There is a lesson from the international capital markets that took me, as a young ICM lawyer, a measure of time to both comprehend and appreciate. It was namely this: in matters legal, market participants have a marked preference for certainty above almost anything else. Even sometimes ahead of justice!
Market participants need to know where they stand.
You see, you can trade or structure around a position that you know to be certain, however undesirable that position may be, and whether or not you believe it to be fair. What is abhorred is not knowing what your position is. Eventually being told by a court after months or years of litigation, for example, that you were correct in your earlier view does not give a lot of comfort if, waiting on that answer, you stood ‘naked’ to a market that has moved on and significantly against you while you remained uncertain whether, when and to what extent to hedge your exposure or otherwise move in reliance on the position you had previously assumed.
This desire for timely and reliable answers can also be seen by the considerable contractual privilege and discretion afforded, for example, to a non-defaulting party by allowing it to self-determine a close-out amount following its counterparty’s default. That determination is subject to good faith and reasonableness. However, a conscious decision was taken that the number of issues subject to referral to court for determination, and the evidentiary basis on which those issues should be decided, would, in each case, be narrow. It was intended that it should be of no consequence if, perhaps with the benefit of hindsight, a better answer could be determined by the court. It was thought more important by the markets that an answer honestly derived by a party could be relied upon as final so that the party could move on.
Whether it is the measure of their claims following a default, the scope of their exposure to market risk, or the strength of their collateral credit support, market participants hate surprises. They need to know where they stand. They seek authoritative answers that can be relied upon. And they trust in the rule of law.
Jeffrey Golden is chairman of the P.R.I.M.E. Finance Foundation in The Hague, and a member of the Foundation’s panel of recognised international market experts in finance, a governor and honorary fellow of the London School of Economics and Political Science, where he has also been a visiting professor in the law department (2010–2013), and a member of chambers at 3 Hare Court. He recently retired from international law firm Allen & Overy LLP, which he joined as a partner in 1994 after 15 years with the leading Wall Street practice of Cravath, Swaine & Moore. He was the founding partner of Allen & Overy’s US law practice and senior partner in the firm’s global derivatives practice, and has broad experience of a wide range of capital markets matters, including swaps and derivatives, international equity and debt offerings, US private placements and listings, and mergers, acquisitions and joint ventures. He has acted extensively for the International Swaps and Derivatives Association, was a principal author of ISDA’s master agreements and has acted as an arbitrator and appeared as an expert witness in several high-profile derivatives cases.
Professor Golden has served on the Financial Stability Board’s market participants group for reforming interest rate benchmarks, the American Bar Association’s working group on the rule of law and economic development (chair), the Financial Markets Law Committee’s working groups on amicus briefs, emergency powers legislation and Enron v. TXU (chair), the Financial Law Panel’s working groups on agency dealings by fund managers and other intermediaries and building societies legislation, the Federal Trust’s working group on European securities regulation and the European Commission’s study group, and the City of London joint working group and ISDA task forces on the legal aspects of monetary union. He is immediate past chair of the Society of English and American Lawyers (SEAL), a former chair of the American Bar Association’s Section of International Law, a member of the ABA House of Delegates, an elected member of the American Law Institute, a life fellow (co-chair, international) of the American Bar Foundation and a trustee of the International
Bar Association Foundation. In 2016, he was elected an Honorary Master of the Bench of the Middle Temple.
The publisher acknowledges and thanks the following for their learned assistance throughout the preparation of this book: