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The nearly global response to the spread of the deadly Coronavirus has led to governmental authorities at all levels issuing “stay-at-home orders,” “orders to close non-essential businesses,” and bans on gatherings of 10 people or more. The resulting shut-down, as well as the impact of widespread remote-working practices and displacement of personnel, may disrupt or interrupt trading and hedging activity. In the face of this uncertainty, financial counterparties, including swap dealers (“SDs”) and non-SDs (“Financial Counterparties”), and commercial end users (“CEUs”) are reviewing the potential impacts on derivatives markets and the availability of those financial markets to adequately hedge commercial risks and provide needed price discovery functions.
This alert highlights some key considerations that financial market participants should take into account in managing their hedging and trading activities, including when performance and regulatory obligations may be excused, what disruption fallbacks may be available, and strategies to address regulatory compliance when trading personnel are working remotely.
Force Majeure Events
A party whose ability to perform under a financial derivative agreement is impacted due to COVID-19 events should consider whether its performance is actually delayed or prevented by a Force Majeure Event, as defined in its financial derivative agreement.
The standard 1992 ISDA Master Agreement (“1992 ISDA”) does not include a Force Majeure clause unless parties elect to adhere to the ISDA Illegality/Force Majeure Protocol (or otherwise modify the Schedule to their 1992 ISDA to include a bespoke force majeure provision). Under the standard ISDA 2002 Master Agreement (“2002 ISDA”), however, Termination Events include a Force Majeure Event, which would occur with respect to a party if, by reason of force majeure or act of state:
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Market participants should then ensure that they continue to monitor all phone, email and IM communications of their trading personnel, as well as any open bids, open offers, or executed trades (either continuously or from time to time) to detect any inappropriate trading strategies or any manipulative or market disruption behavior affecting the derivatives markets. Market participants should also monitor all inquiries and other communications from the CFTC and other relevant regulatory agencies made to any of its trading personnel.
For more information or any questions on the matters covered in this publication, please contact any of the lawyers listed below.
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