Cross-border OTC derivatives underpin global financial markets’ stability, thanks largely to the ISDA Master Agreement (MA), a paradigm of successful lex mercatoria. However, a string of lawsuits challenging cross-border derivatives’ validity shows that there are unsettled tensions. This article deep dives into those disputes, drawing three main lessons. First, the ISDA Master Agreement relies primarily on common law concepts, and on English (and New York) law and courts for support. This glosses over important differences with other jurisdictions on matters of risk ‘disclosure’, ‘advice’, or ‘capacity’, which are often enshrined in mandatory rules and legal principles and can shape contract enforceability. Second, the ISDA MA understandably protects itself from challenges to its enforceability through representations and warranties stating that the parties had ‘capacity’, that no ‘advice’ was provided, and that the parties understood and assumed all risks. Doing so, however, precludes a meaningful dialogue over differences of principle. Throughout the individual disputes courts have not managed to have a dialogue over these differences or find a compromise about the expectations regarding banks’ duties of disclosure of risks, or advice. Third, instead, ‘dialogue’ between legal systems has unfortunately focused on a discussion of non-bank counterparties’ “capacity” to conclude “speculative” transactions under their local laws. This was a bad choice. “Capacity” makes compromise impossible (an entity has it or lacks it, no matter of how careless it was) and determining whether an individual transaction is speculative is an uncertain, often futile exercise. Despite the unsatisfactory state, this litigation offers an opportunity to reflect about possible ways forward for derivatives’ lex mercatoria and governance.

Read the entire article here: https://ssrn.com/abstract=5545822 or https://dx.doi.org/10.2139/ssrn.5545822.