1 Documentation and Formalities
1.1 Please provide an overview of the documentation (or framework of documentation) on which derivatives transactions are typically entered into in your jurisdiction. Please note whether there are variances in the documentation for certain types of derivatives transactions or counterparties; for example, differences between over-the-counter ("OTC") and exchange-traded derivatives ("ETD") or for particular asset classes.
Cayman Islands entities tend to use market-standard documentation for all types of derivatives transactions. The 1992 and 2002 ISDA Master Agreements, including the appropriate Schedules and credit support documentation, are commonly used to document OTC derivatives transactions by Cayman Islands entities. There are no variances in contractual documentation for different types of Cayman Islands counterparties and there is typically no use of any Cayman Islands lawgoverned documentation.
1.2 Are there any particular documentary or execution requirements in your jurisdiction? For example, requirements as to notaries, number of signatories, or corporate authorisations.
No. Cayman Islands law will respect the governing law of the contract to determine execution requirements. The constitutional documents of each Cayman Islands entity will determine the legal authority to execute and deliver binding agreements. It is normal for Cayman Islands entities to authorise entry into the derivatives agreements by way of board resolution (or equivalent) and, where those agreements are executed and delivered by way of deed, to note that such agreement is executed and delivered by way of deed. There is no legal requirement for a corporate entity to have a witness to their signature when executing by way of deed.
1.3 Which governing law is most often specified in ISDA documentation in your jurisdiction? Will the courts in your jurisdiction give effect to any choice of foreign law in the parties' derivatives documentation? If the parties do not specify a choice of law in their derivatives contracts, what are the main principles in your jurisdiction that will determine the governing law of the contract?
New York law and English law are the principal governing laws specified in derivatives transactions. Cayman Islands courts will generally recognise the choice of governing law by the parties, assuming such governing law is legal, valid and binding as a matter of such law. The courts of the Cayman Islands will not observe and give effect to a choice of the laws of a particular jurisdiction as the governing law of a document if (i) it is not pleaded and proved, and (ii) to do so would be contrary to the public policy of the Cayman Islands.
2 Credit Support
2.1 What forms of credit support are typically provided for derivatives transactions in your jurisdiction? How is this typically documented? For example, under an ISDA Credit Support Annex or Credit Support Deed.
All generally accepted market-standard credit support is generally recognised in the Cayman Islands, including collateral in the form of cash and securities. A large number of derivatives transactions use an ISDA Credit Support Annex or Deed, although other forms of bespoke documentation can be used, depending on the nature of the transaction and commercial needs of the parties.
2.2 Where transactions are collateralised, would this typically be by way of title transfer, by way of security, or a mixture of both methods?
This is dependent on the type of derivatives transaction and the governing law of the arrangements. Cayman Islands entities enter into derivatives transactions using both outright title transfer with a right of re-transfer and the grant of security over assets. However, in line with market trends, more derivatives transactions utilise a grant of security over assets.
2.3 What types of assets are acceptable in your jurisdiction as credit support for obligations under derivatives documentation?
There are no specific prohibitions under Cayman Islands law in this regard. Most derivatives transactions involve liquid assets that are easy to take security over, such as cash or securities, but any asset capable of being secured can be used as credit support for obligations under derivatives documentation.
2.4 Are there specific margining requirements in your jurisdiction to collateralise all or certain classes of derivatives transactions? For example, are there requirements as to the posting of initial margin or variation margin between counterparties?
There are no specific margining requirements in the Cayman Islands as there are no specific derivatives regulations that are generally applicable locally. Certain regulated entities, such as banks and insurance companies, may have requirements imposed by the local regulator under their business plans.
2.5 Does your jurisdiction recognise the role of an agent or trustee to enter into relevant agreements or appropriate collateral/enforce security (as applicable)? Does your jurisdiction recognise trusts?
Yes, to both parts of the question. Such arrangements are typically governed by laws other than the laws of the Cayman Islands and so Cayman Islands law will recognise those arrangements, assuming the same are validly made under the applicable governing law. A trust is not a separate legal entity as a matter of Cayman Islands law and it is typical, although not necessary, for a trustee to delegate certain functions to advisors, managers or other agents who have the authority, based on such delegation, to act on behalf of the trustee and execute documents on its behalf.
2.6 What are the required formalities to create and/ or perfect a valid security over an asset? Are there any regulatory or similar consents required with respect to the enforcement of security?
In accordance with Cayman Islands conflicts of law principles, the creation of the security interests would be determined by the governing law of the applicable credit support agreement. The law that determines the proprietary aspects of a security interest will depend, in part, upon the nature of the assets being secured. There are no specific perfection or priority formalities required by local law simply because the collateral provider is a Cayman Islands entity.
3 Regulatory Issues
3.1 Please provide an overview of the key derivatives regulation(s) applicable in your jurisdiction and the regulatory authorities with principal oversight.
There are no current derivatives exchanges or OTC markets being made from the Cayman Islands and consequently, no specific derivatives or swaps legislation in force. The main financial regulator is the Cayman Islands Monetary Authority ("CIMA"), which is directly responsible for the licensing and regulation of various financial services businesses such as banks, insurance companies, trust companies and funds. Those regulatory laws relate to the regulation of the various entities, and for banks, insurance companies and trust companies that are licensed or registered with CIMA, there may be restrictions that relate to the entry of derivatives transactions by such entity. There are no such potential regulatory restrictions under the Mutual Funds Act (As Revised) for funds as licensed and registered funds are not required to file a business plan, but rather it is expected that any entry into derivatives transactions will be disclosed in offering documents to investors.
3.2 Are there any regulatory changes anticipated, or incoming, in your jurisdiction that are likely to have an impact on entry into derivatives transactions and/ or counterparties to derivatives transactions? If so, what are these key changes and their timeline for implementation?
There are no developments pending that the current regulatory or legal environment relating to derivatives transactions may be expected to change in the foreseeable future.
3.3 Are there any further practical or regulatory requirements for counterparties wishing to enter into derivatives transactions in your jurisdiction? For example, obtaining and/or maintaining certain licences, consents or authorisations (governmental, regulatory, shareholder or otherwise) or the delegating of certain regulatory responsibilities to an entity with broader regulatory permissions.
It is common in derivatives documentation for Cayman Islands counterparties to provide representations, warranties and undertakings with respect to their regulated status and compliance with any applicable regulations
3.4 Does your jurisdiction provide any exemptions from regulatory requirements and/or for special treatment for certain types of counterparties (such as pension funds or public bodies)?
No; see our response to question 3.1.
4 Insolvency / Bankruptcy
4.1 In what circumstances of distress would a default and/or termination right (each as applicable) arise in your jurisdiction?
With respect to Companies, Limited Liability Companies ("LLCs") and Exempted Limited Partnerships ("ELPs"), rights in favour of the restructuring officers or liquidators arise upon the presentation of a petition for the appointment of a restructuring officer or the winding up of such entity. However, most derivatives transactions, particularly those governed by ISDA Master Agreements, will provide for wider contractual rights of termination based on wider, contractually agreed defaults.
4.2 Are there any automatic stay of creditor action or regulatory intervention regimes in your jurisdiction that may protect the insolvent/bankrupt counterparty or impact the recovery of the close-out amount from an insolvent/bankrupt counterparty? If so, what is the length of such stay of action?
The Companies Act (As Revised) of the Cayman Islands provides for a restructuring regime (similar to the regimes available in England and Wales and the United States of America) that would allow debt to be restructured with the protection of a moratorium of claims against it by unsecured creditors. Upon the presentation of a petition for the appointment of a restructuring officer under Part V of the Companies Act, the restructuring moratorium will not prevent creditors from exercising contractual rights of set-off or netting. A Cayman Islands entity can present a petition to the court for the appointment of a restructuring officer and on the presentation of the petition, the Cayman Islands entity obtains an automatic moratorium on legal proceedings being continued or commenced by unsecured creditors against the Cayman Islands party. The Companies Act also provides for a discretionary moratorium of proceedings against a Company, LLC or ELP on the appointment of a provisional liquidator. The stay does not prevent any contractually agreed netting arrangements or any secured creditor from enforcing its security or collateral interest.
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Originally Published by ICLG
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