It’s one of the more complex, technical issues related to Brexit, but it’s one that has focused the minds of derivatives professionals since the 2016 referendum result: what does the UK’s exit from the European Union (EU) mean for use of the English law ISDA Master Agreement?
At this point, we don’t have enough information to say for sure. 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.
In response, ISDA is drafting French and Irish law governed Master Agreements as additional governing law options, along with French and Irish court jurisdiction clauses
So, what does all of this mean? As it currently stands, 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.
To be clear, 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. Say an Italian and French counterparty are trading under an English law agreement with English court jurisdiction after Brexit; there’s a dispute and the English court makes a judgement in favour of the Italian counterparty. The Italian counterparty would need to get that English court judgement recognized by a French court in order to get it enforced – it’s an extra step in the process that could take years or, worse, result in another court deciding to reopen parts of the case.
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.
That’s why ISDA is looking to add the new European governing law and jurisdiction options, in addition to existing English, Japanese and New York law choices. In order to be representative of the civil and common law systems across the EU, French and Irish law have been suggested. We are also looking into the possibility of designating the courts of an EU-27 member state for English law agreements.
Working groups have been set up, and are making good progress in considering the issues and identifying what changes might be necessary. This is all about preparing for an uncertain future. Post-Brexit, there will be excellent reasons to both continue using an English law Master Agreement and to use an EU-law-governed agreement. We want to be ready for all eventualities and provide the necessary tools to our members.