Difference between revisions of "Offices; Multibranch Parties - ISDA Provision"

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{{isdaanat|10}}
 
{{isdaanat|10}}
Section {{isdaprov|10}} of the {{isdama}} allows parties to specify whether they are [[Multibranch Parties - ISDA Provision|Multibranch Parties]].  Electing “[[Multibranch Parties - ISDA Provision|Multibranch Party]]” status allows you to transact out of the named [[branch]]es 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 [[branch]]es of a [[legal entity]] have no distinct [[legal personality]] any more than does a person’s arm or leg have different personality from {{sex|her}} head. So being a “multibranch” party seems immaterial.
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Section {{isdaprov|10}} of the {{isdama}} allows parties to specify whether they are [[Multibranch Parties - ISDA Provision|Multibranch Parties]].  Electing “[[Multibranch Parties - ISDA Provision|Multibranch Party]]” status allows you to transact out of the named [[branch]]es 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 [[branch]]es of a [[legal entity]] have no distinct [[legal personality]] any more than does a person’s arm or leg have different personality from {{sex|her}} head. So being a “multibranch” party seems immaterial.
  
 
===={{tag|Tax}}ation====
 
===={{tag|Tax}}ation====
Those details fans will have overlooked the strange, parallel universe of [[tax|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.
+
Those details fans will have overlooked the strange, parallel universe of [[tax|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<ref>I know, I know. It was a joke.</ref> 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, a wise man (now departed):
 
  
:“The risk for a 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 we may be 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.
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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.
  
:“So you end up in a double-jeopardy, in that counterparties may refuse to make a US {{isdaprov|Payee Tax Representation}} on the grounds that, in the absence of the disclosure that NYK is  our settlement centre, there’s nothing to convince them that payments will be made to them (as Payee) from NYK. So, no {{isdaprov|Payee Tax Representation}} (or [[W-8BEN]] form) + no multibranch election = potential withholding tax gross up by us. And/or a possible Misrepresentation {{isdaprov|Event of Default}}.
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Therefore, a double-jeopardy: counterparties may refuse to make the necessary {{isdaprov|Payee Tax Representation}} because they didn’t think it would be needed. So, no {{isdaprov|Payee Tax Representation}} + no [[Multibranch ISDA]] election = potential [[withholding tax]] [[gross up]] or a possible {{isdaprov|Misrepresentation}} {{isdaprov|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”
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Now you could disclose the branch in a {{isdaprov|Confirmation}} (but good luck remembering to do that, and you may not have one in an electronically booked {{isdaprov|Transaction}}), or you could inject more detailed [[representation]]s in [[Part 5 - ISDA Provision|Part 5]] — but none is as simple as putting “Tel Aviv” in the [[Multibranch ISDA|Multibranch]] election.
  
 
===Must you complete [[onboarding]] in each jurisdiction though?===
 
===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<ref>I know, I know. It was a joke.</ref> and Wellington, do you need to [[Onboarding|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.  
+
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<ref>See footnote above.</ref> and Wellington, do you need to [[Onboarding|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.  
  
 
===={{tag|Netting}}====
 
===={{tag|Netting}}====

Latest revision as of 06:39, 9 September 2019

ISDA Anatomy
incorporating our exclusive ISDA in a NutshellTM

In a NutshellTM Section 10:

10. Offices; Multibranch Parties

10(a) If this Section applies, whenever a party enters a Transaction through a branch Office, it represents that recourse against it will be the same as if it had entered through its head office (subject to any Waiting Period for an Illegality or a Force Majeure Event).
10(b) If a party is a Multibranch Party it may, subject to clause 10(c) below, enter into and book Transactions and make and receive payments through Office listed for that party in the Schedule.
10(c) The Office through which a party enters into a Transaction will be specified in the Confirmation or, if not specified, that party’s head office. The specified Office will also be the Office in which that party books and makes and receives payments and deliveries under Transaction. Except to make a Transfer to Avoid Termination Event neither party may change its specified Office for a Transaction without the the other’s prior written consent.

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2002 ISDA full text of Section 10:

10. Offices; Multibranch Parties

10(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.
10(b) If a party is specified as a Multibranch Party in the Schedule, such party may, subject to clause (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).
10(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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Click here for the text of Section 10 in the 1992 ISDA

Resources: 2002 ISDA (wikitext) | 1992 ISDA (wikitext) | 2002 vs 1992 Showdown | 2006 ISDA Definitions | 2008 ISDA | J.C.’s Nutshell ISDA |
Table of Contents | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14 |

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.

Taxation

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[1] 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[2] 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.

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 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

See also

References

  1. I know, I know. It was a joke.
  2. See footnote above.