June 29, 2015

OTC Derivatives and Grexit: ISDA Briefing and Background Materials

With the current situation in Greece becoming even more critical, what could 'grexit' do to your OTC derivatives portfolio?

Many people may be wondering what effect and impacts a 'grexit' could have on your OTC derivatives portfolio. I did some digging around and came across a page from ISDA which conveniently brings together briefings on this from a variety of sources. Make your way over to the ISDA eurozone contingency planning page here, some impressions on me are:

  • Should Greece cease to use the Euro, there are a number of new currency scenarios following, which the paper from Ashurst covers. It's not as simple as you would think. Much ISDA documentation is under English law which underpins how contracts survive or fall when it's not a counterparty bankruptcy, but a sovereign event.
  • ISDA has 5 key bullets in their Contingency Planning update which are an initial set of tactics to achieve stabilty for firms party to OTC derivatives contracts
  • Most of the impacts come from Redenomination, in other words, if Greece doesn't use the Euro – what replaces it? The specifics matter, there could be a transition to a new Greek currency which doesn't have to cause chaos.
  • Trades between non-Greek firms can be affected if their contracts reference a security on the Greek Stock Exchange, or an index using prices from the same. 
  • The announced capital controls can trigger an inability to pay under the ISDA Master, but depending on which version of the Master is in place, the consequences of this can be delayed

There is far more detail to be considered than can be covered here, most of the papers on the ISDA page originate in 2012, but they are based on the ISDA Master which is specific to each bilateral relationship and largely common for many parties. Please get your own practical advice from your own lawyers, but if you haven't already got a plan for this week….

If you know of any other resources or wish to add more material to this topic, use the comments or send me an email. Bill.


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