PRIME Finance: The New Tribunal That Takes Financial Disputes to the Global Arena

PRIME Finance, the Hague's newly-opened tribunal for the moderation of disputes related to derivatives contracts, has the potential to change fundamentally the nature of litigation in international finance. Benzinga Radio asked Jeffrey Golden, professor at the London School of Economics and Political Science, director at MFX Solutions Inc., derivatives lawyer, and chairman of the management board of PRIME Finance, to provide some insight on the tribunal and what it means for financial litigation. The PRIME Tribunal opened for the first time in Hague last week. Tell us the story of how PRIME came into existence.
Jeffrey Golden: PRIME stands for Panel of Recognized International Market Experts. The idea for a world tribunal that could handle some of the more complex financial market cases was floated just before the financial crisis in a paper that I gave to a gathering in the Hague at the Peace Palace. Along came the financial crisis. And in October of last year, with the support of the Dutch government, 60 experts from around the world, immediately following the meeting of finance experts in Seoul, Korea, got on an airplane, traveled to the Hague and locked themselves in the Peace Palace and brainstormed. We came out of that meeting thinking that, with all the attention being given to regulation, [it was still] preventative medicine. There was concern that perhaps not enough thought had been given to whether [our courts] were adequately staffed, whether there were enough competent judges around the world to handle some of the matters coming out of the financial markets which had huge consequence. And that was the inspiration for the project.
Two weeks in, how is it going?
Jeffrey Golden: It's all been very exciting. We knew we had a lot to do so we worked hard before the opening, and we continue to work hard since. We have had a number of queries since the opening about the suitability of PRIME to handle disputes, and of course we do this against a backdrop of continued market and legal uncertainty emanating from issues like the sovereign debt restructurings that are being contemplated, the Eurozone challenges and the like.
That idea of legal uncertainty is one of the main reasons PRIME is needed, correct?
Jeffrey Golden: That's right. We have a pressing need for a settled and authoritative body of law in this area. We find ourselves looking out at a time when in fact we are getting contradictory decisions from some of the national courts on matters where the facts are similar and the markets would have expected a more uniform read. The markets very much depend on certainty and a lot of effort has gone into thinking about ways in which we can get authoritative results sooner and on a less expensive basis.
Are there specific legal disputes in recent years where PRIME could have been involved to produce better resolutions?
Jeffrey Golden: I think what we've seen in recent years -- and this has certainly inspired the interest in PRIME -- is that the nature of the disputes has evolved. It has evolved from cases where the facts may have been dramatic because of a derivatives or other financial market backdrop, but the issues were issues with which the judges were familiar: Did this party have the authority to enter into this kind of trade? Did one party owe a greater duty of care to another? Had it mis-sold the products in any particular way? Was an exchange of emails sufficient to create a contract and if so on what terms? Those were issues which the judges had wrestled with in any number of market contexts. But we have seen the evolution from those cases to cases where the issues before the courts are highly technical and involve matters of parties' internal modeling, formulaic calcuations, attempts to insolvency-proof the contracts that the parties trade from because of the fact that they will be trading across borders and the jurisdictions around the world don't all line up in the same way. Those are cases, as in tax [and] bankruptcy, where expertise of a particular sort may be called on. Certainly the experience of many of our experts would be highly relevant, and to our surprise, although we've seen special subject matter courts for everything from family law to tax and insolvency, we didn't see that kind of specialized tribunal on offer for finance in all the jurisdictions where we would have liked to see one.
Is it difficult for a so-called "traditional" court to keep up with the field of derivatives contracts?
Jeffrey Golden: It's a dynamic marketplace and it's difficult for many to keep up. We do have [in PRIME] a group which is geographically dispersed and with a variety of backgrounds represented and with a real appetite to keep up, to engage.
What is your understanding of the negotiations currently underway between Greece and its creditors over a debt swap? We have this issue of different international jurisdictions coming into play here. Several bonds are denominated under Greek law, and several bonds are denominated under UK law, with collective action clauses. How do you see this playing out?
Jeffrey Golden:The facts are important, the facts are complicated, on the facts vary between one debt issue to the next. There is sensitivity to the knock-on effect of any resolution on the parties' contracts. [These issues] can easily be forgotten by politicians as they sit around the table trying to think about what might be expedient. It's analagous in my mind to the situation we had when the national currencies merged and the Euro appeared. We had politicians very focused on what we would name the new currency and maybe whose picture would go on the coins and notes, but a whole host of technical issues [came into play as well]. These are the kind of technical issues at work where our experts have experience.
The global banking system is facing substantial regulatory headwinds. What is your opinion of the direction regulation is headed, especially in derivatives?
Jeffrey Golden: To read our newspapers, you might think our only hope, the only way forward, is better regulation -- perhaps even greater restrictions on products and even arguably on innovation itself. We know that products don't destroy businesses or economies. People do. We also know that we don't want to stop innovations or even risk-taking. If they aren't human rights, they are hardwired into human nature. The efforts to improve on regulation are hugely important, but there will be accidents and there will be victims. We think the courts and judges have a role to play as well. Judges who understand finance can be an ally to regulators and helpful in reducing systemic risk. Judges, on the other hand, who don't understand finance may be themselves a source of systemic risk, particularly when the parties trade off of standard terms and contracts. A mistake by a judge in interpreting one of those terms will go "woosh," like wildfire around the globe.
How will a push to centralize some of these ad-hoc trading activities change the landscape?
Jeffrey Golden: Clearinghouses and exchanges will become more systemically relevant. A lot of attention is being paid to the way in which central clearing could increase transparency and bring with it benefits. We aren't convinced that as much attention has been given to dispute resolution in the context of clearinghouses and exchanges, and with the systemic impact of decisions being made in that regard, that we have a robust and authoritative body that can help resolve any disputes that arise. We are in discussions with several clearinghouses at the moment. We hope there will be a role for our panel of experts in that regard as well. It would certainly, I'm sure, comfort many to know that the dispute settlement side was being thought through.
What is up next for PRIME? Have you taken any cases yet?
Jeffrey Golden: We have had several inquiries since we opened our doors two weeks ago. We are reviewing papers there to see whether PRIME would be suitable to play that role. The two other focuses of the organization -- one is judicial training. We intend to do all we can to be a resource and support for judges around the world, and provide better training that may not have been offered until now in matters of finance for judges. Also, we aim to organize a library of precedents -- a database of court decisions from around the world and other resources that may be helpful. It may surprise you that there is a gap [there] and that more energy hasn't been put into that to date.
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