1. Documentation and Formalities
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:
- Guarantees via a guarantee agreement.
- Fixed and floating charges via a debenture agreement.
- Pledge/charge over shares via a share pledge agreement.
- Charges.
- Security assignments via a security assignment agreement.
- 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).
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Originally Published by International Comparative Legal Guide
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.
