Adoption of Singapore Law as the Governing Law for OTC Derivative Transactions

Over-the-counter (‘OTC’) derivative transactions have been a feature of the financial markets for a number of decades, and the ISDA Master Agreement, which is used to govern OTC derivative transactions, is ‘probably the most important standard market agreement used in the financial world’ (Lomas v JFB Firth Rixson Inc & Ors [2010] EWHC 3372 (Ch)). Statistics and trends suggest that the Asian OTC derivative market will continue to play an important role in the global economy and Asia is likely to be an important geographical location for many market participants. Against this backdrop, it is instructive to consider whether an alternative governing law (to English or New York law) is a viable option for Asian market participants entering into OTC derivative transactions with one another. In ‘Adoption of Singapore Law as the Governing Law for OTC Derivative Transactions’, we undertake a detailed legal analysis of the choice of Singapore law as the governing law for OTC derivative transactions, with a view to inform and facilitate the thought process in this regard.

We first set the scene by describing the Asian OTC derivatives market and Singapore’s status as an OTC derivatives hub. Although the ISDA Master Agreement was drafted based on English and New York law, it is possible to use other governing laws, at least in the case of the laws of other common law jurisdictions. For example, Singapore and Hong Kong law are used from time to time, albeit on an ad hoc basis, and some jurisdictions (such as Australia and New Zealand) have also developed their own form of the ISDA Master Agreement governed by local laws.

If contracting parties were to consider the choice of governing law question afresh, there are a multitude of factors that are relevant from a legal and commercial perspective. In the context of OTC derivative transactions, Singapore ticks the right boxes as regards a number of factors that assume particular importance, which include certainty and predictability, and freedom of contract and flexibility in structuring transactions. As the Singapore legal system is based on the English common law, the similarities between Singapore and English law suggest that for the same reasons that parties choose English law, they should be open to choosing Singapore law as well.

Further, the significance of the governing law of the contracts lies beyond the contractual aspects of the parties’ relationship and also depends on applicable conflict of laws rules. Between two Asian market participants, an added complication is the ability to enforce foreign judgments in the relevant local jurisdiction(s) concerned. Where the centre of gravity of any dispute is likely to be in Asia, an Asian venue is practically convenient. Given the rise in the use of arbitration for disputes arising out of complex financial transactions (including OTC derivative transactions) and the increasing acceptance of Singapore as a preferred venue for dispute resolution, choosing Singapore law as the governing law would also achieve consistency with the choice of method of dispute resolution.

In our paper, we also consider in detail how the use of Singapore law will interact with the documentation used to govern OTC derivative transactions and the amendments that may be required if contracting parties elect to use Singapore law as the governing law of their ISDA Master Agreement and credit support documents. It is expected that such documentation would be enforceable and should not have to be amended substantially for use with Singapore law. However, there are potential ramifications from a practical perspective, including the commissioning of relevant legal opinions to support such documentation and the enforceability of the netting and collateral provisions.

Ultimately, we conclude that the use of Singapore law as the governing law of OTC derivative transactions is feasible for Asian counterparties from a legal perspective, but its implementation will necessarily involve other practical and commercial considerations.

Kai Loon Loh is a counsel at Ashurst ADTLaw.

Evan Lam is a partner at Allen & Gledhill LLP.