Finding a common path in the derivatives sector

The movement towards more transparent business practices in the finance sector has
prompted a unique agreement between Portuguese banks

The continuing desire for Portuguese
banks to enter into and sell derivatives
products in the domestic market and in
the more difficult financial environment
for companies to establish fixed costs,
has prompted an unprecedented
collaboration, says Sofia Santos
Machado, a banking and finance partner
with Abreu Advogados, who led the

“We have for the first time
established a draft Master Agreement
that will, going forward, be used by all
of Portugal’s major banks to govern
domestic derivatives contract
agreements,” she says.

The project begun at the start of 2009
saw Abreu Advogados organise a
Working Group intended to establish a
standard set of documentation subject to
Portuguese law, to govern derivative
transactions between Portuguese
counterparties. Alongside Santos
Machado, also involved was tax partner,
and the firm’s Managing Partner, Miguel
Teixeira de Abreu, and finance lawyer
André Sousa Vieira.

The members of the Group included
representatives from all the major
Portuguese banks – including Caixa
Geral de Depósitos (CGD), Banco
Comercial Portuguñs (BCP Millennium),
Banco Espí­rito Santo (BES), Banco BPI
(BPI), Banco Portuguñs de Negócios
(BPN), Banco Efisa, Banco Banif and
Banco Finibanco – as well as a number
of foreign banks conducting derivatives
business in Portugal, such as Barclays.

El deseo de los bancos
portugueses de vender
productos derivados en el
mercado doméstico en un
entorno financiero
complicado para establecer
costes fijos, ha provocado
una serie de alianzas entre
los bancos sin
precedentes, explica Sofia
Santos Machado de Abreu

“There is not the same collaborative
tradition among Portuguese banks as
often exists in other jurisdictions and so
a major challenge was to get more than
the banks’ interest in the project. We had
to get them to really engage with it and
see the benefit of adopting a common
approach,” says Santos Machado.

When entering into derivative
transactions with foreign entities,
Portuguese banks usually execute
standard international agreements –
mainly those established by the
International Swaps and Derivatives
Association (ISDA). But such
agreements were felt inappropriate for
domestic use, and the new Master
Agreement is therefore more heavily
influenced by other European schemes,
notably the German regime which also
follows civil law principles. But the aim
of the project was not merely to create a
local translation, she emphasises.

“When entering into derivative
transactions with local or less
sophisticated counterparties it is often
difficult to propose the execution of an
ISDA Master Agreement, or any foreign
documentation for that matter. They do
not take into account the specificities of
Portuguese Law, court rulings or market

Portuguese banks have inevitably
had to deal on a daily basis with the
practical difficulties of using nonstandard
documentation and the
potential of adopting common
agreements subject to local law had
been discussed, but no progress had
ever before been made, says Santos

“The initiative was welcomed by the
market players that understood it as an
opportunity to promote legal certainty
and achieve a common playing field.

But it was also seen as helping to
contribute to a more transparent market
practice and as a means of complying
with business conduct rules – it places
greater emphasis on the ability of less
sophisticated companies to fully
understand what can be very complex

The initiative also follows a recent
European Commission Consultation on
possible initiatives to enhance the
resilience of over-the-counter (OTC)
derivatives markets that has stressed the
need for further standardisation, she

“It is expected that within the near
future European legislation will be
finalised submitting Banks that enter
into non-standard derivative
agreements to more severe capital
requirements. Such regulatory shifts
help stress the need for more local
standard derivatives agreements to be
used especially between banks and less
sophisticated companies. They need to
understand the risks of what they are
taking on.”

The same Working Group has also
created a set of corollary documents to
support the Master Agreement,
establishing common rules on netting,
close out netting and collateral among
others, and is also now looking to agree
a standard set of definitions.

“Whilst working through the
initiative, banks were able to spot gaps
in their own documentation and the
differences in interpretation that existed
between them. Having come from what
may once have been opposite sides we
are all now looking to find a common
path,” she says.