Law Commons^™

Negotiations over the payee tax representations to be made in an ISDA Master Agreement are often confusing, acrimonious and slow. U.S. negotiators, at the urging of expensive tax counsel, often insist that their foreign counterparties make comprehensive tax representations for U.S. tax purposes and deliver certain IRS tax forms to them. Typically, foreign counterparties resist making these representations because they don't understand the purposes behind them. However, these payee tax representations, and the related delivery of tax forms, serve important purposes.

Ensuring liquidity should be the primary goal in negotiating an ISDA Master Agreement (the "Agreement") for smaller, non-rated customers, such as a hedge fund or a middle-market corporation. Often highly leveraged and with little room for error, these customers should focus their efforts when negotiating the Agreement with a dealer on limiting the dealer's opportunity to terminate the Agreement. Unfortunately, however, customers (typically through expensive outside counsel), often instead use up valuable negotiating capital on esoteric legal issues that may only remotely affect a customer's situation.

Granting rehypothecation or "use rights" with respect to pledged collateral is common in the over-the-counter derivative market. In fact, subject to the pledgor's consent, the credit support annex to the International Swaps and Derivatives Association master agreement provides the secured party with the right to rehypothecate, or use for its own purposes, collateral pledged to it---subject only to the obligation to return the collateral once the pledgor has satisfied its obligations. Customers, however, are often alarmed to learn that the dealer requires such an unrestricted right to use and sell the pledged collateral.

This article argues that expressly requiring a borrower to enter into an OTC derivative with a bank as a condition for receiving credit does not violate the antitying restrictions of the Bank Holding Company Act ("BHCA"). Part I of this article discusses the nature of OTC derivatives and demonstrates through examples how OTC derivatives can enable a borrower to minimize various business risks. Part II examines how banks are encouraging their borrowers to utilize various risk management techniques such as OTC derivatives and discusses the impact of BHCA on such efforts. Finally, Part III analyzes the elements of tying a …