Offices; Multibranch Parties - ISDA Provision
2002 ISDA Master Agreement
Section 10 in a Nutshell™
Use at your own risk, campers!
Full text of Section 10
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Section 10 of the ISDA Master Agreement allows parties to specify whether they are Multibranch Parties. Electing “Multibranch Party” status allows you to transact out of the named branches of the same legal entity.
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.
Those details fans will have overlooked the strange, parallel universe of taxation. Here physical presence and not legal personality is what matters. 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.
It is basically a withholding tax gross-up risk. If withholding tax arises on a payment made through your office in Tel Aviv, and the counterparty hasn’t provided evidence of an exemption from withholding, it may argue that we have to gross-up the payment because we did not disclose that we would make payments from Tel Aviv and had we, they would have proved their exemption. So failing to disclose that ILS payments will originate from Israel, may be a material misrepresentation by omission.
Therefore, a double-jeopardy: counterparties may refuse to make the necessary Payee Tax Representation because they didn’t think it would be needed. So, no Payee Tax Representation + no Multibranch ISDA election = potential withholding tax gross up or a possible Misrepresentation Event of Default.
Now you could disclose the branch in a Confirmation (but good luck remembering to do that, and you may not have one in an electronically booked Transaction), or you could inject more detailed representations in Part 5 — but none is as simple as putting “Tel Aviv” in the Multibranch election.
Must you complete onboarding in each jurisdiction though?
Yes — and no. A case where the operational reality trumps the legal theory. If you have a Multibranch ISDA that lists, say, Prague, The Sudan and Wellington, do you need to onboard the client in each of those jurisdictions? Students of onboarding will recognise this as a collossal disincentive to adding branches willy-nilly, but that legal implication will typically depend on an operational setup in the broker’s systems without which it won’t be possible to book a trade in that jurisdiction whatever the legal docs say. So look upon the legal contract as permissive; the thing that will drive your KYC obligations and trigger the onboarding onslaught will be opening an account in your systems at a later date.
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 theoretically 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
- I know, I know. It was a joke.
- See footnote above.