The ISDA (International Swaps and Derivatives Association, Inc.) Cross-Border Risk Management Swaps and Derivatives refers to the standards and methods developed by ISDA to address the risks associated with cross-border swaps and derivatives transactions. This framework aims to ensure compliance with diverse national regulations, decrease legal uncertainty, and increase market stability in the global derivatives business.
Tanzania's swaps and derivatives market is booming, despite the lack of clear legislation governing these hedging instruments. However, on February 10, 2015, the Bank of Tanzania issued a circular imposing restrictions on transactions involving swaps and derivatives denominated in Tanzanian shillings. According to this circular, swaps and forwards involving the Tanzanian shillings can only be conducted by licensed banks and financial institutions, provided there is evidence of an underlying economic activity. Additionally, licensed banks and financial institutions are prohibited from entering into swaps with non-residents for periods shorter than three months and with residents for periods shorter than seven days.
In terms of cross-border hedging swaps and derivatives under ISDA, which are widely utilised around the world, contract parties are normally free to engage in these transactions and choose English law as the governing law. Courts in Tanzania will honour this choice, provided it adheres to the mandatory requirements of the laws of Tanzania, such as those outlined in the circular. Thus, while parties to an ISDA Master Agreement can generally choose their own legal structure, they must nonetheless adhere to the precise regulatory obligations outlined in the laws of Tanzania.
An important aspect of cross-border hedging transactions is managing the insolvency risk of a Tanzanian party (e.g., a borrower) and the resulting impact on the hedging arrangement. Key considerations include the validity and enforceability of close-out netting and set-off provisions. The Companies (Insolvency) Rules, 2004 (the Rules) recognise the concept of close-out netting and set-off provisions. However, these mutual credits, debits, or other mutual dealings do not include any debts incurred when the creditor was aware that a creditors' meeting was summoned, or a winding-up petition was pending. The Rules also prioritise claims, giving secured creditors precedence over unsecured creditors. In practice, when a debtor/borrower becomes insolvent, the specific terms of the ISDA Master Agreement, the priority of creditor claims, and the regulatory framework will dictate the treatment of the hedging arrangement.
Given the increasing use of cross-border hedging instruments under the ISDA framework, it is crucial for Tanzania to develop a comprehensive legal framework to regulate these transactions, beyond the existing limited directives. This would ensure greater clarity and stability in the market, providing better protection for all parties involved in such financial arrangements.
Note: This is not a legal opinion, and the contents hereof are not meant to be relied upon by any recipient unless our written consent is sought and explicitly obtained in writing.
