International financial contracts and the Greek debt crisis

1. Introduction

In recent days, a new and dramatic chapter has been written concerning the Greek debt crisis:

• Greece became the first developed country to default in its obligations to the International Monetary Fund;
• A series of bank holidays were decreed leading to closures of banks and exchanges and the introduction of capital controls; and
• An unprecedented referendum was held on only a week's notice as to whether Greece should accept a proposal of its creditors that was no longer on the table, to which the Greek populace voted a resounding 'no'.

Whilst the market has so far reacted calmly to these developments, the servicing and restructuring of Greece's debt, the solvency of its banks and Greece's position within the Eurozone and as part of the European Union all remain on a knife edge.

As we wrote in 2012 in our briefing "International contracts and the Eurozone crisis", the potential fallout from the Greek debt crisis throws up a multitude of legal issues and uncertainties. The broad conclusions in that earlier briefing remain unchanged, but in this briefing we have added further colour in certain areas and brought the focus more closely to the present situation in Greece. The purpose is to provide a high level framework by which parties to international financial contracts and securities ("Instruments") may broadly analyse (or, more likely, refresh their analysis of) their legal exposure to the events unfolding in Greece.

This is an area which is fraught with uncertainty, both practically in terms of how these scenarios will in practice play out, and legally given the vacuum of applicable international treaty provisions, the inadequacy of standard contractual terms and the prevalence of conflict of law issues. Precise legal analysis will depend on the specific terms of the Instrument and the facts as they unfold.

2. Key Legal Risks

The legal risks in relation to potential exposures under Instruments to the Greek debt crisis can be broadly grouped into three key legal risks:

2.1 Redenomination of currency of payment from euro to a replacement Greek currency ("Redenomination risk")

• If Greece exits the Eurozone and establishes its own currency, will euro payment obligations under an Instrument be redenominated into the new currency?
• If Greece introduces a parallel currency or quasi currency but does not exit the Eurozone, will euro payment obligations under an Instrument be redenominated into the new currency?

2.2 Potential for impact on validity of contracts and triggering of certain contractual terms ("Continuity of contract risk")

• Could Greece's failure to make the payment due on its loan from the International Monetary Fund (the "IMF Loan") on 30 June 2015, or on any of its other borrowings, trigger cross default clauses under an Instrument?
• Would contractual payment obligations under an Instrument be automatically discharged for "frustration in the event of a Greek redenomination of its currency?
• Would Greek exit from the Eurozone trigger illegality, force majeure, material adverse change or disruption provisions or be an event of default under an Instrument?
• What would be the effect of termination of ECB emergency liquidity to the Greek banking system on Instruments?

2.3 Effect on Instrument of redenomination or disappearance of underlying reference asset and potential for hedge mismatch ("Basis risk")

• What is the consequence for an Instrument linked to a reference asset which redenominates into a new currency (e.g. a share)?
• For Instruments hedged by an underlying OTC contract with a euro element, is there a danger of mismatch if, for example, the underlying hedge is redenominated but the overlying Instrument is not?
• What is the effect of the unexpected closures of the ATHEX regulated market and the Multilateral Trading Facility of "EN.A" (Alternative Market of the Athens Exchange) on valuation of Instruments linked to Greek stocks?

There are also capital and exchange control risks and practical issues on enforcement, and we touch on these below.

3. Redenomination Risk

In this briefing we are assuming one of the scenarios below:

(A) "GREXIT": Greece exits from the Eurozone whether on an agreed terms basis or acting unilaterally " and introduces its own new currency ("New National Currency"), with the euro remaining the currency of the remaining Eurozone member states.

The founding Eurozone members assumed that the adoption of the euro would be an irreversible process – hence there is no provision for a member state to exit the Eurozone or to be expelled from it.^[1] Therefore, Greece's departure from the Eurozone would be in breach of its treaty obligations to the other member states. However, particularly in view of the long-running frustrations of other Eurozone members and that concerns of "contagion" may have slightly receded since the crisis first erupted in 2011, it is not impossible that a Grexit may be on agreed terms even though the treaty framework for such does not currently exist.

Whilst we cannot predict the precise scope of any new monetary law, it is highly likely that Greece would introduce a law ("New Currency Law") redenominating its own sovereign debt and the debt owed by its nationals from euro into its New National Currency. Greece could (and almost definitely would) also introduce capital controls prohibiting payments in euro in respect of that debt and capital controls to stem the outflow. As a commercial matter, it is expected that there would be a rapid depreciation in the rate of exchange between the euro and the New National Currency from the official exchange rate set by Greece in its New Currency Law.

(B) PARALLEL CURRENCY: Greece introduces a new currency or quasi currency, such as government IOUs, warrants or other instruments ("Scrip"), which by a new Greek law it designates as valid for the purposes of making certain payments in Greece. The Scrip would have an official rate of one to one for the euro. This would be a temporary measure and Greece would seek to remain in the Eurozone (at least for an interim period). We note that Greece has previously (in 2010 and 2011) issued a form of Scrip known as "pharma bonds" for the purpose of enabling the government to pay for health care supplies.

There have been various other possible courses floated such as the adoption of a currency peg (ie Greece retains the euro but exits the Eurozone) or even adopting a digital currency.

3.1. Redenomination risk

3.1.1. Key factors

In relation to private contracts and securities, whether or not a particular Instrument which includes euro payment obligations will redenominate into the New National Currency would depend on a number of unknown factors, including the particular terms of the Instrument. With regard to the relevant terms of the Instrument, we would expect that the following would be the key factors in the legal analysis:

• Governing law and submission to jurisdiction
• Intention of the parties to the Instrument as to which currency should apply, by reference in particular to (i) the definition of euro (if any) and (ii) the place of payment
• Conflicts of law and (possibly) public policy considerations

Parties also need to consider other factors such as capital and exchange controls and practical difficulties on enforcement.

3.1.2. Governing law and jurisdiction clauses

1. Governing law and courts of Greece

Assuming that an Instrument would otherwise fall within the scope of the New Currency Law (for example, because a counterparty with a euro payment obligation is a Greek national), we can be fairly confident that such Instrument would indeed redenominate into the New National Currency where (i) its governing law is Greek law and (ii) it provides for the submission to the jurisdiction of the Greek courts. Further – though less certain – we would expect that even if only one of these factors is present, the Instrument would redenominate. Most obviously this would be the case where there is submission to jurisdiction of the Greek courts, as such courts are likely to recognise the New Currency Law even where the Instrument is governed by a different law. It should also be the case where the governing law is Greek law, as the courts of another state are likely to recognise the New Currency Law where the Instrument is governed by Greek law. It is possible though that the courts of another state would refuse to recognise a New Currency Law enacted following a unilateral exit by Greece in breach of EU treaties.

2. Governing law and courts of England

However, the reverse may not necessarily be the case. Instruments which are governed by English law and which provide for the submission to the courts of England may still be held to be validly redenominated from euro into the New National Currency.

Parties should note that even if an Instrument provides for the submission to jurisdiction of the courts of England (or another country other than Greece), in certain circumstances the Greek courts may nevertheless assume jurisdiction over the Instrument. Even where there is exclusive submission to the English courts, proceedings could still be issued in Greece but, under the Recast Brussels Regulation, the Greek courts should stay their proceedings in favour of the English courts even if the Greek courts were first seised.

Assuming that the courts of England have assumed jurisdiction, an English court would consider the intention of the parties to the Instrument, as well as conflict of laws and (possibly) public policy considerations.

3.1.3. Intention of the parties - definition of "euro" and place of payment

Under the lex monetae principle, it is for a sovereign state to determine its own currency, and other states are bound to honour such choice, including any substitution by a state of one currency for another. Accordingly, if Greece introduces a New National Currency in place of the euro, an English court would seek to establish whether the parties to the Instrument had intended that the currency of payment should be that of Greece (i.e. previously the euro, but now the New Local Currency as exchanged for euro at the official rate in the New Currency Law) or the remaining Eurozone members (i.e. the euro). Key factors in this analysis would be:

• Definition of "euro" (if any)
• Place of payment

We consider three scenarios:

1. If "euro" is defined with reference to the single currency

If "euro" is defined in the Instrument to be the single currency introduced pursuant to the European treaties, then (absent other terms to the contrary) an English court should conclude that the currency of payment under the Instrument will remain euro.

2. If "euro" is defined with reference to the currency of Greece

On the other hand, while not likely, it is possible that "euro" could be defined in the Instrument as the currency of Greece. Subject to any other terms of the Instrument suggesting otherwise (e.g. the place of payment as discussed immediately below), an English court should consequently find that the intention of the parties was to apply the currency of Greece – including any replacement currency introduced by it from time to time – and therefore redenominate the Instrument from euro into the New National Currency (at the official rate under the New Currency Law).

3. If "euro" is not defined

If "euro" is not defined in the Instrument then an English court would consider other factors to determine the intention of the parties; in particular, the place of payment. In such case, and in the absence of anything suggesting otherwise in the Instrument, if the place of payment is Greece, then there is a presumption that the parties intended the currency of payment to be the New National Currency.

3.1.4. Conflicts of laws and public policy considerations

1. Conflicts of laws

An English court may find that the parties' intention was to make payment in euro, but may nevertheless hold that such payment obligations are unenforceable under applicable EU conflict of laws treaties. This would be the likely outcome where the place of payment is within Greece.

If Greece remains in the EU, under the "Rome I" convention (and, in relation to Instruments entered into prior to 17 December 2009, the "Rome Convention") an English court would have discretion to recognise a mandatory redenomination provision under the New Currency Law of Greece where the obligations arising out of the contract have to be or have been performed in Greece – e.g. if the place of payment is in Greece (under the Rome Convention, there is no requirement as to the place where the obligations are performed).

Where the place of payment is in Greece, whether or not Greece remains in the EU, an English court would also consider whether a New Currency Law, which rendered payment in euro illegal in Greece, would lead to "frustration" of the Instrument, and therefore decline to enforce it. We consider this in "Continuity of Contract Risk" below.

2. Public policy

Conversely, an English court may find that the parties' intention was to make payment in the New National Currency or that the court has a discretion under Rome I to recognise such law, but may decline to do so on the grounds of public policy in the case where Greece has unilaterally withdrawn from the Eurozone in breach of its EU treaty obligations.

3.1.5 Capital or exchange controls

Though an English court may uphold the validity of euro-denominated payments under the terms of an Instrument, parties also need to consider whether such payments may be unenforceable or otherwise blocked by capital or exchange controls which may be introduced by Greece.

1. International Monetary Fund Agreement

The IMF's Articles of Agreement divide capital controls into two categories: controls on capital movements; and controls on payments for current transactions. The distinction is not clear but in appropriate circumstances both types of controls are permitted by the IMF Articles of Agreement and both Iceland and Cyprus have in recent years introduced capital controls on capital and current movements within the terms of the IMF Articles of Agreement. While capital controls may well be permitted by international treaties and give rise to significant practical problems they would be unlikely to affect the enforceability of Instruments governed by laws other than Greek law (unless frustration is relevant – see 4.1.2 below).

Exchange controls are different. Under s. 2(b) of Article VIII of the IMF Articles of Agreement (given effect in the UK by the Bretton Woods Agreements Order in Council 1946), the UK is obliged to treat "[e]xchange contracts which involve the currency of any [IMF member] and which are contrary to the exchange control regulations of that member maintained or imposed consistently with this Agreement…" as unenforceable. "Exchange contract" is not defined in the IMF Articles of Agreement but the English courts have held that such term should be interpreted narrowly and confined to contracts to exchange the currency of one country for the currency of another^[2]. Thus, assuming that Greece remains in the IMF, Instruments comprising FX options or swaps and other contracts of exchange would likely be unenforceable if caught by the exchange controls of Greece.

2. EU treaties

If Greece remains in the EU it could also justify capital or exchange controls on grounds of public policy or public security under Article 65 of the Treaty on the Functioning of the European Union. However, such defence will be interpreted narrowly by the European Court of Justice and is unlikely to be successful in a unilateral exit scenario.

3.1.6 Additional considerations in relation to a parallel currency

The issues which arise should Greece introduce a parallel currency are very similar to those described in 3.1.1 – 3.1.5 above to the extent that any new Greek law seeks to mandate payments in Scrip. In addition, it is worth noting:

• there are provisions of existing European law, such as Articles 2 and 10 of Council Regulation 974/98 on the introduction of the euro, which suggest that only the euro may be the currency in circulation and the currency of legal tender in member states in the Eurozone; and
• it is much less likely that a court outside Greece would redenominate contractual obligations from euro to Scrip where the euro continues to be a lawful currency in Greece (albeit perhaps not lawful according to Greek law for all transactions).

4. Continuity of Contract Risk

There are two aspects to what we call "Continuity of contract risk": (i) potential "frustration" of an Instrument and (ii) the triggering of certain contractual termination provisions in an Instrument. In addition, the failure of Greece to make the payment due on the IMF Loan on 30 June 2015, or on any of its other borrowings, may have the potential to trigger cross defaults under certain Instruments.

4.1 Frustration

There are a number of possible consequences of a Grexit or the introduction of a parallel currency which could, arguably, "frustrate" the purpose of an Instrument, rendering it unenforceable under English law. These include:

• "Redenomination of a payment obligation from euro to another currency or Scrip
• "Imposition of capital or exchange controls making payment by one party illegal
• However, a number of criteria would need to be satisfied for an Instrument to be "frustrated". Of these, perhaps the most difficult requirement to meet is that, as a result of change of circumstances, the performance of the Instrument must be unlawful or impossible or otherwise radically different from that contemplated by the parties when the contract was originally made.

4.1.1 Redenomination of payment obligations

Redenomination of payment obligations under most Instruments will generally not be enough to satisfy the criteria for frustration. Indeed under the so-called "continuity of contracts" principle, the validity of contracts is not affected by the introduction of a new currency. Further, any new Greek monetary law and associated provisions may well provide that (i) all contracts governed by the laws of Greece continue to be valid and binding and (ii) the introduction of its new currency or Scrip shall not operate to frustrate contracts.

4.1.2 Capital or exchange controls

The imposition of capital or exchange controls, which make it illegal for one party to make a payment in euro to the other party, is an event which may satisfy the criteria for "frustration". In any event, as we note above, where the place of payment of the Instrument is in Greece, an English court may decline to enforce payment in euro under that Instrument where such payment would be illegal under the New Currency Law.

4.2 Potential contractual triggers

A Grexit could potentially trigger a number of typical contractual terms in an Instrument, although it is unlikely that the introduction of a parallel currency would have the same effect. Each Instrument needs to be analysed separately, and relevant terms will vary widely depending on whether the Instrument is documented under market standard loan, security, derivative, repo (as to which, see our briefing here or other framework documents. We look briefly at a sample of common terms across various international financial instruments below.

• Event of default: If the payment obligations under the Instrument do not redenominate but one party seeks to pay in the "wrong" currency (i.e. the New National Currency or Scrip rather than euro), such event may trigger an event of default under most Instruments. It is also possible that cross default clauses and default for breach of representations by a party may apply.
• Illegality: The introduction of capital or exchange controls rendering performance illegal could trigger "illegality" clauses, allowing a party to cause early termination of the Instrument (potentially subject to exhausting all other remedies and the expiry of a waiting period).^[3]
• Material adverse change: It is conceivable that a Grexit could constitute a "material adverse change" under some Instruments, depending on how broadly the term is drafted and the impact of the event (including a subsequent substantial devaluation in the New National Currency) on the borrower or issuer.
• Force majeure: In the absence of illegality, a party could argue that an exchange control prohibiting the making of a payment by it under an Instrument is a "force majeure" event, relieving it of its payment obligations. "Force majeure" could also apply where international payment systems are unable to cater for a New National Currency, or possibly following the plummeting in value of a New National Currency.
• Currency indemnity: A currency indemnity is meant to compensate a party where a judgment is given in a currency other than the currency of the contract. Therefore, a party owed an amount in euro but where the judgment currency is the New National Currency (or Scrip) could try to claim for any currency losses. However, such indemnity would likely be difficult to enforce, particularly in the Greek courts.
• FX disruption/market disruption/hedging disruption: Primarily with regard to OTC derivatives and structured securities Instruments, any or all of FX disruption/market disruption/hedging disruption events could possibly be triggered on a Grexit, leading to early termination or adjustment (see also "Basis risk" below).
• Expropriation: If, for example, the Greek government seizes foreign currency deposits of the borrower's/issuer's/reference issuer's group, "expropriation" may apply.
• Non-business days: With the unscheduled closure of Greek banks for extended periods, this may have the undesirable effect of creating periods where there are no business days or effective days for the purpose of making payments or serving notices to terminate transactions or to make margin calls.

4.3 The IMF Loan

The IMF Loan is not technically a contractual loan: it consists of SDRs (special drawing rights, an IMF 'creature') and its terms have not been made public. Non-payment is therefore unlikely to constitute a default under a contractual loan, but, rather, a breach of an international law obligation to comply with the country's commitments under the IMF's Articles of Agreement. Whether? a cross-default/event of default under an Instrument has occurred will depend on the exact wording of the relevant clause but, given the opaqueness of the exact arrangements underpinning the IMF Loan, it is unlikely. However, many financial contracts involving Greece as a reference entity/counterparty have been amended on a more 'tailored' basis, so a case-by-case analysis will inevitably be required.

Non-payment of the IMF Loan has the potential to have an effect on loans to Greece from the European Financial Stability Facility (EFSF), which expressly include a cross default covering IMF loans. However cross default under the EFSF loans also requires, as a further condition in addition to non-payment, a notification from the Managing Director of the IMF to the Executive Board of IMF.

In addition to the IMF Loan, Greece faces a number of upcoming debt repayment obligations, including respective series of bonds held by both private creditors and by the ECB. A default on the latter in particular has been widely considered as the point of no return for ECB to cut off its lifeline to Greek banks.

4.4. Termination of ECB liquidity support

The four systemic Greek banks have been relying on ECB emergency liquidity to stay afloat. If such support is no longer forthcoming, it is expected that these would have to enter into some form of bank resolution regime. It is understood that whilst Greece has not as yet implemented the Bank Recovery and Resolution Directive, it does have available a bank recovery legislative framework, which came into force against the backdrop of the recent consolidation of the Greek banking system. This framework contemplates, among others, a special liquidation procedure, as well as a 'good/bad' bank split mechanism. Insolvency-related events of default included in Instruments may not be capable of being called as a matter of Greek law in this context, so a careful analysis will be required in these circumstances.

5. Basis Risk

Instruments under which payments are linked to Greek underlyers currently denominated in euro or which are hedged by reference to a euro-denominated derivatives contract with a Greek counterparty, may lead to unwanted outcomes for parties following a Grexit. Similarly, the closure of Greek exchanges may affect valuation of Instruments with underlyers traded on such exchanges.

5.1 The currency of an underlying reference asset (e.g. stock or equity index) is redenominated

Derivative Instruments may be linked to reference assets which redenominate from euro into a New National Currency " e.g. shares of companies listed on the Athens stock exchange. Indices could also redenominate along with constituent stocks within equity indices.

In such circumstances an English court may find an implied term based on the court's determination of the intention of the parties.

In the case of a component of a pan-Eurozone index redenominating into a New National Currency, the index calculation agent may have the ability to adjust the index itself to cater for such an event without an issuer having to make adjustments at the Instrument level. Otherwise, index adjustment event terms may apply, potentially allowing a party to adjust or early terminate.

Alternatively, parties may be able to exercise change in law provisions to adjust or early terminate the Instrument. Any exercise of change in law would reference the New Currency Law and may depend on the impact on a party's hedge and whether valuations can still be made. In addition, an Instrument may have hedging disruption provisions allowing for a postponement following which an Instrument may be redeemed.

5.2 Currency mismatch between Instrument and hedge

For some Instruments, there will be a risk that, following a Grexit, an Instrument may redenominate but its hedge may not, or vice versa. For example, a Euro-denominated structured securities offering may remain payable in euro, but its OTC hedging contract " in the circumstances outlined in "Redenomination" above " could redenominate into the New National Currency. Again, the most likely provisions that may apply are change in law and hedging disruption, depending on the particular terms and factual circumstances. In such a scenario, it may be that amending protocols, which it is anticipated that the main industry groups would develop, will address some of these issues.

5.3 Unexpected stock exchange closures

It is unclear how the closure of the Athens Exchange for the period prescribed in the Legislative Act of 28 June 2015 would be treated under Instruments which incorporate the terms of the 2002 ISDA Equity Derivatives Definitions. Taken literally, the term "Scheduled Trading Day" could apply to each closed day (save possibly the first) given that, following the announcement by the applicable Greek regulator of the exchange closures, the exchanges could thereafter be said to be not "scheduled" to be open. Taking a more purposive view, and arguably in line with past ISDA guidance in this area (though we note that any such guidance is not binding), on the basis that the timing of the closure announcement left no time for market participants to take any remedial action in relation to their positions, one could argue that the closed days (or at least each such day after the first closed day) are not "Scheduled Trading Days" as that term was meant to be interpreted, but rather that such days are Scheduled Trading Days which are "Disrupted Days". In either interpretation, valuation will be postponed; however, there may be a consequential difference between the two in that there will be a longstop date of a certain number of Scheduled Trading Days after which a good faith valuation must be taken.

6. Issues on Enforcement

Thus far, we have focussed on the decision of the relevant court. But a judgment only has value to the extent it can be enforced.

So long as capital controls are in place in Greece, they are likely to pose practical difficulties to a contractual party wishing to make payment under an Instrument in circumstances where the payment has to be made through a bank or other institution affected by the capital controls. In addition, a Greek court would likely apply the capital controls in any litigation even where the Instrument the subject of the litigation is governed by the law of another country and is enforceable under the law of that other country. Likewise, there may well be many circumstances in which a non-Greek court, such as an English court, would be bound to apply the capital control legislation and refuse to enforce a contract which requires payment to be made in circumstances not permitted by that legislation.

Should Greece introduce a New Currency Law, the enforcement of an English court judgment against assets located in Greece would, in all likelihood, be problematic. It is unlikely that a request to the Greek courts to enforce a judgement would be successful as those courts would be obliged to give effect to the New National Currency and would therefore not be in a position to enforce an English court judgment for a debt in euro.

7. Assessing and mitigating the risks

There are many unknowns in terms of how a Grexit might play out. Most observers assume that member states will legislate for the consequences of any such event, and that such legislation will override the terms and conditions of private contracts. Also, trade bodies are likely to develop market standard protocols for parties to apply to certain Instruments to account for the event. Nevertheless, no one knows what will happen or what any future legislation will cover and which, if any, market protocols will be agreed. Therefore, market participants should be regularly reviewing the terms of existing Instruments and considering which terms to include in new Instruments to assess the degree of potential exposure and seek to mitigate the risks insofar as possible as the crisis unfolds and the legal position eventually begins to emerge. In terms of such review, it may be prudent to consider that if Greece does become the first country to exit the Eurozone it may not be the last, and indeed a complete break up of the Eurozone may not be impossible.

With that in mind, we suggest parties to international Instruments should undertake the following basic steps:

7.1 Eliminate or reduce nexus with 'at risk' member states

Parties should review existing Instruments and consider draft terms of future Instruments with a view to eliminating or reducing any nexus with a member state considered to be 'at risk' of Eurozone exit ("'at risk' member state"). Depending on the particular Instrument and all the other relevant circumstances surrounding it, parties wishing to reduce redenomination risk may wish to consider the following terms and suggestions:

• Governing law: This should be English law, New York law^[4] or some other law other than that of an 'at risk' member state.
• Jurisdiction: Ideally, this should be exclusively English courts, New York courts^[5] or some other court other than those of an 'at risk' member state.
• "Euro": Such term should be defined, and the definition should not be with reference to the currency from time to time of an 'at risk' member state but instead to the single currency introduced pursuant to the EU treaties. For example:

"Euro" means the lawful single currency of the member states of the European Union that have adopted and continue to retain a common single currency through monetary union in accordance with European Union treaty law (as amended from time to time).^[6]

• Place of payment: This should not be a city in an 'at risk' member state in order to help rebut the presumption that payments should be in the New National Currency. There should be a single place of payment outside an 'at risk' member State or there should be a unilateral discretion to alter the place of payment.
• "Business Day" (including "Payment Business Day") definition: Ideally, this should not be with reference to a city in an 'at risk' member state.

7.2 Include terms permitting flexibility to terminate and/or adjust on a Eurozone exit/breakup

Parties should consider including terms in Instruments which permit flexibility to terminate and/or adjust on a Eurozone exit or Eurozone breakup scenario. In particular, depending on the nature of the Instrument, parties may wish to consider the following possible terms and guidance:

• Illegality: Ensure this is wide enough to cover both events, and the consequences are broad enough to cover termination and/or adjustment (as needed).
• Material Adverse Change/Force Majeure: The same considerations as Illegality apply.
• Eurozone exit/breakup "sweep-up termination/adjustment" clause: Consider adding a generic clause to provide maximum flexibility, particularly bearing in mind the uncertainties as to how events might play out both factually and legally. Such a provision should allow early termination or adjustment to the terms of an Instrument on or before the introduction of a New National Currency to preserve the commercial terms on a good faith and commercially reasonable basis and subject to any applicable legislation. For example, we have included such clauses in structured securities programmes.
• Trade body guidance: Closely monitor applicable trade body guidance to pick up proposed market standard terms and protocols.

7.3 Consider disclosure of significant exposure to Eurozone Exit/Breakup

Parties should consider whether specific disclosure " probably by way of a risk factor " is required in relation to the potential consequences to such party of a Eurozone exit or Eurozone breakup:

• Scope and content: Given the basic uncertainties " both factual and legal " as to the impact of any such event, making the appropriate disclosure is not straightforward. However, any description in a securities offering document which is overly vague would be at risk of being rejected by an approving authority. Whilst acknowledging the various uncertainties as to outcome of the Eurozone crisis, such a risk factor could highlight the various economic and political considerations (e.g. extent of sovereign debt and risk of contagion) which might lead a party to be particularly vulnerable to the fallout from a Eurozone exit or Eurozone breakup scenario. It could also describe the exposure of a party as a consequence of the location of relevant assets in an 'at risk' member state[⁷].
• Trade body guidance: As above, parties should pay particular note to any trade body guidance which might devolve into market standard approach as to disclosure.

7.4 Be particularly mindful in relation to securities, such as securitised derivatives

Parties may wish to take extra care in relation to Instruments which are in the form of securities versus bilateral contracts since:

• Difficulties in amendment: It may be difficult to adopt market-wide protocols developed by trade bodies to cater for Eurozone exit or Eurozone breakup scenarios in securities' terms and conditions given that holders will need to consent. This is rarely a straightforward process, particularly where securities are held in clearing systems.
• Hedge mismatch: Particularly in relation to securitised derivatives (as we note above), there is a potential for basis risk where the impact of a Eurozone exit or Eurozone breakup event on the hedge differs from the overlying Instrument.

7.5 Race to the courts

• As we noted above, given the increased risks of redenomination being upheld where the Greek courts seek to apply English law, there may be a clear advantage in a party being the first to open proceedings in the English courts. Even where there is exclusive submission to the English courts, there is still a risk that a party may open proceedings before the Greek courts.

8. Conclusion

We have tried in this briefing to provide a high level framework by which to approach the numerous and varied key legal risks caused by the Greek debt crisis. Our original briefing on this topic was released some 3 ½ years ago, but " despite the recent dramatic turn of events in Greece " it is likely that it will take some time further for events to fully play out and for the specific legal position to emerge.

_Notes

<sub>1. There is a provision to depart the European Union and most commentators assume that an exit from the EU would necessitate departure from the Eurozone (and vice versa).
2. See United City Merchant (Investments) Ltd v Royal Bank of Canada [1983] 1 A.C. 168.
3. Parties to derivative Instruments should note the modifications in relation to Illegality introduced in the 2002 ISDA Master Agreement as compared to the 1992 ISDA Master Agreement. Those modifications under the 2002 ISDA Master Agreement include that the definition of "applicable law" has been clarified (in order to include laws relevant to payment or delivery other than that of the ISDA Master Agreement) and that the Illegality provision only applies after giving effect to any applicable disruption fallback or remedy (and after expiry of a waiting period).
4. There may be advantages in applying the laws of a state outside of the EU, given the lack of EU treaty coverage – though there may be other treaties that apply and other downsides to applying the laws of such state.
5. The same considerations in note 4 apply.
6. From Ashurst submission to ICMA in December 2011 in connection with consultation on revised definition of the euro.
7. For example, on 6 January 2012 the US Securities and Exchange Commission published guidance for US banks requiring them to publish more detail on their exposure to European sovereign, corporate and financial institution debt. See "SEC calls for detail on debt exposure" in The Financial Times, 8 January 2012.</sub>