International Swap and Derivatives Association, Inc 10 East 53rd Street, 9th Floor New York, 10022 New York USA Goteborg 16 October 2017 ISDA Master Agreements and ISDA Credit Support Documents: Enforceability of Certain Close-out. Set-off and Default Provisions when using the ISDA/FIA Client Cleared OTC Derivatives Addendum - Clearing Member Reliance Opinion Ladies and Gentlemen, 1 GENERAL 1.1 We have been asked by ISDA to provide a legal opinion on the ISDA/FIA Client Cleared OTC Derivatives Addendum (the "Addendum") which has been entered into between a Client organized under the laws of Sweden and a Clearing Member in respect of the issues set out in section 6 (Questions) below in respect of which a) the Addendum is being used in conjunction with an agreement in the form of a 1992 ISDA Master Agreement (Multicurrency - Cross Border), a 1992 ISDA Master Agreement (Local Currency - Single Jurisdiction) or a 2002 ISDA Master Agreement (each published by ISDA and each, a "Covered Base Agreement") and together with the Addendum, (the "Clearing Agreement"); b) pursuant to its terms, the Addendum is supplemented by one or more collateral agreement(s) in the form of: (i) a 1995 Credit Support Annex governed by English law (the "T ransfer Annex") together with a paragraph 11 in the forms published by ISDA on 8 July 2013 and as updated on 22 July 2014 and on 9 June 2015 (the "Paragraph 11"); or (ii) a 1994 Credit Support Annex governed by the laws of the State of New York (and along with the Transfer Annex the "Credit Support Documents") together with a paragraph 13 in the form published by ISDA on 9 June 2015 (the "Paragraph 13"); and..................... Wistrand Advokatbyra P.O. Box 11 920, SE-404 39 Gotebo rg, Sweden Visitingaddress Lilla Bommen 1 Tel+46(0)31 77121 00 Fax+46(0)31 771 21 50 I I gbg@wistrand.se www.wistrand.se Bankgiro 144-3050 Plusgiro 70 00 22-7 STOCKHOLM GtiTEBORG MALMO
c) the Clearing Member and the Client have entered into two or more Client Transactions that supplement, form part of and are subject to the Clearing Agreement and result in at least one Cleared Transaction Set. 1.2 We have been informed that the validity and enforceability of the Addendum when used with a Covered Base Agreement is of interest to banks and corporations that have entered into Client Transactions with a Swedish Client, governed by relevant Clearing Agreements, as a matter of both credit risk assessment and considerations of capital adequacy. 1.3 This opinion shall be read as an extension to the opinion on bilateral close-out netting and multibranch close-out netting under Swedish law issued by this firm on 3 May 2017 (the "Swedish Industry Netting Opinion") and may be relied upon by Clearing Members who enter into an Addendum with a Client organized under the laws of Sweden on the basis of the assumptions set out in section 3. 1.4 Messrs Mannheimer & Swartling Advokatbyra has issued a memorandum of law to ISDA regarding the validity and enforcement under Swedish law of Collateral Arrangements under the ISDA Credit Support Documents dated 6 March 2012 as latest updated on 30 August 2017 (the "Swedish Industry Collateral Opinion"). When making our analysis regarding collateral in central counterparty clearing of OTC derivatives in this memorandum, we have reviewed the Swedish Industry Collateral Opinion, share the views therein and make references to the same where we deem that to be appropriate. 1.5 Capitalized terms used and not defined herein shall have the meaning ascribed to them in the Addendum or the relevant Covered Base Agreement, as applicable. 2 DOCUMENTATION 2.1 For the purpose of this opinion we have, including the documents reviewed in relation to us giving the Swedish Industry Netting Opinion, reviewed: - the Covered Base Agreements; -the Addendum; -the Credit Support Documents, the Paragraph 11 and the Paragraph 13; and - the Swedish Industry Collateral Opinion. 3 ASSUMPTIONS AND QUALIFICATIONS 3.1 In addition to the assumptions, qualifications and limitations contained in the Swedish Industry Netting Opinion and the Swedish Industry Collateral Opinion, this memorandum of law is subject to such other assumptions, qualifications and
limitations as are made herein, including the assumptions regarding the Addendum, the Covered Base Agreement and the Credit Support Documents, as detailed in sections 3.1.9-3.1.24 of this memorandum. 3.1.1 3.1.2 3.1.3 3.1.4 3.1.5 3.1.6 Other than what is stated herein we express no opinion generally on the validity or enforceability of the 1992 ISDA Master Agreement (Multicurrency- Cross Border), the 1992 ISDA Master Agreement (Local Currency- Single jurisdiction), the 2002 ISDA Master Agreement, the Addendum, the Credit Support Documents, the Paragraph 11 or the Paragraph 13 or generally on force majeure or illegality issues under Swedish law; We express no opinion as to any law other than Swedish law and this opinion does not relate to compliance with or matters governed by the laws of any jurisdiction except Sweden; We have assumed that there are no provisions of the laws, including but not limited to public policy or mandatory rules, of any jurisdiction other than Sweden which would have any implications on our responses in this memorandum; We have assumed that the Client is an entity organized under the laws of Sweden and that bankruptcy proceedings for such Client would be subject to Swedish bankruptcy law 1 ; A close-out and netting provision must be "fair" as regards the valuation method used in order to determine amounts under close-out and netting procedures. The same applies to amendments under the Client default rules in the Addendum, which enable a Clearing Member to take into account its costs or gains in determining termination amounts at the relevant Agreed clearing counterparty. There are, however, no fixed rules on how this fairness should be obtained. In the end the courts would have to decide. A fair assumption is that for instruments publicly traded, the quoted market value would prevail. For other assets, valuation by either agreed persons or entities or by more than one person or entity would be advisable. Under Swedish procedural law any evidence can be brought forward in front of a court and the court will then decide the legal value of such evidence and render its decision based on that; Provisions in the Credit Support Documents, leading to the valuation percentage of any collateral being deemed to be less than 100 per cent on an Early Termination Date in respect of all Transactions under a Clearing Agreement may be deemed unlawful forfeiture of security under Section 37 of the Swedish Contracts Act; 1 Please note that the Swedish National Pension Funds (the so called AP-Funds), UCITS-funds and special funds as described in Appendix B to the Swedish Industry Netting Opinion cannot enter into bankruptcy. Our conclusions regarding consequences in the event of insolvency proceedings will thus not apply to these entities. We however believe that our conclusions regarding close-out netting in the absence of insolvency proceedings applies, see Sections 9.3 and 9.4 in the Swedish Industry Netting Opinion. j
3.1.7 The recognition of the laws of jurisdictions other than the Kingdom of Sweden by Swedish courts or enforcement authorities does not include those laws which such courts or authorities consider (i) to be procedural in nature, (ii) to be revenue or penal laws, (iii) to involve the exercise of sovereign powers or powers of public or administrative law or (iv) the application of which would be inconsistent with public policy, as such terms are interpreted under the laws of Sweden; and such courts or authorities may require proof of the relevant provisions of those laws; 3.1.8 3.1.9 If court proceedings have been taken against a party, such proceedings may preclude other sets of proceedings to be taken in Sweden if the claims and the parties in the proceedings are substantially identical; and We express no opinion on rules regarding relations between two central counterparties or between two administrators. The Addendum 3.1.10 3.1.11 3.1.12 3.1.13 3.1.14 3.1.15 3.1.16 3.1.17 Two institutions (either two derivatives dealers or a derivatives dealer and a sophisticated end-user of derivatives, together the "Parties"), have entered into the Addendum, one as a Clearing Member and one as a Client; The Client is organized under the laws of Sweden, see 3.1.4 above; The master agreement (i.e. the underlying agreement that is supplemented by the Addendum) is a Covered Base Agreement; The Addendum is governed by English law or New York law, as the case may be, and is enforceable under the laws of England and Wales or the State of New York, as the case may be; No provisions of the Addendum that are crucial to our opinion have been altered in any material respect in the version entered into between the Parties; On the basis of the terms and conditions of the Clearing Agreement and acting in a manner consistent with the intentions stated in the Clearing Agreement, the Parties over time enter into a number of Client Transactions, of a type covered by the Swedish Industry Netting Opinion, that are intended to supplement, form part of and be subject to the Clearing Agreement; The Client Transactions entered into result in at least one Cleared Transaction Set under the Clearing Agreement; The Core Provisions of each Agreed CCP Service are legal, valid and binding under the relevant governing law and against the relevant Agreed CCP and the Clearing Member (including upon the insolvency of the relevant Agreed CCP and/or the Clearing Member).
Covered Base Agreement 3.1.18 3.1.19 3.1.20 3.1.21 Prior to, or at the same time as, entering into the Addendum, the Parties have entered into a Covered Base Agreement; The Covered Base Agreement is governed by English law or New York law, as applicable; Other than pursuant to the Addendum, no provision of the Covered Base Agreement that is necessary for the giving of the Swedish Industry Netting Opinion in respect of the Covered Base Agreement has been altered in any material respect; On the basis of the terms and conditions of the Covered Base Agreement and other relevant factors, and acting in a manner consistent with the intentions stated in the Covered Base Agreement, the Parties over time enter into a number of Transactions that are intended to be governed by the Covered Base Agreement and the Transactions are of a type covered by Swedish Industry Netting Opinion. Credit Support Document 3.1.22 3.1.23 3.1.24 The Parties have entered into a Credit Support Document, either directly or due to the Addendum deeming that a Credit Support Document supplements and forms part of the Clearing Agreement; The Credit Support Document is governed by English law or New York law, as applicable; and Other than pursuant to the Addendum and the Paragraph 11 or the Paragraph 13, as applicable, no provisions of the Credit Support Document that are necessary for the giving of the Swedish Collateral Opinion in respect of the Credit Support Document have been altered in any material respect. 4 SWEDISH RULES FOLLOWING THE IMPLEMENTATION OF EMIR 4.1 Pursuant to the entry into force of Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories ("EMIR") in the European Union (of which Sweden is a member state) on 16 August 2012, new Swedish rules were proposed in a white paper (proposition 2013/14: 111) on security at a central clearing counterparty (Sw: Sakerheter vid clearing hos central motpart). Such new rules entered into force on 1 August 2014 through legislation (SFS 2014:478) and have amended i.a. Chapter 5 Sections 1 and 2 of the Financial Instruments Trading Act ("FIT A"). First, new wording has been added to Chapter 5 Section 1 of FITA (Chapter 5 Section 1 of FITA in its entirety is defined below as the "Netting Legislation") under which final settlement of all outstanding obligations between two parties in
conjunction with trading in financial instruments, or in other similar rights and obligations, shall take place pursuant to an agreement to this effect between a central counterparty and a clearing member or a client to a clearing member under EMIR in the event one of the parties is placed in insolvent liquidation, provided the settlement has taken place in accordance with the operational rules of the central counterparty. Such final settlement shall be valid against the estate in insolvent liquidation and the creditors of such party in insolvent liquidation. Further, a new Section 2 of Chapter 5 of FITA has been added stipulating that: (a) if a clearing member has accepted contractual terms to the effect that assets and positions which are held on behalf of clients shall be transferred to another clearing member according to article 48 of EMIR, such terms shall be valid against the bankruptcy estate and creditors of the transferring clearing member; and (b) the assets and positions referred to in (a) above shall be considered to pertain to the bankruptcy estate of the insolvent clearing member according to Chapter 3 Section 3 of the Swedish Bankruptcy Act (1987:672) only (underlined by us) when it, despite reasonable efforts, is not possible to identify the client to which such assets and positions belong. 4.2 Transaction types The Netting Legislation applies to trading "in financial instruments, in other similar rights or obligations, or in currencies". (i) (ii) (iii) In the preparatory work to the Netting Legislation it is stated that the same rules will apply to new instruments with equivalent characteristics to those mentioned in the Netting Legislation. As of 1 November 2007 the Securities Market Act (Sw.Lag (2007:528) om vardepappersmarknaden) came into force in Sweden implementing the Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets and financial instruments amending Council Directives 85/611/EEC and directive 2000/12/EC of the European parliament and the Council and repealing Council directive 93/22/EEC ("MiFID"). The Securities Market Act inter alia amends the term "financial instruments" in Swedish law to conform with MiFID. For more details on transaction types please refer to our Swedish Industry Netting Opinion. 4.3 Set-off Set-off can take place in cases of insolvent liquidation for transactions falling under the Netting Legislation as stated in the Swedish Industry Netting Opinion and Section 4.1 above (adding agreements on set off with a clearing counterparty).
This applies regardless of whether the agreement contains provisions relating to setoff on an on-going basis. It makes no difference whether the agreement contains provisions in respect of Early Termination as opposed to Automatic Early Termination and the set-off does not need to take place on the day of the bankruptcy or any other earlier time. Note that Swedish law does not recognise any retroactive insolvency rules such as the "zero-hour" rule. 5 SWEDISH RULES ON COLLATERAL 5.1 Under Swedish law, the parties are free to agree upon security measures and such agreements would be upheld between the parties. However, in order not to be recoverable in the insolvency of a party subject to Swedish insolvency rules, collateral must be agreed upon when the secured transaction is entered into and perfected at that time or "without delay" thereafter. Perfection would, under Swedish substantive law, typically be achieved by the transferor/pledgor being cut off from access to the collateral and depriving the pledgor of its right to dispose of and control the collateral (by the collateral being handed over to the transferee/pledgee, by a third party in possession of the collateral being notified of the transfer/security interest or in another manner). 5.2 In certain cases, including without limitation, securities and cash held in a bank account, Swedish choice of law rules would or may provide for the substantive rules of another jurisdiction to determine what actions are relevant for a security interest to have been duly perfected. 5.3 The general rule on security which is granted or perfected after the date at which the secured transaction is entered into is that such security may be recoverable if the transferor/pledgor were to become insolvent during the claw-back period, (typically three months following the latter of granting or perfection of security) unless the posting of collateral may be deemed "ordinary" despite the late granting/perfection. 5.4 In the preparatory work, proposition 2001/02:57 to Chapter 4 Section 12 of the Bankruptcy Act (the "White Paper"), it is stated that what is "ordinary" shall be judged based on all circumstances connected to a specific transaction. The exemption for ordinary posting of collateral is however, primarily, aimed at transactions which are not triggered by payment problems or insolvency of the debtor and which would have taken place even if the debtor would have been solvent. With reference to statements in the White Paper to the relevant statutory provision now in place regarding margin security in cleared transactions, it is our opinion that transferring margin security which has been contractually agreed at the outset in accordance with standard market terms, would be deemed ordinary and thus not recoverable (even if the margin security is transferred later than in connection with the entering into of a secured transaction, including the transfer of the security to a new Clearing Member), provided that the transfer is made in accordance with the
terms of the contract, i.e the Credit Support Documents, and those terms are consistently applied throughout the life of the contract and not disregarded for a long time and then applied when one party encounters financial difficulties. The reasoning above applies irrespective of whether the collateral or margin security transferred is made pursuant to an arrangement labelled security or in an arrangement labelled transfer but the effect of which is to provide security (such as the Transfer Annex). Following the entry into force of EMIR, Swedish legislation has been amended effective as of 1 August 2014 to the effect that: (i) (ii) (iii) A central counterparty holding collateral as pledgee will be permitted to use such collateral without a specific agreement to that effect having been entered into with the pledgor (Chapter 3 Section 1 of FITA), thus adding central counterparties to the entity types listed in the Appendix to Question 10 in the Swedish Industry Collateral Opinion, see also the answer to question 10 in the Swedish Industry Collateral Opinion; If a pledge of financial instruments is made to a central counterparty in order to provide security pursuant to EMIR then the pledgor's rights to the pledged security shall not be affected by the central counterparty having a right to use the collateral in the way stipulated in article 39.8 of EMIR (Chapter 5 Section 2 b) of FITA); and A creditor holding gold as security, which has been posted as security to a central counterparty and which meets the criteria in the delegated regulation (EU) No 153/2013 and EMIR regarding regulatory technical standards for central counterparties shall, as is the case now for financial instruments and currency (cash), be permitted to sell such gold, provided the sale is carried out on commercially reasonable terms. (Chapter 8 Section 10 of the Bankruptcy Act) (See also question 17 in the Swedish Industry Collateral Opinion). 6 QUESTIONS Questions and answers Question 1 Would the conclusions reached in the Swedish Industry Netting Opinion, in relation to a Covered Base Agreement apply equally where a Covered Base Agreement is used in conjunction with the Addendum? The conclusions reached in the Swedish Industry Netting Opinion, in relation to a Covered Base Agreement would apply, for the entities covered by the Swedish
Industry Netting Opinion, equally where a Covered Base Agreement is used in conjunction with the Addendum. With regards to Resolution Entities, our answer is subject to what is stated under section 7 in the Swedish Industry Netting Opinion. Question 2 Would the conclusions reached in the Swedish Industry Collateral Opinion in relation to the use of a Credit Support Document apply equally where the relevant Credit Support Document is used in conjunction with the Paragraph 11 or the Paragraph 13, as applicable? We believe that the conclusions reached in the Swedish Industry Collateral Opinion, for the entities covered by the Swedish Industry Collateral Opinion, in relation to the use of a Credit Support Document apply equally where a Credit Support Document is used in conjunction with the Paragraph 11 or the Paragraph 13, as applicable. Please note that under Swedish law, as set out in the answer to Question 10 in the Swedish Industry Collateral Opinion, if a pledgee is given a right to use or dispose of collateral, the pledgor's title to the collateral will generally not be protected against creditors of the pledgee (which would be the case if the pledgee does not have the right to use or dispose of collateral). The arrangement could in such a case be considered a transfer of ownership rather than a security interest (albeit most likely only in relation to third parties). When using Paragraph 13, if the Parties want to ensure that the Pledgor's title to the Posted Collateral (if located, or deemed located, in Sweden) is to be protected, we refer to the recommendations of elections under Question 10 in the Swedish Industry Collateral Opinion. The Parties should thus consider making an election in 13(g)(i)(3) incorporating the same wording as contained in Paragraph 6(c) in the Credit Support Deed (English law) and elect that Section 10(b) of the Addendum shall not apply. Under Swedish law, as set out in the answer to Question 11 in the Swedish Industry Collateral Opinion, if a pledgor has a right to substitute collateral this could indicate that the pledgor would have a certain degree of control of the collateral, something that could render the security interest unperfected (at least partially) under Swedish law. Although there are statements from the Swedish legislator which supports the view that substitution of collateral may not endanger the perfection of a security interest created therein, provided the value of the substitute collateral corresponds to or exceeds the value of the replaced collateral, there is a lack of case law in Sweden which renders the question still unclear under Swedish law. When using Paragraph 13, and considering the uncertainty under Swedish law, we refer to the recommendation for election under Question 11 in the Swedish Industry Collateral Opinion, and thus the Parties should consider specifiying in the Addendum Annex that the Secured Party's consent to a substitution is required (if the collateral is located, or deemed located, in Sweden).
Please also note that there are specific rules regarding the use of collateral applicable to Parties that are supervised by the Swedish Financial Supervisory Authority (the "FSA"), which, apart from entities based in Sweden, can be entities which are based outside the EEA and has an authorisation from the FSA to conduct financial operations in Sweden through a branch ("Financial Entities"). These rules require that, in order for Financial Entities to be entitled to either (i) use, utilise or dispose of a financial instrument owned by another party or (ii) assign or pledge to a third party a security interest in financial instruments without assigning the secured obligations at the same time, the parties must enter into a specific agreement in writing specifically for the purpose of governing the use of collateral. Further, as regards a re-pledge to a third party of a security interest in financial instruments, there is a prohibition against re-pledging such security interests on terms more onerous than those governing the original security interest or as security for a greater obligation (a larger monetary obligation) than the obligation secured by the original security interest. It should be noted that these limitations are not applicable to a secured party's right to realise collateral following enforcement. Moreover, the aforementioned restrictions are not applicable in case the Financial Entity enters into an agreement with (or take part in an agreement between) certain other supervised Financial Entities, governmental authorities, international banks or other equivalent supervised foreign financial entities. The provisions regarding a specific agreement shall also not apply to central counterparties as referred to in EMIR. With regards to Resolution Entities, our answer is subject to what is stated under section 7 in the Swedish Industry Netting Opinion. It should be noted that, as of 3 January 2018, investment firms (including banks and credit institutions authorised to conduct investment/securities business) will be prohibited to conclude title transfer financial collateral agreements (including repurchase agreements) relating to financial instruments, currency or credit claims, with retail clients for the purpose of securing or covering present or future, actual or contingent or prospective obligations of clients. This prohibition implements article 16.10 in MiFID II. Apart from what has been stated above and with reference to section 5 above, and with reference to what is stated in Mannheimer Swartling Advokatbyr~ AB update letter to ISDA dated 30 August 2017, there are no other points raised in the Swedish Industry Collateral Opinion we wish to bring to your attention herein.
Question 3 Would the use of the Addendum in conjunction with a Covered Base Agreement affect the conclusions reached in the Swedish Industry Netting Opinion in relation to Transactions other than Client Transactions? The use of the Addendum in conjunction with a Covered Base Agreement in relation to Transactions other than Client Transactions (thus for non-cleared transactions) would not affect our conclusions in the Swedish Industry Netting Opinion, for the entities covered by the Swedish Industry Netting Opinion. Question 4 Would the use of Paragraph 11 or the Paragraph 13, as applicable, in conjunction with the relevant Credit Support Document affect the conclusions reached in the Swedish Industry Collateral Opinion to the extent that those conclusions relate to Existing Collateral Agreements? We believe that the use of Paragraph 11 or Paragraph 13, as applicable, would not affect the conclusions reached in the Swedish Industry Collateral Opinion, for the entities covered by the Swedish Industry Collateral Opinion, to the extent that those conclusions relate to the Existing Collateral Agreements. With regards to Resolution Entities, our answer is subject to what is stated under section 7 in the Swedish Industry Netting Opinion. It should be noted that, as of 3 January 2018, investment firms (including banks and credit institutions authorised to conduct investment/securities business) will be prohibited to conclude title transfer financial collateral agreements (including repurchase agreements) relating to financial instruments, currency or credit claims, with retail clients for the purpose of securing or covering present or future, actual or contingent or prospective obligations of clients. This prohibition implements article 16.10 in MiFID II. Question 5 Are the limited recourse provisions contained in Section 15 of the Addendum enforceable under Swedish law in relation to the Client? a) In the absence of insolvency proceedings In the absence of insolvency proceedings in relation to a Swedish Client the choice of law in the contract would prevail based on the freedom of contract principle under Swedish law (see Section 5.2 in the Swedish Industry Netting Opinion and the reservations made therein). If the law of another jurisdiction would be chosen Swedish law would, subject to such reservations, not be applicable.
b) In the event of insolvency proceedings In the event of insolvency proceedings in relation to a Swedish Client we believe it to be highly likely that the limited recourse provisions in Section 15 in the Addendum will be upheld by a Swedish court. We base this opinion on the freedom of contract principle under Swedish law. There are, however, to the best of our knowledge, no judgements from Swedish Courts of Appeal or the Supreme Court which further support our opinion. This memorandum is given in Gothenburg, Sweden. The advice set out herein is limited to Swedish law as of the date hereof and is in itself governed by and shall be construed in accordance with Swedish law and will not give rise to any action in any other jurisdiction. We assume no obligation to inform you of any changes in the foregoing subsequent to the date set forth in the beginning of this letter. However, we are not aware of any pending legislative developments which may impact the contents of this letter. This memorandum is addressed to the International Swaps and Derivatives Association Inc. for its own use and benefit and for the use of its members and their affiliates (each a "Beneficiary") and may not be relied upon by any other person or for any purpose other than in connection with the issues described above, except that we consent to a copy being shown to the Beneficiary's professional advisors and to its regulatory or supervisory authorities for information purposes only, on the basis that we assume no responsibility to such regulator or any other person as a result. WISTRAND ADVOKATBYRfl. GOTEBORG KB Kristofer Selvin