The corollary of this could well be increased collateral requirements, failure to meet which could well lead to default (actually or potentially). Furthermore volatility from increased risk exposures under OTC derivatives transactions or in the value of UK securities collateral could also result in more margin calls on the affected parties.

Governing law

Many contracts under ISDA Master Agreements are governed by English law and the parties submit to the jurisdiction of the English courts.

Currently all EU countries apply EU rules on governing law in the Rome I Regulation (for contractual obligations) and the Rome II Regulation (for non-contractual obligations). When Brexit is finalised these may no longer apply and an alternative method of preserving these important rules on governing law may need to be found. However, if Brexit finally resulted in the UK becoming a European Free Trade Association (“EFTA”) member state then Rome I and Rome II would still apply.

Tax provisions

These would need to be reviewed by expert tax advisers to determine which (if any) provisions would need amendment or renegotiation.

EU Regulations

Many of the laws which govern the OTC derivatives markets in the EU derive from EU Regulations and Directives. The final nature of the UK Brexit will determine how much (if any) of this EU law the UK will want to keep. However, if the UK became a member of EFTA following Brexit the following EU legislation would still apply:

  • The EU Directive on Financial Collateral Arrangements (2002/47/EC).
  • The EU Credit Institutions Winding-Up Directive (2001/24/EC).
  • The EU Bank Recovery and Resolution Directive (2014/59/EC).
  • Rome I and Rome II Regulations as mentioned before.

Other technical amendments of a good housekeeping nature will probably need to be made to ISDA Master Agreements.


While currently we can really only theoretically gauge our positions on the  impact of Brexit on our existing  ISDA Master Agreements, we must be even more mindful of what we include in new Schedules so that we do not insert provisions which in future could prove ineffective, prejudicial or unworkable.

Our existing Schedules are the “known knowns”. We do not want to store up trouble in the future in new Schedules through known or unknown unknowns.

The author acknowledges with thanks a useful article by Hogan Lovells published on 8th June 2016 entitled "What would Brexit mean for derivatives transactions?" which covers these topics in further detail.

Posted by Paul Harding

Tagged: ISDA negotiation ISDA OTC derivatives Brexit

Category: ISDA negotiation

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