The ISDA Master Agreement: Insolvency Stalemate and Endgame Solutions for Hong Kong Liquidators

Abstract

The standard form ISDA Master Agreement published by the International Swaps and Derivatives Association (ISDA) is the pre-eminent market standard contract used by the global derivatives market to document OTC derivative transactions. The recent collapse of Lehman Brothers and other major financial institutions around the world has exposed certain weaknesses in the termination and close-out provisions of the ISDA Master Agreement, especially where the counterparty in a derivative contract becomes insolvent. This article will examine the universal problems faced by insolvency administrators and liquidators globally when trying to terminate and close out ISDA contracts, and recover amounts due to the insolvent counterparty (if any). Experience will be drawn from recent court rulings on these issues in Australia and the United States of America (which had opposing outcomes), with a view to consider the legal position in Hong Kong and potential endgame solutions for Hong Kong liquidators facing similar difficulties.