ISDA Examines Treatment Of Derivatives Under Economic Sanctions Programs

ISDA examined the potential impact on the derivatives markets of recently enacted sanctions programs in the United States, the European Union and elsewhere.

To minimize market disruption and economic consequences for non-sanctioned entities, ISDA recommended "that interpretive guidance be provided contemporaneously with any sanctions program which expressly addresses the intended effects of that program on derivatives transactions." Specifically, ISDA urged sanction authorities to consider eight core principles:

1. sanctions programs should provide clarity regarding derivatives transactions that may be affected;

2. non-sanctioned parties should be given a reasonable timeframe of not less than 30 days to "close out, voluntarily unwind or novate" transactions if the performance of derivatives transactions would be affected (provided that any required payments to sanctioned parties be made into blocked accounts);

3. non-sanctioned parties should be allowed to net or set off collateral or margin acquired or posted under credit support documentation against the amounts owed by or to sanctioned parties (provided that any excess collateral owed to sanctioned parties be held in blocked accounts);

4. counterparty credit exposure under derivatives transactions or collateralization arrangements should not constitute an "extension of credit" for purposes of prohibitions on dealings in the new debt of a sanctioned entity;

5. typical derivatives transactions should not be considered as "facilitation" or "services in support" of prohibited new debt, equity or other instruments unless there exists a clear link to the issuance, performance or existence of such prohibited instruments;

6. non-sanctioned entities should be permitted to enter into derivatives that reference underlying sanctioned entities and perform their obligations under those transactions;

7. sanctions authorities should harmonize their approach to derivatives as far as is practical; and

8. sanctions authorities should seek to avoid conflicts among different sanctions programs, or among a sanctions program and other legal, regulatory or contractual obligations of non-sanctioned parties, and that when such conflicts do arise, sanctions authorities should provide clear guidance as to how non-sanctioned entities are to resolve them.

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