THE IMPORTANCE OF CHOICE OF LAW AND FINALITY TO PvP, NETTING AND COLLATERAL ARRANGEMENTS
| Published date | 01 February 1996 |
| Pages | 170-177 |
| DOI | https://doi.org/10.1108/eb024879 |
| Date | 01 February 1996 |
| Author | RANDALL GUYNN,MARGARET TAHYAR |
| Subject Matter | Accounting & finance |
THE
IMPORTANCE OF CHOICE OF
LAW
AND FINALITY TO
PvP,
NETTING AND COLLATERAL ARRANGEMENTS
Received: 22nd February, 1996
RANDALL
GUYNN
AND
MARGARET
TAHYAR
RANDALL GUYNN
HAS BEEN A PARTNER OF DAVIS POLK &
WARDWEI.L SINCE
1993.
A FORMER CLERK OF
CHIEF
JUSTICE
WILLIAM REHNQUIST OF THE
US
SUPREME COURT, HE HAS BEEN ACTIVE
IN
ADVISING THE FIRM'S CLIENTS ON
NETTING, COLLATERALISING AND
OTHERWISE
MANAGING THEIR CREDIT AND
LIQUIDITY RISKS ASSOCIATED WITH
INTERNATIONAL SECURITIES SETTLEMENT,
PAYMENT SYSTEM AND DERIVATIVES
TRANSACTIONS.
MARGARET TAHYAR
HAS
BEEN
ASSOCIATED
WITH
DAVIS POLK
&
WARDWELL SINCE
1989.
PREVIOUSLY,
SHE
SERVED
AS
A
CLERK
TO THE HONORABLE
ROBERT
H. BORK ON
THE
DC
COURT
OF
APPEALS
FOR
THE
DC CIRCUIT
AND
TO THE
LATE JUSTICE
THURGOOD MARSHALL
ON
THE
US
SUPREME
COURT.
SHE
WAS
SIGNIFICANT EXPERIENCE
IN
CLEARANCE
AND
SETTLEMENT
ISSUES.
THEY CAN BOTH
BE
CONTACTED
AT
DAVIS
POLK
&
WARDWELL,
450
LEXINGTON
AVENUE,
NEW
YORK,
NY 10017. TEL + 1(212) 450
4000,
FAX.
1(212)450
5563.
ABSTRACT
The authors argue that two of
the
signi-
ficant legal
issues
that must be solved if
cross-border
payment
versus
payment,
net-
ting and
collateral
arrangements are to
achieve their
full potential involve
choice
of law and finality. First,
the
parties
must
be able to determine, in advance, what
law will govern and,
second,
each pay-
ment, netting event or security interest
must
achieve
a
sufficient
degree
of finality
under
applicable
law.
INTRODUCTION
During the last five years, central
banks,
the European Union (EU) and
market participants have begun to
realise that payment-versus-payment
(PvP),
netting and collateral arrange-
ments have the potential to reduce
Herstatt risk sharply. According to
some market participants, Herstatt
risk accounts for more than half of
their foreign exchange credit expo-
sure.
It is astonishing that this form
of credit risk is still ubiquitous in the
foreign exchange markets despite
more than 20 years of hand wringing
170
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