Over-the-Counter Derivative Financial Instrument as an International Commercial Contract

INTRODUCTION. Derivative financial instruments (derivatives) are in high demand in international commercial turnover. Although the economic and legal literature presents the point of view that derivatives can exist in the form of securities, the most common is the contractual approach to derivatives. According to this approach, derivatives are commercial contracts, the value of which depends on a certain variable known as the underlying or base asset. In some cases, derivative contracts have cross-border nature and thus they can be viewed as international commercial contracts. Despite the existence of Russian-language derivatives studies published by Russian legal scholars, derivative financial instruments are usually considered in domestic rather than international context. In the present publication, the author makes an attempt to fix this gap and analyzes transactions with derivatives as international commercial contracts accompanying cross-border movement of goods and services. The main emphasis in the article is made on standard templates used by the parties to contracts that are derivative financial instruments.

MATERIALS AND METHODS. The author used 2002 ISDA Master Agreement as a basic source for the present article. This agreement is the most recent version of a standard framework contract for derivatives trading in international financial markets. The methodological base of the publication is represented by general scientific methods (analysis, synthesis, induction, deduction) as well as specific legal research methods. In particular, formal legal method was employed for the literal interpretation of the provisions of the standard documentation, while historical method was invoked to describe the evolution of standard derivative market templates. Apart from that the author employed statistical methods to evaluate the volume of derivatives market and the place that standard contracts have in over-the-counter derivatives trading.

RESEARCH RESULTS. The article claims and proves that over-the-counter derivative transactions can be defined as international commercial contracts that fall under the scope of international private law. Over-the-counter derivatives transactions are concluded based on standard templates containing provisions related to dispute resolution and applicable law. The research made covered such issues as contractual parties, the form of cross-border derivative transaction, the contents of the contract as well as the liability following the breach of contractual obligations. The key feature of these agreements is the possibility of early termination through close-out netting. Another feature is the flexibility when concluding transactions as they may be entered into orally while the failure to deliver a formal document evidencing the terms of the trade does not lead to the invalidity of the transaction itself.

DISCUSSION AND CONCLUSIONS. The author comes to conclusion that ISDA standard templates are widely used in international trade. This fact is evidenced by case law as all doctrinal sources. However following the introduction of unilateral restrictive measures adopted by foreign states, the ISDA role in contractual regulation of derivative trading will decrease due to their unavailability to Russian parties.

1. Aitkulov T., Anichkin A., Malyukevich D., Batsura M. Sdelki s proizvodnymi finansovymi instrumentami: kak izbezhat' nedejstvitel'nosti [Transactions with Derivative Financial Instruments: How to Avoid Invalidity]. – Juridicheskaja rabota v kreditnoj organizacii [Legal Work in a Credit Organization]. 2018. № 1. P. 45-54. (In Russ.).

2. Erpyleva N.Ju. Mezhdunarodnoe chastnoe parvo [Private International Law]. Moscow: Higher School of Economics Publishing House. 2015. 655 p. (In Russ.).

3. Gudkova A.A. Glavnyj istochnik sovremennogo torgovogo prava: akty new lex mercatoria [The Main Source of Modern Commercial Law: Acts of New Lex Mercatoria]. – Voprosy rossijskoj justicii [Issues of Russian Justice]. 2021. № 15. P. 215-227. (In Russ.).

4. Ivanova E.V. Dogovornye formy derivativov: nekotorye aspekty pravovogo regulirovanija [Contractual Forms of Derivatives: Some Aspects of Legal Regulation]. – Zakon [Law]. 2007. № 7. P. 125-135. (In Russ.).

5. Kanashevsky V.A. Mezhdunarodnye sdelki: pravovoe regulirovanie [International Transactions: Legal Regulation]. 2-e izd., pererab. i dop. Moscow: International Relations. 2019. 704 p. (In Russ.).

6. Klementyev A.P., Fonotova O.V. Principy UNIDRUA, kasajushhiesja primenenija polozhenij o kompensacii za prekrashhenie (Principes d’UNIDROIT concernant l’applicabilité des clauses de résiliation-compensation), i ih znachenie dlja pravovogo regulirovanija rynka derivativov [UNIDROIT Principles on the Applicability of Close-Out Compensation Provisions and Their Significance for the Legal Regulation of the Derivatives Market]. – Trudy Instituta gosudarstva i prava Rossijskoj akademii nauk [Proceedings of the Institute of State and Law of the Russian Academy of Sciences]. 2024. № 6 (19). P. 95-120. (In Russ.).

7. Kormosh Yu.I. Standartizacija vnebirzhevyh srochnyh sdelok kak antikrizisnaja mera dlja rossijskogo finansovogo rynka [Standardization of Over-the-Counter Derivatives as an Anti-Crisis Measure for the Russian Financial Market]. – Trudy Instituta gosudarstva i prava Rossijskoj akademii nauk [Proceedings of the Institute of State and Law of the Russian Academy of Sciences]. 2010. № 4. P. 173-202 (In Russ.).

8. Lunts L.A. Kurs mezhdunarodnogo chastnogo prava [Course on Private International Law]. V 3 t. Moscow: Spark. 2002. 1007 p. (In Russ.).

9. Lunts L.A. Kurs mezhdunarodnogo chastnogo prava: Mezhdunarodnoe chastnoe pravo: Obshhaja chast' [Course on Private International Law: General Part]. 3-e izd., dop. Moscow: Legal Literature. 1973. 384 p. (In Russ.).

10. Mazhorina M.V. Lex mercatoria: srednevekovyj mif ili fenomen globalizacii? [Lex Mercatoria: A Medieval Myth or a Phenomenon of Globalization?]. – Pravo. Zhurnal Vysshej shkoly jekonomiki. [Law. Journal of the Higher School of Economics]. 2017. № 1. P. 4-19 (In Russ.).

11. Mezhdunarodnoe i zarubezhnoe finansovoe regulirovanie: instituty, sdelki, infrastruktura [International and Foreign Financial Regulation: Institutions, Transactions, Infrastructure]. Monografija. Pod red. A.V. Shamraeva. V 2 ch. Moscow: KNORUS, CIPSR. 2014. Ch. 2. 640 p. (In Russ.).

12. Otdel'nye vidy objazatel'stv v mezhdunarodnom chastnom prave [Certain Types of Obligations in Private International Law]. Pod red. V.P. Zvekova. Moscow: Statut Publ. 2008. 603 p. (In Russ.).

13. Pleshakova N.S. Pravovye aspekty transgranichnyh sdelok s vnebirzhevymi proizvodnymi finansovymi instrumentami (derivativami) [Legal Aspects of CrossBorder Transactions with Over-the-Counter Derivative Financial Instruments]. – Mezhdunarodnoe parvo [International Law]. 2017. № 3. P. 31-44. (In Russ.).

14. Puzyreva E.N. Lex mercatoria kak istochnik regulirovanija transgranichnogo obrashhenija cennyh bumag [Lex Mercatoria as a Source of Regulation for the CrossBorder Circulation of Securities]. – Problemy jekonomiki i juridicheskoj praktiki [Problems of Economics and Legal Practice]. 2014. № 5. P. 145-148. (In Russ.).

15. Selivanovsky A.S. Pravovoe regulirovanie rynka proizvodnyh finansovyh instrumentov [Legal Regulation of the Derivatives Market]. Moscow: Higher School of Economics Publishing House. 2022. 375 p. (In Russ.).

16. Vertlib F.O., Shumanov K.S. Principy osushhestvlenija likvidacionnogo nettinga UNIDRUA i rossijskoe zakonodatel'stvo o likvidacionnom nettinge: voprosy sootvetstvija [Principles of UNIDROIT on Close-Out Netting and Russian Legislation on Liquidation Netting: Compliance Issues]. – Vestnik Moskovskogo universiteta MVD Rossii [Bulletin of Moscow University of the Ministry of Internal Affairs of Russia]. 2020. № 7. P. 82-91. (In Russ.).

17. Vilkova N.G. Dogovornoe pravo v mezhdunarodnom oborote [Contract Law in International Turnover]. Moscow: Statut Publ. 2004. 511 p. (In Russ.).