Long-Form Confirmations versus Isda Master Agreements

In addition, there is interesting case law on CFLs (see LSREF III Wight Limited v Millvalley Limited or Macquarie Bank Ltd v Graceland Industry Pte Ltd) that illustrates the potential problems you need to consider, including the human error committed by banks in restructuring the LFC business, poorly prepared LFC documentation, and the technically simple collapse of transactions before the completion of isDA. This leads to problems with the closure of the amounts. It should also be noted that the risk mitigation standards published by ISOCO (International Organization of Securities Commissions) in 2014 confirm that CFLs should only be used in exceptional circumstances and as one-off transactions. According to IOSCO guidelines, agreeing on a framework agreement should always be the preferred option to the extent possible before transitions are completed. Long confirmation or “LCF” usually refers to documents related to a financial transaction between two parties who have not (yet) signed a framework agreement for this type of transaction. Instead, they document the transaction in a “long form” that takes into account a basic version of the framework agreement in question between the parties for the purposes of the transaction. This analysis is discussed in LSREF III Wight Limited v. Millvalley Limited, in which the parties disputed whether the confirmation of swaps was governed by the 1992 or 2002 framework agreements of the International Swap and Desivas Association (ISDA). The case contains a particularly interesting debate on the difference between construction and correction. It also shows the potential pitfalls of using long-term confirmations. Some practitioners consider a confirmation in a long form as a confirmation that contains all the terms and conditions that apply to a transaction[1] (type 1). Others view long-term confirmation as confirmation that a contract is provided to control the underlying ISDA if an ISDA framework agreement has not been executed (type 2). Either way, the use of long-term confirmations has a long history.

Although the extent of their use has decreased in recent years due to the increased emphasis on risk management, the desire to take advantage of business opportunities means that the business practice has not yet disappeared before the legal documentation. This is especially true for shorter trades and certain asset classes such as FX. In LSREF III Wight Limited v. A long confirmation or “LFC” usually refers to the documentation of a financial transaction between two parties who have not (yet) signed a framework agreement for this type of transaction. Instead, they document the negotiation on a “long form” that assumes there is a basic version of the respective framework agreement between the parties for the purposes of the transaction. Some practitioners consider a long confirmation to be a confirmation that fully contains all the terms and conditions applicable to a transaction[1] (type 1). Others consider a long confirmation to be a confirmation that assumes that an underlying ISDA framework agreement exists in circumstances where an actual ISDA framework contract has not been executed (type 2). Either way, the use of long confirmations has a long history. Although the extent of their use has decreased in recent years due to the increased focus on risk management, the desire to take advantage of trading opportunities means that the practice of trading is still not extinguished before the legal documentation. This is especially true for short-term trading and certain asset classes such as FX. It should also be remembered that if no decision is made regarding the ISDA calendar, some fallback solutions occur automatically and are usually not favorable to the buyer, since the PRE-printed ISDA form was developed to protect traders.

The most important provision to mention in this context is the cross-default clause, which would only apply if selected in the isda calendar. This means, for example, that if your counterparty defaults on its debt obligations under loan agreements with other banks, banks that have signed ISDAs could terminate their transactions with your broker when you could not. Not applying a cross default is a counterparty default risk that you must consider. If the transaction goes down for any reason before is signed by ISDA, you will be at the mercy of your counterparty with respect to the final calculations, the benchmarks it will use, the closing amount due, settlement schedules and other advertisements that it will decide in its sole discretion, in addition, you have no way to dispute any of their conditions or calculations….