Long-Form Confirmations Versus Isda Master Agreements
Long-form confirmation or “CFL” usually refers to documents relating to a financial transaction between two parties that have not (yet) formally signed a framework contract for this type of transaction. Instead, they document trade in a “long form” that considers a basic version of the framework agreement in question between the parties for the purposes of the transaction. This analysis will be discussed by LSREF III Wight Limited v. Millvalley Limited, in which the parties argued over whether a swap confirmation had been settled by the 1992 or 2002 International Swap and Desivas Association (ISDA) master agreements. The case contains a particularly interesting debate on the difference between construction and rectification. It also shows the potential pitfalls of using long-term confirmations. Some practitioners consider a confirmation in a long form to be a confirmation that contains all the conditions and provisions applicable to a transaction (type 1). Others consider long-term confirmation to be a confirmation that a contract to master the underlying ISDA is provided when an ISDA master contract has not been executed (type 2). One way or another, the use of long-term confirmations has a long history. Although the extent of their use has decreased in recent years due to a greater emphasis on risk management, the desire to use commercial opportunities means that trade practice has not yet disappeared before legal documentation. This is particularly the case for shorter transactions and certain asset classes, such as FX. In the case of LSREF III Wight Limited v.
Millvalley Limited  EWHC 466 (Comm), LSREF III Wight (Wight) asked whether an interest rate confirmation contained the terms of a 1992 generic ISDA management contract or a 2002 management contract. In November 2006, Millvalley entered into an interest rate swap with Anglo Irish Bank Corporation plc (AIB) (the initial swap). This was a coverage agreement requested by AIB in connection with an organization made available to Millvalley by AIB. The initial swap was confirmed in a long-term confirmation of January 2007. This long confirmation contained a standard language, in which it was stated that the parties would immediately include a 1992 ISDA master, and until the implementation of this ISDA masteragrement, the 1992 STANDARD-ISDA masteragrement would apply. The only choice was that English law would be applicable. The consultation paper seems to have to imply that two or more counterparty transactions should not be confirmed in a long form. Under these conditions, written documentation of commercial relationships should be made before or at the same time as the derivatives transaction that has not been implemented. There is no distinction between short-term or long-term transactions or between asset classes. This may require some companies to review existing practices in documenting derivatives transactions. The sector has until October 17, 2014 to respond to the consultation, so the long-term confirmation days are not yet complete.
With respect to the confirmation of derivatives transactions, the consultation paper states that “in the case of one-off transactions, the documentation of trading relationships could take the form of a confirmation of negotiation including all the essential rights and obligations of counterparties on the centrally agreed-upon over-the-counter derivative transaction.” In other words, it is possible to use long-term confirmation on a single basis. Although the execution of several Type 1 long-form confirmations results in a loss of compensation advantage, IOSCO is probably primarily concerned with the risks associated with performing several Type 2 long-form confirmations. While a basic isda-master agreement is considered to exist, long-term confirmations of this type generally do not document any of the elections held as part of the ISDA management agreement schedule and which assist in risk management, such as identity. B of some entities, the default cross-thresholds and