Derivatives 2024

1.1 Please provide an overview of the documentation (or framework of documentation) on which derivatives transactions are typically entered into in your jurisdiction. Please note whether there are variances in the documentation for certain types of derivatives transactions or counterparties; for example, differences between over-the-counter ("OTC") and exchange-traded derivatives ("ETD") or for particular asset classes.

OTC derivatives transactions are typically documented under a set of streamlined standard documentation developed by the International Swaps and Derivatives Association, Inc. ("ISDA"), a leading trade association for participants in the OTC derivatives markets and particularly under its most commonly used versions, namely the 1992 ISDA Master Agreement and the 2002 ISDA Master Agreement. These are often entered into in conjunction with relevant ISDA Schedules, which allow parties to tailor the terms of the ISDA Master Agreement, such as the termination provisions, the tax representations, administrative matters and the inclusion of any additional provisions. Where necessary, an ISDA Credit Support Annex/Credit Support Deed is usually entered into, which reduces credit exposure via, for example, the granting of security interests or title transfer of collateral.

The economic and commercial terms of each individual OTC derivatives transaction are documented in an ISDA Confirmation, which supplements the ISDA Master Agreement and forms a single agreement between the parties.

Further mechanisms can be introduced via ISDA Protocols, which are developed by ISDA to deal with a variety of legal developments and which allow the parties to amend the ISDA Master Agreements via an adherence procedure.

ETDs are documented in standard documents to which minimal amendments are made. The terms of such documents are determined by the exchange through which they are entered into.

Our responses to this chapter will focus on OTC derivatives transactions.

1.2 Are there any particular documentary or execution requirements in your jurisdiction? For example, requirements as to notaries, number of signatories, or corporate authorisations.

There are no particular documentary or execution requirements in Cyprus for derivatives arrangements. Usually, the suite of documents of a derivatives transaction is governed by the laws of another country (usually English law); to that effect, any formalities of the relevant jurisdiction will need to be observed.

Where the collateral consists of a pledge/charge over shares of Cypriot companies, the formalities set out in the Contracts Law, Cap. 149 will need to be complied with.

The requisite corporate approvals must be passed for the Cypriot company in accordance with the articles of association of the company, approving the entry into the transaction and authorising a representative to sign the agreement on its behalf. Typically, a resolution of the board of directors will suffice unless there are special provisions in the articles of association also requiring shareholder approval.

In addition, it is customary for a mini due diligence to be conducted on the Cypriot company and for an opinion to be provided by independent Cypriot counsel verifying the capacity and authority of the company to enter into the transaction.

1.3 Which governing law is most often specified in ISDA documentation in your jurisdiction? Will the courts in your jurisdiction give effect to any choice of foreign law in the parties' derivatives documentation? If the parties do not specify a choice of law in their derivatives contracts, what are the main principles in your jurisdiction that will determine the governing law of the contract?

The ISDA documentation is customarily governed by English law. The choice of English law is usually recognised as a valid choice of law by Cypriot courts and will generally be upheld, recognised and enforced by the courts of Cyprus except for those laws or specific provisions (i) that the Cyprus courts would consider to be procedural in nature, (ii) that are of a penal or revenue nature, or (iii) the application of which would be inconsistent with public policy.

More specifically, Regulation (EC) No. 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations ("Rome I") is directly applicable in Cyprus; thus, Cypriot courts must respect a choice of law even where the chosen law is that of a non-Member State.

If the choice of law is not specified, the applicable law will be determined in accordance with the provisions of Rome I.

2. Credit Support

2.1 What forms of credit support are typically provided for derivatives transactions in your jurisdiction? How is this typically documented? For example, under an ISDA Credit Support Annex or Credit Support Deed.

Credit support can be in the form of, inter alia, the following:

1. Guarantees via a guarantee agreement.
2. Fixed and floating charges via a debenture agreement.
3. Pledge/charge over shares via a share pledge agreement.
4. Charges.
5. Security assignments via a security assignment agreement.
6. Margin collateral arrangements via ISDA standard credit support documents.

The ISDA Credit Support Annex is also used by Cypriot counterparties.

2.2 Where transactions are collateralised, would this typically be by way of title transfer, by way of security, or a mixture of both methods?

We have seen collateralisation in the form of both a title transfer and security. The Financial Collateral Arrangements Law No. 43(I)/2004 (the "Financial Collateral Arrangements Law"), which transposes the provisions of Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements (the "Financial Collateral Directive"), recognises both: (a) a title transfer financial collateral arrangement where the collateral provider transfers full ownership of, or full entitlement to, financial collateral to a collateral taker for the purpose of securing or otherwise covering the performance of relevant financial obligations; and (b) a security financial collateral arrangement by which a collateral provider provides financial collateral by way of security to or in favour of a collateral taker, retaining the full or qualified ownership of, or full entitlement to, the financial collateral when the security right is established.

2.3 What types of assets are acceptable in your jurisdiction as credit support for obligations under derivatives documentation?

The parties are free to elect the type of assets. Commonly, these comprise cash or securities. Where the assets are required for risk mitigation purposes in accordance with the margining rules applicable to uncleared OTC derivatives, as analysed in question 2.4 below, regulatory technical standards specify the classes of assets that can be used as collateral. Some examples of such assets include the following:

• Cash.
• Gold.
• Debt securities issued by central governments or central banks of Member States.
• Debt securities issued by Member States' regional governments or local authorities whose exposures are treated as exposures to the central government of that Member State.
• Debt securities issued by specified multilateral development banks or by specified international organisations.
• Debt securities issued by third countries' governments or central banks.
• Debt securities issued by credit institutions or investment firms (provided these are not issued by the collateral provider or members of its group).
• Corporate bonds (provided these are not issued by the collateral provider or members of its group).

2.4 Are there specific margining requirements in your jurisdiction to collateralise all or certain classes of derivatives transactions? For example, are there requirements as to the posting of initial margin or variation margin between counterparties?

On the basis of the European Market Infrastructure Regulation No. 648/2012 ("EMIR") and the relevant regulatory technical standards, counterparties to non-centrally cleared OTC derivative contracts are required to exchange margin for the purposes of limiting credit exposure if their aggregate average notional amount ("AANA") of uncleared derivatives exceeds the regulatory threshold. The margin rules require participants to exchange collateral in the form of segregated initial margin ("IM" – defined as the collateral collected by a counterparty to cover its current and potential future exposure in the interval between the last collection of margin and the liquidation of positions or hedging of market risk following a default of the other counterparty) and variation margin ("VM" – defined as the collateral collected by a counterparty to reflect the results of the daily marking-to-market or marking-to-model of outstanding contracts). The counterparties obligated to comply with the margining requirements are FCs, NFCs (as explained in question 3.1 below) above the clearing thresholds ("NFC+s") and non-EEA entities that would qualify as FCs or NFC+s if they were established in the EU.

ISDA has developed relevant protocols, Credit Support Annexes and a standard margin model to facilitate compliance with the aforementioned.

2.5 Does your jurisdiction recognise the role of an agent or trustee to enter into relevant agreements or appropriate collateral/enforce security (as applicable)? Does your jurisdiction recognise trusts?

As a common law jurisdiction, Cyprus has historically inherited key principles on trusts from the English legal system. There are different forms of trusts that are recognised and formed under Cyprus law (bare trusts, private trusts, constructive trusts, resulting trusts, implied trusts, charitable trusts, discretionary trusts, etc.). The key legislation regulating trusts in Cyprus is the Trustees Law, Cap. 193, as amended, and the International Trusts Law No. 69(I)/1992, as amended. The formalities that must be fulfilled for the proper construction of a trust are the "Three Certainties", namely: certainty of intention; certainty of subject matter; and certainty of object.

It is not uncommon in financing transactions for a security trustee to be appointed to hold the benefit of the security on behalf of certain beneficiaries. The security trustee in such a case is made a party to the security documents.

The typical arrangement when it comes to derivatives is for the assets to be held by custodians on trust for the beneficiaries.

It is also not uncommon under Cyprus law to use a security agent rather than a security trustee. The role of the agent in such a case will be determined by the documents appointing the agent.

Provided the security trustee or security agent has been validly appointed, there is no issue under Cyprus law to involve such parties in a transaction.

2.6 What are the required formalities to create and/or perfect a valid security over an asset? Are there any regulatory or similar consents required with respect to the enforcement of security?

Generally, a charge as well as every amendment, assignment or other change to it granted by a Cypriot company constitutes a registrable charge pursuant to the provisions of the Cyprus Companies Law, Cap. 113 and is required to be registered with the Cyprus Registrar of Companies. The relevant form for the registration of the charge must be filed within 21 days from the date of the signing thereof in the event that the signing has taken place in Cyprus or within 21 days after the date on which the relevant agreement creating the charge could, in due course of post, and if dispatched with due diligence, have been received in Cyprus. In the latter case, the Registrar of Companies has, as a rule of practice, allowed the registration of charges created abroad to take place within 42 days from the execution thereof. Failure to register such charge will render the same void as against the liquidator and any creditor of the company so far as any security on the company's property or undertaking is conferred.

Where the charge constitutes a financial collateral arrangement within the ambit of the Financial Collateral Arrangements Law, the above registration requirement is not applicable. The Financial Collateral Arrangements Law itself provides that the provision of financial collateral under a financial collateral arrangement should not be made dependent on the performance of any formal act, including the filing with an official body or registration in a public register.

In any case, where the collateral is transferred as an outright transfer, the above registration requirement is arguably not applicable since the immovable property is no longer in the possession of the collateral giver. Nevertheless, registration is customary for added certainty in case of re-characterisation.

In terms of enforcement, where the collateral is a pledge over the shares of a Cypriot entity, immediate out-of-court enforcement can be achieved provided the mechanism of the pledge agreement is drafted in a manner that facilitates it.

3. Regulatory Issues

3.1 Please provide an overview of the key derivatives regulation(s) applicable in your jurisdiction and the regulatory authorities with principal oversight.

The key derivatives regulations applicable in Cyprus are the following:

1. EMIR.
2. Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments ("MiFID II") and the respective Law on the Provision of Investment Services, the Exercise of Investment Activities, the Operation of Regulated Markets and Other Related Matters No. 87(Ι)/2017 ("MiFID Law") transposing the same.

EMIR

EMIR lays down requirements for the clearing of OTC derivatives through authorised central counterparties ("CCPs"), bilateral risk-management requirements for OTC derivative contracts that are not cleared through CCPs (margining requirements mentioned in question 2.4 above), reporting requirements for derivative contracts and uniform requirements for the performance of activities of CCPs and trade repositories. The aim of EMIR is to increase transparency in the OTC derivatives markets, mitigate credit risk and reduce operational risk.

The EMIR requirements must be observed by and are applicable to both financial counterparties ("FCs") and non-financial counterparties ("NFCs").

FCs include:

1. investment firms;
2. credit institutions;
3. insurance undertakings or reinsurance undertakings;
4. UCITS and, where relevant, its management company;
5. institutions for occupational retirement provisions;
6. alternative investment funds; and
7. central securities depositories.

An NFC is an undertaking established in the EU in a form other than an FC.

Certain clearing thresholds must be surpassed in order for the clearing requirement to be applicable. The clearing thresholds are as follows:

1. EUR 1 billion in gross notional value for OTC credit derivative contracts;
2. EUR 1 billion in gross notional value for OTC equity derivative contracts;
3. EUR 3 billion in gross notional value for OTC interest rate derivative contracts;
4. EUR 3 billion in gross notional value for OTC foreign exchange derivative contracts; and
5. EUR 3 billion in gross notional value for OTC commodity derivative contracts and other OTC derivative contracts not provided for under points (a) to (d).

The thresholds are calculated on the basis of the aggregate month-end average positions in OTC derivatives for the previous 12 months.

MiFID Law

The MiFID Law transposes the provisions of MiFID II. In accordance with the MiFID Law, entities providing investment services or investment activities in connection with transferable securities, which include most derivatives, must be licensed and authorised by the Cyprus Securities and Exchange Commission ("CySEC") in order to do so; there are heightened regulatory protections when such services and activities are provided to retail clients.

The regulatory authorities with principal oversight are CySEC and the European Securities and Markets Authority ("ESMA").

3.2 Are there any regulatory changes anticipated, or incoming, in your jurisdiction that are likely to have an impact on entry into derivatives transactions and/or counterparties to derivatives transactions? If so, what are these key changes and their timeline for implementation?

There are no anticipated regulatory changes.

3.3 Are there any further practical or regulatory requirements for counterparties wishing to enter into derivatives transactions in your jurisdiction? For example, obtaining and/or maintaining certain licences, consents or authorisations (governmental, regulatory, shareholder or otherwise) or the delegating of certain regulatory responsibilities to an entity with broader regulatory permissions.

As mentioned above, entities that provide investment services and activities in connection with derivatives require licensing and authorisation from CySEC in order to provide such services, on the basis of the MiFID Law. The scope of the licensing (that is, types of services and activities as well as the type of financial instruments dealt with) will appear in the public register maintained by CySEC.

If the entity providing the service is a credit institution, it will have dual regulation both from the Central Bank of Cyprus and CySEC.

As mentioned in our response to question 1.2 above, corporate approvals are typically passed by the Cypriot counterparty approving the entry by the same into the derivatives transaction and authorising a representative to sign the relevant agreements.

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Originally published by ICLG

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.