장외파생금융상품 거래를 위한ISDA 기본계약서 체결 관련 법적 쟁점

In relation to the cross border over-the-counter (“OTC”) derivatives transactions, most market participants use the ISDA Master Agreement. The ISDA Master Agreement is drafted based on the English law or New York (“NY”) law as a governing law. However, there are areas where local laws have to be applied regardless of parties’ agreement on the governing laws. Understanding this is inevitable to negotiate ISDA Master Agreement, this paper is to discuss legal issues when negotiating and executing ISDA Master Agreement focusing on 2002 ISDA Master Agreement. As mentioned, most of ISDA Master Agreement chooses either English law or NY law as a governing law. However, we have to consider that English or NY has the common law system which means the court can change the law by overturining previous cases or by denying market practices through the court’s holdings without congressional procedures. As a basis, when we execute ISDA Master Agreement, we have to first consider the legal ability of the counterparty to enter into OTC derivatives transactions. This can be whether the legal entity has the legal authority to enter into the ISDA Master Agreement or the person who actually signs on the ISDA Master Agreement has been authorized to sign on such a contract. Since the Financial Services and Capital Markets Act was enacted, the asset management company’s legal authority to enter into ISDA Master Agreement has been cleared for the hedging purpose derivatives transaction or swap transaction with the underslying assets of the interest rate or bonds for the entrusted fund. ISDA Master Agreement makes a material misrepresentation as one of events of default. Any representation made to the counterparty should be continuously true and need to be carefully made. Korean banktuptcy law is interpreted as allowing the liquidation of collaterals kept by a counterparty of the ISDA Master Agreement as an exception to the automatic stay; however, it needs to be also understood that the liquidation of collaterals has to be waited until the actual legal procedure’s commencement. When calculating the close-out netting amount, the scope of set-off can be extended to include non-defaulting parties’ affiliates by so called the triangular set-off clause and also it can be extended to include other credit and debts such as loans or deposits. This kind of extention of set-off scope seems to be generally acceptable in English law but it is not accepted in NY law under the bankruptcy law’s restrictions. However, in early termination cases where bankruptcy law dose not apply, this extended set-off scope is generally applicable and so accepting this clause in the Schedule is considered reasonable. Credit support documents are based on either English law based on title transfer or NY law based on secured interest. However, both laws generally allow use, sell, lend or rehyphocate collaterals received from the ISDA Master Agreement counterparty. When banktupt counterparty does not hold the collaterals, then the other creditor counterparty has a risk to become an unsecured creditor. Asset management’s liability is limited to the value of the asset under management. Therefore, generally there are additional termination events; net asset value becomes less than certain percentage of the principal amount or the key asset manager’s responsibility to manage certain entrusted fund is terminated. One of the events of defaults is the tax event which is any change of tax legislation which can increase counterparties’ tax obligations leading to reduction of profit of the coutnerparties. Any legislative discussion on tax effecting derivatives needs to be careful as it can put many and major domestic financial institutions into a risk to terminate all of their OTC derivatives transactions entered under the ISDA Master Agreement. It is beneficial to use the net exposure of each counterparty when calculating BIS ratio. To use net exposure, there must be a valid set-off agreement executed. Among the set-off payment methods, there is the first method which is not recognized by the BIS and therefore when executing 1992 ISDA Master Agreement, it need to be careful not to choose the first method. This paper reviewed legal issues which can occur when negotiating ISDA Master Agreement but there may be much more legal issues I cannot imagine. Therefore, any legal issues which can be obstacles to the growth of derivatives market or can promote the derivatives market need to be actively discussed and clarified.