The future of financial services arbitration

Recent years have seen rapid growth in the use of arbitration as a means of resolving disputes in the financial services sector, an area where English or New York court jurisdiction has traditionally been favoured by market participants.  This trend has been driven by the perceived advantages of arbitration, notably the superior enforcement mechanisms for arbitration awards (as compared to court judgments) under the New York Convention.  This is of particular importance given the increasing prevalence of cross-border finance transactions involving emerging markets jurisdictions, where arbitration awards are often more readily enforceable than foreign court judgments.  The availability of a neutral forum, and the ability to choose arbitrators with specialist expertise, are also important advantages for some parties in the financial services sector.

The growing popularity of arbitration as a dispute resolution option for finance transactions is reflected in the consultation by the International Swaps and Derivatives Association (ISDA) on the use of arbitration under its Master Agreements, which began in January 2011 and has now concluded.  It is also reflected in the establishment of the Panel of Recognised International Market Experts in Finance (P.R.I.M.E. Finance), a specialist arbitration forum targeting complex financial disputes.  P.R.I.M.E. Finance celebrated its first anniversary earlier this year, and reports significant progress since opening its doors for business in January 2012.

In this blog, we review both developments and their impact on the arbitration landscape. A version of this blog was first published on 23 August 2013 in the Global Arbitration Review.  

 ISDA consultation on the use of arbitration to resolve OTC derivative disputes

ISDA has reached the end of an extensive consultation process on the use of arbitration clauses in its Master Agreements, which are the market standard form agreements for documenting swaps and other derivative transactions.  The consultation process has involved all levels of ISDA membership across the globe, including trading, commodities and other financial firms, legal practitioners, arbitral institutions, and academics.

On 9 September 2013, ISDA published its long awaited Arbitration Guide, comprising a number of model arbitration clauses and an explanatory memorandum on arbitration.  The model arbitration clauses included in the Guide provide for numerous different combinations of governing law, arbitral rules/institution and seat of arbitration as follows:

• English law; London seat; Rules of Arbitration of the ICC (ICC Rules);
• New York law; New York seat; ICC Rules;
• English or New York law; Paris seat; ICC rules;
• English law; London seat; Arbitration Rules of the LCIA;
• Choice of English or New York law (except for the arbitration agreement itself, which is to be governed by Hong Kong law); Hong Kong seat; Arbitration Rules of the Hong Kong International Arbitration Centre (HKIAC);
• Choice of English or New York law (except for the arbitration agreement itself, which is to be governed by Singapore law); Singapore seat; Arbitration Rules of the Singapore International Arbitration Centre (SIAC);
• New York law; New York seat; International Arbitration Rules of the American Arbitration Association – International Centre for Dispute Resolution (AAA-ICDR); and
• English or New York law; Zurich or Geneva seat; Swiss Chambers' Arbitration Institution rules;
• English law; London seat; P.R.I.M.E. Finance arbitration rules (P.R.I.M.E. Rules);
• New York law; New York seat; P.R.I.M.E. Rules; and
• English or New York law (except for the arbitration agreement, which is to be governed by Dutch law); The Hague seat; P.R.I.M.E. Rules.

The Arbitration Guide reflects discussions at meetings held by ISDA's Financial Law Reform Committee to discuss the arbitration proposals, most recently in London on 18 June 2013.

A major topic of discussion at the London meeting was the choice of arbitral rules and seats offered in the model clauses.  For its part, ISDA has consistently stressed that it has no preferences in this regard and that the choice of arbitral rules and seats in the draft guide reflect the views expressed by members during the consultation process.  The list of model clauses has evolved considerably throughout the consultation.  For example, the model clauses that provide for arbitration under the P.R.I.M.E. Rules and the Swiss Chambers' Arbitration Institution Arbitration Rules were added at a late stage following support for their inclusion from attendees at the London meeting.  ISDA has not ruled out the possibility of preparing additional model clauses in the future. Accordingly the list is not closed and will no doubt continue to develop to reflect market preferences and growth among arbitral seats and institutions.

Another theme throughout the consultation process has been the extent to which ISDA's model arbitration clauses should provide for various "add-ons" that can be used in conjunction with a basic arbitration clause.  ISDA has ultimately decided to keep the model clauses as simple as possible, an approach which has received considerable support from members.  However, the explanatory memorandum accompanying the model clauses provides a brief explanation of certain potential "add-ons" so that users are aware of the possibilities in this regard.

The potential "add-ons" include an “optional” arbitration clause (i.e. a clause which gives one or both parties the right to choose between arbitration and litigation once a dispute has actually arisen, which are more common in loan agreements than in the derivatives context).  "Fast track” arbitration procedures are also discussed.  Such provisions are sometimes seen as a way of addressing what is perceived as the main disadvantage of arbitration in the finance context, namely the lack of any default or summary judgment mechanisms of the kind available in many court systems (which can make it quicker and more straightforward to recover obvious debts).

Looking forward, ISDA's support for arbitration means that disputes relating to the derivatives markets are likely to be an increasingly prominent feature of the arbitration landscape in years to come.

 P.R.I.M.E. Finance

P.R.I.M.E. Finance, a new financial dispute resolution body based in The Hague, celebrated its first birthday in January 2013.  Among other services, P.R.I.M.E. Finance aims to provide a bespoke forum for resolving complex financial disputes, including cases relating to derivatives, swaps, wholesale trading and other financial products. It supplements the existing selection of institutions providing services and rules for arbitration. 

The key elements of P.R.I.M.E. Finance's offering are its panel of expert arbitrators and its customised arbitration rules.

P.R.I.M.E.'s panel of expert arbitrators includes, among others, sitting and retired judges, arbitrators, and finance experts (including central bankers, regulators, and derivatives market participants).  P.R.I.M.E. Finance claims that its panel "include[s] some of the most senior people in the financial markets with collectively over 2,000 years of experience".  The panel's composition is intended to address a perceived lack of specialist knowledge and experience among the generalist judges that are often called upon to resolve complex financial disputes when court jurisdiction is invoked.  P.R.I.M.E. Finance's panel reflects (and responds to) widespread demand in the finance sector for arbitrators with specialist industry expertise.  For example, the 2013 PwC / Queen Mary University International Arbitration Survey reported that:

"In Financial Services, the number one benefit is the expertise of decision-maker. This appears to be in line with the perception that many disputes in the Financial Services sector are highly technical and parties select industry specialists for their cases".

As for the P.R.I.M.E. Rules, these are based on the 2010 United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules, which are widely used in ad hoc arbitrations worldwide. However, the P.R.I.M.E. Rules include a number of customisations as follows:

• Expedited proceedings: the P.R.I.M.E. Rules allow the parties to agree shortened timelines to settle urgent disputes rapidly, subject to the agreement of the arbitral tribunal.  This seeks to deal with the lack of summary judgment procedures in arbitration as compared to court proceedings. 
• Interim measures: the P.R.I.M.E. Rules provide improved options for parties seeking urgent provisional measures, namely either an emergency arbitrator appointed from P.R.I.M.E.'s panel of arbitrators, or alternatively a referee under the Dutch Referee Arbitration Rules (but only where the Netherlands is specified as the seat of the arbitration).
• Transparency: unusually for arbitration, the P.R.I.M.E. Rules expressly permit excerpts of awards to be published without specific party consent, and allow the entire award to be published in anonymised form, provided neither party objects within one month of receipt of the award. This feature is intended to facilitate development of a body of case law in this area, thereby furthering the predictability of the financial markets.

P.R.I.M.E. Finance reports strong progress during its first year of operations.  While it will likely take some time for a substantial number of disputes to be referred to arbitration under the P.R.I.M.E. Rules, P.R.I.M.E. reports that it was administering its first case within weeks of opening.  P.R.I.M.E. also reports that it has received large numbers of enquiries from contracting parties who are considering including P.R.I.M.E. Finance arbitration clauses in their agreements.  The inclusion of P.R.I.M.E. Finance as one of the options in ISDA's Arbitration Guide will no doubt reinforce this trend and help to secure a pipeline of arbitrations for P.R.I.M.E. over the coming years.  P.R.I.M.E. also reports strong uptake of its other services, which include assistance in identifying suitable individuals to act as expert witnesses and expert determiners, as well as judicial training to enhance understanding amongst judges of financial market transactions and related international jurisprudence.  P.R.I.M.E. Finance reports that seminars have been held (or are scheduled) with judges in a number of countries, including Russia, the United States, Singapore, Korea, and a number of African jurisdictions.

Like the ISDA consultation, the establishment of P.R.I.M.E. Finance demonstrates (and responds to) the growing popularity of arbitration in the financial sector.  While it is still early days for P.R.I.M.E. Finance, the initiative has generated considerable enthusiasm and interest in the market, and it is hoped that coming years will see significant uptake of its services.  P.R.I.M.E.'s efforts to customise the arbitral process for use in the financial sector are to be welcomed in any event, and should help to stimulate innovation amongst other arbitral institutions.

 The future for financial services arbitration

Arbitration practitioners in Asia have long been used to seeing arbitration clauses as the prevalent form of dispute resolution in cross-border finance transactions.  As other emerging markets (such as those in Africa) continue their rise, this trend looks set to spread to other regions.  Within the EMEA (Europe, Middle East and Africa) region typically used as a business division within the financial services sector, it is only for intra-EU transactions where the old orthodoxy of court jurisdiction continues to hold strong.

Servicing such a developing market requires innovation and pragmatism amongst the arbitration community of the kind typified by ISDA and P.R.I.M.E. Finance.  Frustrations will be justifiable for any party forced to pursue a slow unopposed arbitral process to recover an undisputed debt.  Arbitrators, institutions and counsel alike must take note.

For further information, please contact Nick Peacock, Partner, Dominic Kennelly, Associate or Emily Blanshard, Associate or your usual Herbert Smith Freehills contact.