Closing Out Derivative Contracts Following Brexit

    View Author July 2016

    The turmoil in financial markets after the shock Brexit vote on 23 June can be expected to lead to defaults and close outs under derivative contracts caused by, for example:

    • Market movements leading to margin calls, which counterparties may be unwilling or unable to meet.
    • Events of default or potential events of default occurring, for example, if relevant sovereigns, financial institutions or other entities suffer ratings downgrades in the coming weeks and months.
    • Repudiation of contracts by out of the money counterparties claiming not to be bound by their terms.

    The last wave of defaults following the financial crisis in 2008 have resulted in guidance being provided by the English courts on various aspects of the default and close out mechanisms under ISDA-based and similar derivative agreements. This note looks at selected lessons to bear in mind this time.