MEMORANDO TO: Yanire Martes · MEMORANDO TO: Yanire Martes International Swaps and Derivatives...
Transcript of MEMORANDO TO: Yanire Martes · MEMORANDO TO: Yanire Martes International Swaps and Derivatives...
MEMORANDO
TO: YanireMartes
InternationalSwapsandDerivativesAssociation,Inc.
FROM: BrunoPinedaCordero
NataliaAlmiedaOleas
ISSUE: ISDAQuestionnaireEcuador
DATE: July4,2016
Thepurposeofthismemorandumistoprovidegeneraladviceinrespecttocrossborder
OTCderivatives froman Ecuadorian lawperspective, according to thequestionnaire
senttousinApril,2016.
1. DoOTCderivativestransactionsfaceanenforceabilityproblem(e.g.dueto
anti-wageringprovisionsetc.underlocallaw)?
WehavenoprecedentsofenforcementofOTCderivativestransactions.
Derivatives transactions are expressly permitted activities for financial
entitiesaccordingtoarticle194oftheEcuadorianMonetaryandFinancing
Codeand the regulations issuedby theSuperintendencyofBanksand the
Monetary and Financing Board. Even if derivatives transactions are not
expresslypermittedactivities fornon- financial entities, these transactions
shouldbeallowedforhedgingpurposesandalsoasinvestmenttransactions
whichmaybeperformedbyallnon-financialcompaniesonanon-ordinary
baseaccordingtoarticle3oftheCompaniesLaw.
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2. Are thereany issueswith foreign lawgovernedcontracts (mainlyEnglish
and New York law) when used for cross-border transactions into your
jurisdiction?Forexample,somecountriesmayrestricttheuseofforeignlaw
andlanguagedocumentswhenitcomestocontractingwithlocalpubliclaw
orstateentities.
No,therearenoissueswithforeignlawgovernedcontracts(mainlyEnglish
andNewYorklaw)whenusedforcross-bordertransactionsintoEcuador.
Financial institutions, hedge funds and other private Ecuadorian
counterparties do not need the authorization of third parties in order to
submittoforeign law.Ontheotherhand, it ispossiblefortheState,State
institutionsandStateinstrumentalities,tosubmitthemselvestoforeignlaw
andforeignjurisdictionorarbitration,aslongasthereisapriorauthorization
fromtheAttorneyGeneralfromthemainofficeroftherelevantentity.
3. Arethereprovisions(ofastatutory,customary,commonlaw,etcnature)in
locallawthatprovidefortheenforceabilityofclose-outnetting?Isclose-
outnettingdefinedinadditiontoset-offunderlocallaw?Doeslocallaw
allownettinginaccordancewiththetermsoftheunderlyingcontract(e.g.
theISDAMasterAgreement)?
No,therearenolegalorregulatoryprovisionsinEcuadorthatprovideforthe
enforceabilityofclose-outnetting.Close-outnettingisnotexpresslydefined
underEcuadorianlaw,contrarytoset-offwhichisregulatedbytheCivilCode.
By not being expressly defined, close-out netting is neither permitted nor
prohibited,whichmeansitcouldbeconvenedbasedonthewilloftheparties,
butsubjecttotherestrictionsmentionedinthisanswerstoset-off.According
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to articles 1671, 1672 and 1673 of the Ecuadorian Civil Code, set off is
applicableonlyinthefollowingcases:
1.Eachobligationmustconsistonamonetaryobligationorinanobligation
involving fungible things or undetermined choses of the same gender and
kind.
2.Bothobligationsmustbedueanddetermined.
3.Bothobligationsmustbepayable.
4.Inanycase,thepartiesshallbedebtorsofeachother.
4. In case therearenettingprovisionsunder local law,do theyapply toall
typesofcounterparties,e.g. financial institutions,corporates(commodity
trading firms, utilities, manufacturers etc.), SPV, public law entities
(municipalities,centralbank,developmentbanksetc.)?
Not applicable, as we mentioned before, there are no netting provisions
underlocallaw.
5.Is the scopeof transactions eligible restricted in anyway, e.g. to certain
products(rates,currencies,equities,creditetc.). Whataboutcommodity
products (gas, coal, oil, metals, agricultural etc.) and "new" products
(emissions allowances, freight rates, weather variables etc.)? Is there a
different treatment for financially settled transactions as opposed to
physicallysettledones(i.e.wheretheunderlyingproductisdelivered)?
No,asthereisnoalegalorregulatoryrestrictioninapplicablelaws(Finance
andMonetaryCodeandregulationsissuedbytheSuperintendencyofBanks
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andtheEcuadorianMonetaryandFinancingCode),thescopeoftransactions
eligibleisnotrestricted(e.g.tocertainproducts,commodityproductsagainst
newproducts).Furthermore,therearenodifferenttreatmentforfinancially
settledtransactionsasopposedtophysicallysettledones.
6. Are financial collateralarrangementsgovernedby foreign lawrecognized
under local law? In particular, would title transfer and security interest
arrangements(underEnglishandNYlaw)beenforceable(e.g.ISDAcredit
supportdocumentation)?
TheanswerdependsonthelocationoftheassetsaccordingtotheEcuadorian
CivilCode.
According to thearticle15of theEcuadorianCivilCode, theeffectsof the
agreements related to assets located in Ecuador shall be according to
Ecuadorian laws. Thus, title transfer and security interest arrangements
regardingassetslocatedinEcuadorshouldbegovernedbyEcuadorianlaws
or,iftheyarenotsubjecttolocallaw,thecontractsmustbeconformedto
locallawinorderforthemtohaveeffectsinEcuador.
In case the assets are located abroad, financial collateral arrangements
governed by foreign law should be recognized under Ecuadorian law.
Therefore,transferandsecurityinterestarrangements(underEnglishandNY
law)shouldbeenforceable(e.g.ISDAcreditsupportdocumentation).
The same rules apply in case the counterparty is the Ecuadorian State,
EcuadorianStateinstitutionsandEcuadorianStateinstrumentalities,aslong
assuchentitieshavetherequiredauthorizationsandtheycomplywithpublic
lawrequirementsinordertocontractunderforeignlaw,itshallberecognized
astheapplicablelaw.
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7. Anyotherissuesunderlocallaw(e.g.conflictoflawrules;jurisdictionissues
(e.g.arbitrationrecommended)?
Weforeseethefollowingeventualproblemsincaseofenforcementofforeign
sentencesorawardsrelatedtoISDAtransactions:
a. Nettingclauses/set-off:Aswementionedbefore,set-offisonlypossible
incase:
1. Eachobligationmustconsistonamonetaryobligationorinanobligation
involvingfungiblethingsorundeterminedchosesofthesamegenderand
kind.
2.Bothobligationsmustbedueanddetermined.
3.Bothobligationsmustbepayable.
4.Inanycase,thepartiesshallbedebtorsofeachother.
Thus,itisnotpossibleset-offincaseof(i)immatureorcontingentdebtand
(ii)debtswithsubsidiariesnotpartiesoftheagreement.
Also, please bear in mind that if the counterparty is a corporation and a
limitedliabilitycompany,ithassubmitteditselftoacreditors’arrangement
process and this process has been accepted by the Superintendency of
Companies,SecuritiesandInsurance,asuspiciousperiodof180dayswillbe
appliedtoobligationsterminatedbymeansofcloseoutnetting.
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This creditors’ arrangement process (called “concurso preventivo de
acreedores” or “concordato”) applies to non-financial and non-insurance
corporations and limited liability companies in an arrangement process
lookingfordebtor’srelief.Thissuspiciousperiodappliesbecauseinaclose
outnettingdebtsthatarenotduecouldbepaid.
b.Compoundinterest:CompoundinterestareprohibitedinourConstitution
andinotherlaws.Thus,itwillbeagainstpublicpolicyanditwillbedifficultto
enforcetheprovisionsofaforeignsentenceorforeignawardcontemplating
compoundinterest.
ForfurtherinformationandadviceontheapplicationofthelawsofEcuadortoOTC
derivatives transactions as well as enforceability of ISDAMaster Agreement, please
contact:
NataliaAlmeida-Oleasnalmeida@[email protected]
Yourssincerely,
BrunoPinedaCordero NataliaAlmeidaOleas