Over-the-Counter Derivative Financial Instrument as an International Commercial Contract

INTRODUCTION. Derivative financial instruments (derivatives) are in high demand in international commercial turnover. Although the economic and legal literature presents the point of view that derivatives can exist in the form of securities, the most common is the contractual approach to derivatives. According to this approach, derivatives are commercial contracts, the value of which depends on a certain variable known as the underlying or base asset. In some cases, derivative contracts have cross-border nature and thus they can be viewed as international commercial contracts. Despite the existence of Russian-language derivatives studies published by Russian legal scholars, derivative financial instruments are usually considered in domestic rather than international context. In the present publication, the author makes an attempt to fix this gap and analyzes transactions with derivatives as international commercial contracts accompanying cross-border movement of goods and services. The main emphasis in the article is made on standard templates used by the parties to contracts that are derivative financial instruments.MATERIALS AND METHODS. The author used 2002 ISDA Master Agreement as a basic source for the present article. This agreement is the most recent version of a standard framework contract for derivatives trading in international financial markets. The methodological base of the publication is represented by general scientific methods (analysis, synthesis, induction, deduction) as well as specific legal research methods. In particular, formal legal method was employed for the literal interpretation of the provisions of the standard documentation, while historical method was invoked to describe the evolution of standard derivative market templates. Apart from that the author employed statistical methods to evaluate the volume of derivatives market and the place that standard contracts have in over-the-counter derivatives trading.RESEARCH RESULTS. The article claims and proves that over-the-counter derivative transactions can be defined as international commercial contracts that fall under the scope of international private law. Over-the-counter derivatives transactions are concluded based on standard templates containing provisions related to dispute resolution and applicable law. The research made covered such issues as contractual parties, the form of cross-border derivative transaction, the contents of the contract as well as the liability following the breach of contractual obligations. The key feature of these agreements is the possibility of early termination through close-out netting. Another feature is the flexibility when concluding transactions as they may be entered into orally while the failure to deliver a formal document evidencing the terms of the trade does not lead to the invalidity of the transaction itself.DISCUSSION AND CONCLUSIONS. The author comes to conclusion that ISDA standard templates are widely used in international trade. This fact is evidenced by case law as all doctrinal sources. However following the introduction of unilateral restrictive measures adopted by foreign states, the ISDA role in contractual regulation of derivative trading will decrease due to their unavailability to Russian parties.