The practice of arbitrating derivatives disputes

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The practice of arbitrating derivatives disputes

A wholly foreign-owned bank in China established by a leading global commodity derivatives trading bank group (the claimant), and a large Sino-foreign joint venture non-ferrous metal smelting and processing enterprise (the respondent) entered into a copper forward transaction (the original transaction) under which the respondent would purchase copper from the claimant. Afterwards, due to the respondent’s poor management, the claimant terminated the original transaction by closing out the position (the closing-out transaction), and requiring the respondent to pay the settlement amount by the settlement date in January 2015.

However, the respondent failed to pay and did not respond to a subsequent delivery confirmation letter. Consequently, the claimant applied for arbitration at the Shanghai International Arbitration Centre, based on the arbitration clause, claiming for the respondent to pay the settlement amount and interest on the late payment.

TRIBUNAL’S FINDINGS

After hearing the case, the arbitral tribunal considered there were four aspects in dispute. First, regarding the application of the law, the tribunal held that the transaction between the parties was an over-the-counter forward transaction of copper commodities in financial derivatives trading. According to the agreement on “applicable law” in the schedule, the master agreement and the schedule are governed by the laws of the People’s Republic of China. The tribunal referred to the Interim Measures for the Administration of Derivative Product Trading Business of Banking Financial Institutions, amended by the China Banking Regulatory Commission (CBRC) on 5 January 2011, and other general civil and commercial laws and regulations, such as the Contract Law.

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Xu Zhihe is deputy director of the department of research and information at SHIAC

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