December 2, 1999
NEW YORK The Foreign Exchange Committee today published recommended revisions (the "New Provisions") to replace the Force Majeure, Act of State, Illegality and Impossibility Section of its ICOM, IFEMA and FEOMA agreements (the "Agreements"). The New Provisions are accompanied by a User's Guide and a form of contractual amendment that counterparties can execute if they wish the New Provisions to apply to their Agreements.
The New Provisions were drafted in response to a study by the Financial Markets Lawyers Group which examined the operation of the Agreements in connection with disruptions in various international financial and currency markets. During the drafting process, the Subcommittee received extensive comment from representatives of a large group of commercial and investment banks and representatives of the Emerging Markets Traders Association and the International Swaps and Derivatives Association, Inc. ("ISDA").
The New Provisions are designed to reflect current market practice and to minimize inconsistencies in various industry documents that could result in market participants taking contradictory positions in times of market disruptions. The New Provisions are intended to increase the level of legal certainty and reduce confusion in the markets. The Foreign Exchange Committee expects that the New Provisions will help strengthen best practices and facilitate the maintenance of orderly markets during disruptions.
In comparison to the force majeure provisions in the current Agreements, the New Provisions greatly shorten the waiting period before a party may liquidate affected transactions, clarify the types of events that are covered, and more precisely specify the party or parties entitled to liquidate transactions and perform the necessary calculations.
Under the New Provisions, if a Force Majeure Event occurs in a particular currency, there is a waiting period of three business days, during which neither party can liquidate transactions. After the waiting period ends, some or all transactions in that currency covered by an Agreement may be liquidated at then current market prices, even if the date on which the transactions were to settle is months or years in the future. Of course, parties must mutually agree to amend their existing documentation to adopt the New Provisions, and they can also mutually agree to take actions other than as specified in the New Provisions.
The Foreign Exchange Committee believes the New Provisions and related materials will be useful generally in the international derivatives markets, and understands that ISDA is now also studying these issues.
A copy of the New Provisions, User's Guide and Form of Amendment is available at the Foreign Exchange Committee's website. The New Provisions are not related to the Foreign Exchange Committees "Y2K: Best Practice in the Foreign Exchange Market," which can also be accessed on the Committees website.