ISDA master agreement as a source of lex mercatoria in the international derivatives market

Abstract

International financial markets play a vital role in the modern market economy. Among the instruments traded in these markets, derivative contracts are of particular interest. Over-the-counter derivatives are widely used to allocate risks pertaining to commercial activity. In contrast to many other commercial transactions, derivative products are documented based on model contracts produced by the professional community. The ISDA Master Agreement is by far the most influential of these. This framework contract is published by the International Swaps and Derivatives Association (hereinafter — ISDA), a private corporation established in 1985 to represent swap dealers and promote swaps contracts in general. Currently ISDA is a driving force behind the regulation of over-the-counter financial markets on a global scale. The prevailing use of its standard agreements may lead to the conclusion that ISDA documentation is a part of lex mercatoria, the a-national legal order not relying on any state law. Many scholars in the field of private international law tend to share this view. The article maintains that a connection to the laws of common law jurisdictions such as the state of New York and England and Wales is a strong argument against the status of ISDA agreements as transnational law. Apart from that it considers contractual self-help remedies, such as suspension of performance and close-out netting, as evidence of transnational and autonomous nature of ISDA documentation. Though their existence seems more convincing than the wide use of ISDA templates alone, these provisions are interpreted by national courts in reliance on the rules of applicable law. In the conclusion the author notes that, despite their importance in financial markets, the ISDA Master Agreements by no means operate as contrat sans loi. Therefore, they lack the degree of autonomy demonstrated by the UNIDROIT Principles of International Commercial Contracts and some of the International Chamber of Commerce (hereinafter — ICC) publications, and cannot be considered the sources of lex mercatoria in the strictest sense. However, given its enormous experience, the ISDA may, in future, draft a contractual instrument not connected to any national legal order. At present, in response to the need to update its standard documentation in the wake of the UK's exit from the European Union, ISDA has chosen to re-subordinate its 2002 model contracts to the laws of France and the Republic of Ireland, rather than publish contracts that are not governed by the law of any state.