Offices; Multibranch Parties - ISDA Provision
In gory detail
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1992 ISDA
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2002 ISDA
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||Offices; Multibranch Parties
- (a) If Section 10(a) is specified in the Schedule as applying, each party that enters into a Transaction through an
Office other than its head or home office represents to and agrees with the other party that, notwithstanding the place
of booking or its jurisdiction of incorporation or organisation, its obligations are the same in terms of recourse against
it as if it had entered into the Transaction through its head or home office, except that a party will not have recourse
to the head or home office of the other party in respect of any payment or delivery deferred pursuant to Section 5(d)
for so long as the payment or delivery is so deferred. This representation and agreement will be deemed to be
repeated by each party on each date on which the parties enter into a Transaction. - (b) If a party is specified as a Multibranch Party in the Schedule, such party may, subject to clause 10(c) below,
enter into a Transaction through, book a Transaction in and make and receive payments and deliveries with respect to
a Transaction through any Office listed in respect of that party in the Schedule (but not any other Office unless
otherwise agreed by the parties in writing). - (c) The Office through which a party enters into a Transaction will be the Office specified for that party in the
relevant Confirmation or as otherwise agreed by the parties in writing, and, if an Office for that party is not specified
in the Confirmation or otherwise agreed by the parties in writing, its head or home office. Unless the parties
otherwise agree in writing, the Office through which a party enters into a Transaction will also be the Office in which
it books the Transaction and the Office through which it makes and receives payments and deliveries with respect to
the Transaction. Subject to Section 6(b)(ii), neither party may change the Office in which it books the Transaction or
the Office through which it makes and receives payments or deliveries with respect to a Transaction without the prior
written consent of the other party.
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Commentary
Paragraph 10 of the ISDA Master Agreement allows parties to specify whether they are multibranch parties or not.
Branches
A "branch" in this context is a presence in a jurisdiction other than the jurisdiction in which the counterparty is incorporated. For example:
- "Deutsche Bank AG, London Branch" is a physical manifestation of the German Aktiengesellschaft, albeit located in London, with no other standing under English law and is a "branch".
- "Goldman Sachs International", on the other hand, is an unlimited liability company incorporated in England and Wales which is legally distinct from The Goldman Sachs Group, Inc., and would not count as a "branch", and indeed has its own ISDA.
Electing "multibranch party" status allows a counterparty to transact swap confirms out of various different branches of the same legal entity. Deutsche may wish to transact out of its Frankfurt HQ and also out of its London branch.
Details fans will immediately note that, from the point of view of legal and corporate philosophy - surely a subject dear to every attorney's heart - the differing branches of a legal entity have no distinct legal personality any more than does a person's arm or leg have different personality from her head. So being a "multibranch" party seems immaterial.
Taxation
Those details fans will have overlooked the strange, parallel universe of taxation. Here it is presence and not legal personality is important. Specifying that your counterparty may trade from its offices in, for example, Prague, Kabul or The Sudan may impact the tax payable on payments under the relevant transactions under the ISDA. Where both parties are multibranch parties and have numerous overseas branches, a complex multilateral analysis of all the different permutations is assured.
Quoth, elegantly, the great Alistair Fulton (now departed):
- "The risk for [Counterparty] is essentially a withholding tax gross-up risk. If withholding tax arises in relation to a payment made to a counterparty through our NYK office, and the counterparty hasn't provided us with evidence of an exemption from withholding, the counterparty may argue that [Counterparty] is obliged to gross-up the payment on the basis that, but for our failure to disclose to them that payments may be made from NYK, they would have provided evidence of their exemption. So, by failing to disclose that USD payments will originate in NYK, we make a misrepresentation by omission of something that may be material to the counterparty.
- "So you end up in a double-jeopardy, in that counterparties may refuse to make a US Payee Tax Representation on the grounds that, in the absence of the disclosure that NYK is a [Counterparty] settlement centre, there's nothing to convince them that payments will be made to them (as Payee) from NYK. So, no Payee Tax Representation (or W-8BEN form) + no multibranch election = potential withholding tax gross up by [Counterparty]. And/or a possible Misrepresentation Event of Default".
- "Of course there are other ways to get around it: disclosure of the branch in a Confirmation (operational risk, and of no use in electronically booked txns), or more detailed reps in Part 5 - but none is as simple or uncomplicated as simply putting "New York" in the Multibranch election"
Netting
While, by dint of the legal personality, it wouldn't make any difference under English or New York law, and really shouldn't anywhere else, there are those jurisdictions which are not so theroetically pure in their conceptualisation of the corporate form. Your counterparty may have the misfortune to be incorporated in such a place.
If so, the validity of close-out netting against that entity may indeed depend on the branch from which it transacts - and indeed there is a possibility that the governing law of the jurisdiction of the branch may endeavour to intervene (particularly relevant if it has assets). Another reason, perhaps, to disapply the "multibranch party" for a counterparty incorporated in such a jurisdiction. The way to check this is at the netting opinion review sheet contains the following question:
Does the opinion confirm that close-out netting under the agreement is enforceable notwithstanding the inclusion of branches in non netting jurisdictions? Yes/No