Taskforce finds euro fix for derivatives contracts

After six months of meetings, in-house and private practice finance lawyers from around the world have hammered out a protocol that should prevent tens of thousands of derivatives and swaps contracts having to be individually renegotiated because of the euro.

Allen & Overy partner Jeffrey Golden opened the protocol to the first signatories – Charles Ross-Stewart of Citibank, Cathryn Field of Paribas and Michael Wood of Dresdner Bank – at the firm's London office last week.

Golden, in his capacity as European counsel to the International Swaps and Derivatives Association (ISDA), had been compiling the comments and suggestions from dozens of lawyers around the world.

Golden explained that most of the tens of thousands of derivatives contracts in force are based on ISDA's standard terms for swaps and derivatives “the Master Agreement”, which were published in 1992.

Because this was before a full definition of the euro had been worked out, current contracts do not expressly contemplate the conversion of European currencies into the euro. ISDA realised this could mean that each would have to be bi-laterally renegotiated.

ISDA set up a “documentary taskforce” two years ago to draft a template for converting contracts. In-house lawyers from the 75 ISDA members who took part met with private practice lawyers first in London and later in Paris and Frankfurt, to find an easier way for contracts to be converted. They identified five areas where contracts might need changing – including the definition of business days, aspects of bond option transactions and agreement on what to do when the price source for a contract disappeared because a currency had been replaced by the euro.

Member banks can opt for any or all of these five to be amended in their contracts with other members. ISDA will display the options elected by its members on its Web site. Members who choose the same options will automatically have agreed to have their contracts with each other amended.

ISDA is seeking opinions in Japanese law from Akihiro Wani of Mitsui Yasuda Wani & Maeda and in New York law from Dan Cunningham of Cravath Swaine & Moore.