English law repo market under threat

A looming rift between two capital markets regulators is threatening the position of London as the centre for resolving disputes in repo transactions.

The row concerns the standard contract used to govern repo market deals.

The International Securities Market Association (ISMA), with some 770 corporate members in 51 countries, believes that its own six-year-old master agreement – known as the Global Master Repurchase Agreement – is already regarded universally as the standard document.

English law usually governs any transaction using the standard. But now, the Banking Federation of the European Union has decided to draw up an alternative European master agreement for repo and other trading transactions which would be written under the national law of one of the parties involved.

The federation is understood to want a contract that would be more adaptable to the legal systems in Continental Europe.

ISMA is resisting the federation's proposal, arguing that it would “be likely to create confusion, inconsistencies, and promote inefficiencies” in the market.

Thomas Hunziker, ISMA's Swiss-based general counsel, said: “We feel that the federation's initiative is not very helpful. Uniformity is already a very strong argument for continuing to use the GMRA.”

Giving an example of legal confusion under the federation's proposed contract, he said: “You could have a repo deal between a Spanish bank and German bank, and they would have to negotiate which state's law would govern it.

“If you then have an Italian bank with a deal behind that of the Spanish bank, you could then end up with a dispute involving more than one jurisdiction.”

Such complexity would be problematic for a such a large, fast-moving market, he said. It could also remove much of the dispute resolution work away from London, he added.

ISMA is now awaiting the federation's response to its concerns.

As international financial instruments, repo deals are highly complex and can demand a great degree of legal input.

The market for repo transactions – essentially the lending of securities such as fixed income bonds – involves deals totalling trillions of dollars every year.