Standard Forms / Documentation / Guidelines
FINANCIAL MARKETS LAWYERS GROUP
33 LIBERTY STREET
NEW YORK, NY 10045-0001
BRITISH BANKERS’ ASSOCIATION
PINNERS HALL
105-108 OLD BROAD STREET
LONDON EC2N 1EX
October 8, 1999
Mr. Spiros V. Bazinas
Legal Officer
International Trade Law Branch
Office of Legal Affairs
United Nations Commission on International Trade Law
Vienna International Centre
P.O. Box 500
A-1400 Vienna
AUSTRIA
Re: UNCITRAL Draft Convention on Assignment in Receivables Financing
Dear Mr. Bazinas:
The Financial Markets Lawyers Group1 and the British Bankers Association2 welcome this opportunity to jointly comment on the UNCITRAL Draft Convention on Assignment in Receivables Financing (the "Draft Convention"). The FMLG and the BBA applaud the efforts of the Working Group on International Contract Practices ("Working Group") to promote the availability trade financing. The Draft Convention would clearly remove obstacles to receivables financing resulting from existing legal uncertainty as to the validity of cross-border assignments and their effect on debtors and other third-parties.
Like the Working Group, the FMLG and the BBA have long sought to promote greater legal certainty regarding the enforceability of international financial contracts and related commercial transactions. We have sought to enhance legal certainty among financial services providers ("FSPs") and other major market participants in the over the counter ("OTC") foreign currency and derivatives markets by encouraging various countries to clarify the status of certain contractual and statutory creditor rights upon the insolvency of a contractual counterparty. Both our groups have actively promoted the use by FSPs around the globe of certain standardized contractual terms. We have also commissioned legal opinions clarifying the enforceability of certain netting, close-out and set-off rights contained in the model foreign exchange master netting agreements jointly published by our organizations.3 We believe our efforts to mitigate the legal risks associated with entering into an international financial contract affords us a unique perspective regarding the Working Group’s efforts to standardize the legal rules applicable to cross-border receivables financings.
The FMLG and the BBA are united in their concerns about the Draft Convention. We believe that, given its broad scope, the Draft Convention would undermine the high degree of predictability that is one of the cornerstones behind today’s highly successful OTC foreign currency and derivatives markets. The FX Master Agreements developed by the BBA and the FMLG have historically afforded FSP active in the international foreign exchange markets legal certainty regarding the enforceability of payment and close-out netting rights for a wide range of foreign exchange-related transactions. However, these rights are based on the continuing validity of certain contractual provision in the FX Master Agreements that expressly prohibits either party from assigning any or all of its underlying rights or obligations without the prior written consent of the other party.
Such assignments are prohibited because a FSP’s continued willingness to enter into these transactions with a customer at competitive prices is based on the assumption that the FSP can set-off or net a customer’s payment obligation to the FSP against any debt owed by the FSP to the customer including deposits or other collateral maintained with the FSP. Given that a FSP may over time enter into hundreds or even thousands of transactions with a particular customer or another FSP, the FSP’s gross exposure to the other party can be enormous. By documenting these transactions under one of the FX Master Agreements, the FSP can substantially reduce their exposure to their customers (and each other), but only so long as the counterparty clearly has no contractual or other legal basis upon which to assign the FSP’s payment obligations under a particular transaction or any other claim the customer has against the FSP (i.e. deposits, collateral).
Assuming the Draft Convention were to apply to the obligations of a FSP or a customer under a foreign currency contract or other privately negotiated derivative transaction, it would clearly undermine the established contractual prohibition on assignment without consent included in the FX Master Agreements and other model master netting agreements. As a result, an assignment made without the consent of the FSP may inappropriately: (i) oblige a debtor/FSP to pay a third-party; or (ii) freeze a FSP’s defenses and/or rights of set-off. Such a result would obviously conflict with the contractual netting rights and statutory priority scheme that are so fundamental to the fluid and efficient operation of these markets.
Clearly, the Working Group was cognisant of these important issues when it prepared the most recent version of the Draft Convention. The remarks accompanying the Draft Convention recognise that application of the terms of the Draft Convention to payment obligations arising from OTC derivatives transactions such as foreign currency spot, forward and option contracts would be problematic. As a result, the Working Group appears to be weighing various different methods of addressing the treatment of these sorts of assignments. The remarks accompanying Article 4 of the Draft Convention indicate that an express exclusion of "clearing-house, swaps, and derivative transactions" might be an appropriate solution so as not to unsettle "existing and well-functioning practices." We agree.
Given the vital role that foreign exchange and derivative transactions play in facilitating international trade, we strongly urge the Working Group to opt for simplicity and clarity and exclude from the scope of the Draft Convention: (i) any obligations of a FSP arising from the provision of financial services (i.e. deposits, foreign currency and derivatives contracts etc.) and, (ii) any obligations to a FSP arising from the same activities provided that the obligation is connected with an obligation of the FSP to make a payment or deliver currency, securities commodities or other countervalue. Excluded obligations should, of course, also include those arising out of any clearing, payment or securities settlement system as well as any other clearing-house for financial contracts. The FMLG and the BBA strongly believe that the Working Group can best achieve its objective of encouraging FSP and other parties to provide international trade finance credit by adopting as broad a definition as possible of the sorts of FSP obligations and financial contracts that are exempted. Accompanying this letter is a sample provision for consideration by the Working Group.
The remarks accompanying the Draft Convention also suggest that in lieu of an exclusion, Article 10 could merely be amended to provide that a debtor in a derivative or clearing-house transaction would not be bound by the assignment unless it consents. We view this approach as both unwise and unworkable.4 This approach would allow for the transfer of a security interest in any net payment obligation arising under a master netting agreement; thereby potentially requiring the FSP to deliver its payment to a third-party upon notice rather than setting off such payment against any other amounts owed by the assignor to the FSP.
Such a regime would also be impractical and would undermine existing and well functioning market practices. For example, a significant number of international finance transactions include interest rate or currency hedges as an integral part of the transaction. Likewise, exporting and multinational companies with significant exposure to currency fluctuations routinely manage this currency risk by entering into OTC foreign exchange hedging transactions with a FSP that requires the deposit of certain cash collateral.5 In each of these cases, the "receivable" -- foreign currency -- which the FSP otherwise owes to its customer as part of the related transaction is an essential part of the FSP’s day-to-day security or protection for the performance by its customer of the customer's own obligations to the FSP.6 It is therefore crucial that the receivable and related cash collateral owed by the FSP not be assignable to a third-party, as this would interfere with the FSP’s ability to set off against such amounts the customer's obligations or to withhold its own performance pending performance by the customer.
Any approach that either fails to generally exclude from the Draft Convention obligations of or to a FSP arising from the provision of financial services or merely modifies Article 10 of the Draft Convention runs the risk of undermining the willingness of FSP to enter into cross-boarder foreign currency and derivative transactions, reducing the availability of trade credit generally (and increasing its cost) and ultimately detracting somewhat from the otherwise positive contribution that the Convention would make to international trade.
In closing, we would like to commend UNCITRAL and the Working Group for the sensitivity they have shown regarding the concerns of the banking and financial community. If the FMLG or the BBA may be of any further assistance to UNCITRAL, please do not hesitate to contact the FMLG in New York (212-720-5024) or the BBA in London (171-216-8857). Again, we appreciate the opportunity to comment on the Draft Convention and thank you for your consideration.
Sincerely,
/s/ Joyce M. Hansen
Chair
Financial Markets Lawyers Group
/s/ William Mason
British Bankers Association
FOOTNOTES
1 The Financial Markets Lawyers Group ("FMLG") is organized under the sponsorship of the Federal Reserve Bank of New York ("FRBNY") and is made up of representatives of the various United States and European commercial and investment banks that are active in the over the counter foreign exchange markets. The FMLG's primary responsibility is to coordinate various legal projects undertaken by the New York Foreign Exchange Committee ("FXC"). The FXC, which was likewise organized under the sponsorship of FRBNY, represents many of the most significant participants in foreign currency trading in the United States.
2 The British Bankers' Association ("BBA") is the principal trade association for banks operating in the United Kingdom. It has more than 300 members from over 60 countries, including all the major banks trading in foreign exchange in London. The BBA is a member association of the European Banking Federation ("EBF") and also supports the comments which the EBF has previously submitted on the Draft Convention.
3 For your convenience, we have enclosed copies of three widely used agreements that we published in 1997 in association with the Canadian Foreign Exchange Committee and the Tokyo Foreign Exchange Markets Practices Committee: the International Foreign Exchange Master Agreement ("IFEMA"), the Foreign Exchange and Options Master Agreement ("FEOMA") and the International Currency Options Market (ICOM) Master Agreement ("ICOM" and collectively with IFEMA and FEOMA, the "FX Master Agreements"). If you require additional information about our work or our membership, we encourage you to visit our websites (www.ny.frb.org/fmlg and www.bba.org.uk).
4 FSPs also have certain operational and practical objections to allowing third-party assignments of deposits maintained at the FSP given that receipt of a notice from an unknown third-party assignee is likely to result in an immediate freeze on the bank account.
5 Commercial companies routinely enter into similar collateralized transactions with their FSP because they have continual and sometimes substantial needs for foreign currencies or to convert foreign currency earnings into their accounting currency.
6 In some cases this protection mechanism is formalized through, for example, master netting, collateral or set-off agreements. In other cases it is a practical protection which the financial institution has, for example, in the case of single forward foreign exchange contracts.