Arbitrating Complex Cross-Border Derivatives Disputes; the HKIAC Approach

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Parties engaged in complex financial disputes with cross-border elements are increasingly turning to international arbitration. A recent survey found that 69% of financial service institutions consider arbitration to be well-suited for disputes in the finance industry. Against this background, the Hong Kong International Arbitration Centre (HKIAC) has witnessed an uptrend in the complex financial disputes it administers. Joe Liu, Deputy Managing Counsel, Hong Kong International Arbitration Centre outlines common aspects of complex derivatives disputes, before discussing the advantages of resolving such disputes through arbitration. With reference to a case study, innovations and procedures that the HKIAC has devised to meet the needs of the market are examined.


In recent years, international arbitration of complex financial disputes has gained considerable momentum.  According to a 2013 study by Queen Mary University of London and PricewaterhouseCoopers (Queen Mary Survey), 69% of the financial service institutions surveyed consider arbitration to be well-suited for disputes that arise in their industry sector.[1]

There are a number of reasons why international arbitration is rapidly being recognised as a preferred means of dispute resolution for cross-border derivatives transactions and many other types of complex financial transactions, particularly those involving emerging jurisdictions.  Driving forces include the growing diversity of counterparties and jurisdictions involved in derivatives trading, worldwide enforceability of arbitral awards against assets located in over 150 countries, access to neutral and specialist decision-makers, and confidentiality requirements.

Against this background, the Hong Kong International Arbitration Centre (HKIAC) has seen an increasing number of financial disputes being referred to arbitration.  On 1 November 2013, HKIAC’s new Administered Arbitration Rules (HKIAC Rules) came into force.  The HKIAC Rules are well suited for use in the resolution of derivatives and other financial disputes, and include innovative changes which were nominated for Global Arbitration Review’s award for best development of 2013.[2]  With these Rules in place and the HKIAC Secretariat’s ample experience in handling financial cases, HKIAC arbitration provides an attractive forum for complex and high-value disputes arising out of cross-border derivatives and other types of financial transactions.

In 2013, the International Swaps and Derivatives Association (ISDA) published its guidance (ISDA Arbitration Guide) on the use of an arbitration clause with either the 1992 or the 2002 version of the ISDA Master Agreement as a result of a growing demand for the use of arbitration for disputes arising out of privately negotiated or over-the-counter (OTC) derivatives transactions.[3]  Recognising HKIAC’s competence of handling derivatives and other financial disputes, HKIAC is featured in the model clauses recommended by the International Swaps and Derivatives Association (ISDA) [4] and the Financial Sector Branch of the Arbitration Club.[5]

This article analyses the typical disputes arising out of derivatives contracts and the advantages of referring these disputes to arbitration.  A case study is examined at the end of the article to demonstrate how derivatives disputes can be resolved in HKIAC arbitrations in a timely and cost effective manner.


A derivative is a financial instrument where the future obligations of one or more parties are linked in a specified way to another asset or index, so that the instrument is treated as having a value which is separate (although derived) from the value of the underlying asset or index.[6]  Derivatives are valuable for various reasons.  They enable parties to engage in risk management, hedging, arbitrage between markets and speculation.  By dealing in derivatives, parties trade specific financial risks (for example interest rate, currency, equity, commodity price and credit risk) to other entities that are in a better position to take or manage these risks — typically without needing to exchange the primary assets or commodities.[7]

Derivatives are traded both publicly and privately.  OTC derivatives are generally more complex and pose more risks, as they are privately negotiated and there is no price reporting.  Many of the commercial and legal terms used in OTC derivatives contracts are developed principally through negotiation between the parties involved.  Some OTC derivatives may become so complex that drafting and negotiating the governing documents could take substantial time and effort.

In view of the complexities involved with derivatives and the amount of variables subject to negotiation, ISDA has published its 1992 and 2002 versions of the ISDA Master Agreement, which provides standard industry terms and structures 85% of all OTC derivative stransactions.[8]  Typically, parties use the ISDA Master Agreement and supplemental documentation as a template for negotiation.  Section 13 of the 1992 and 2002 ISDA Master Agreements provides for English or New York governing law and contains jurisdictional clauses conferring jurisdiction on the English or New York courts.   However parties may enter into amendments to the standard terms by way of a Schedule, including an arbitration clause tailored specifically to the transaction(s) concerned.

Due to the complexities and considerable risks associated with derivatives transactions and the customers’ varying degrees of financial sophistication, there is potential for legal uncertainty and propensity for disputes.  Common types of disputes, claims or defences raised by customers in derivatives transactions include the following:

  • Capacity or authority to enter into a derivatives transaction. It is not uncommon for a party who has lost its investment in a derivatives transaction to contend that it did not have the capacity to enter into the transaction or it lacked the authority to do so.[9]


  • Inaccurate or incomplete documentation. With a large volume of derivative transactions entered into by parties and the practice of agreeing trades orally, there is potential for the transaction documents to be inaccurate or incomplete.  PricewaterhouseCoopers regularly conducts legal risk assessments for financial institutions and notes frequent drafting errors and inconsistencies, incorrectly recorded counterparties, and missing executed contracts.[10]


  • Valuation. Valuation disputes refer to situations where a derivatives counterparty challenges the valuation of the derivative position associated with an OTC transaction, including the valuation method and/or reference date used.


  • Misselling. Misselling claims typically arise in the context of less sophisticated corporate or governmental parties who purchased complex financial products without fully appreciating the risks involved.  Where the seller has failed to advise the buyer as to the suitability of the investments in light of the buyer’s risk tolerance and where the buyer has relied on the representations made by the seller to its detriment, the buyer may have a cause of action.[11]


  • Breach of duty of care. A customer who purchased derivatives from a bank may argue that the bank owes certain professional duties that are either implied into the contracts or are owed in tort.  The alleged duties may include a duty to manage and monitor the customer’s account, a duty to ensure that recommended investments are suitable for the customer’s risk tolerance, and a duty to ensure that the customer fully understood the nature and risks of the recommended products.


  • Misrepresentation. An out-of-money buyer of a derivatives transaction may make a misrepresentation claim against the seller on the basis that the seller made an untrue statement of fact or law which induced the buyer to enter into the transaction thereby causing it loss.


  • Failure to comply with alleged mandatory laws of the place of the customer. A derivatives counterparty who has suffered loss sometimes seeks to nullify the transaction on the basis that it is invalid or unenforceable under the alleged mandatory provisions of the law of the place of the counterparty, even though the parties have chosen a different law to govern the contract.[12]


Notable derivatives disputes in the region include the following: (i) misselling claims brought by San-Hot against DBS following the former’s loss arising from the purchase of a series of accumulator contracts;[13] (ii) the Chinese court proceedings commenced by China Haisheng against Morgan Stanley and its Hong Kong affiliate, claiming recession of currency swap transactions and compensation for the associated losses;[14] and (iii) the Singapore Court of Appeal’s decision in a dispute between Deutsche Bank and its investor, Chang Tse Wen, arising out of the huge losses suffered by the latter from an accumulator.[15]

Banks typically seek to invoke standard terms in the transaction documentation to defeat the customer’s claims, such as non-reliance, own-judgment, non-advisory and exclusion of liability clauses, relying on the principle of contractual estoppel.  This principle is firmly established under English law[16] and Hong Kong law.[17]  The Singapore courts, however, appear to have taken a slightly less bullish approach in applying banks’ standard terms.  In Deutsche Bank v. Chang Tse Wen,[18] the Singapore High Court hesitated to apply the doctrine of contractual estoppel and its exposition on the law was subsequently questioned by the Court of Appeal.  However, the Court of Appeal declined to elaborate on the issue and it therefore leaves the status of the doctrine of contractual estoppels unclear under Singapore law.


There are a number of advantages for parties to arbitrate disputes arising under derivatives contracts.  These advantages also apply to many other types of financial disputes.  The key advantages are summarised below.

  • Enforcement. The increased use of arbitration is driven primarily by the worldwide enforceability of arbitral awards under the New York Convention.  At the time of writing, there are 156 contracting states to the New York Convention (including the world’s most prevalent financial markets).  The Convention requires the courts of the contracting states to recognise and enforce an arbitral award subject to limited grounds for non-enforcement.  It will typically be easier to enforce an arbitral award under the New York Convention than to enforce a foreign judgment where no comparable regime exists.  This is crucial in a derivatives transaction with a counterparty that has assets in multiple jurisdictions, because arbitration allows the award creditor to enforce against assets in several places.  In the absence of a unified regime for enforcement of court judgments, a party who has obtained a favourable judgment in relation to a derivatives dispute may face relatively complex procedures for enforcement and, in some cases, a full rehearing of the merits may be required.


  • Neutrality. Many parties to derivatives transactions involving emerging jurisdictions are increasingly reluctant to litigate disputes in their counterparties’ local courts.  The ISDA Arbitration Guide provides a list of risks associated with local court proceedings, which include: (i) perception of bias or corruption on the part of a judicial authority; (ii) delay; (iii) lack of experience/expertise by local lawyers and judges in dealing with derivatives contracts; (iii) failure by the court to respect a foreign governing law; (iv) lack of consistency in decision-making; and (v) having to litigate in an unfamiliar and/or inconvenient language.[19]  Arbitration allows parties to arbitrate their disputes in a neutral forum.  This is of particular importance where one of the parties is a government or state-owned entity.  In recent years, numerous OTC derivatives disputes have arisen between financial institutions and state governments where the risk of prejudice or bias would have been extraordinary if such disputes were subject to resolution in local courts.[20]


  • Relevant expertise of arbitrators. Another significant advantage arbitration can add to the resolution of derivatives disputes is the ability of the parties to select legal and derivatives experts with relevant industry expertise and experience to act as arbitrator.  Judges in many local courts simply do not have knowledge of how derivatives work.


  • Privacy and confidentiality. Unlike court proceedings which are usually public, arbitral proceedings are always held in private, and information disclosed and decisions made during the arbitral process are generally confidential.  Privacy and confidentiality are pivotal for many OTC derivatives disputes due to the commercial reputation involved.  For banks and large financial institutions in particular, if a customer was allowed to disclose his/her losses and/or to broadcast the details of the dispute, it may result in a negative perception of the viability of the underlying derivatives and a damaged reputation of the financial institution, and may attract similar claims from other customers.


  • Narrow scope of disclosure. The scope of discovery of documents in arbitration is generally narrower than in court proceedings in London or New York.  The International Bar Association’s Rules for the Taking of Evidence in International Arbitration 2010 (IBA Rules)[21] are often used as guidance or adopted in arbitral proceedings with respect to the production of documents.  The IBA Rules allow a party to request the production of specific documents that are relevant to the case and material to its outcome.  This can be advantageous to banks and financial institutions which often bear the burden of disclosure in contentious proceedings.


According to the Queen Mary Survey, in the financial services sector, the number one benefit of arbitration is the expertise of the decision-maker, because many financial disputes are highly technical and parties tend to select industry specialists for their disputes.  Speed is also cited as a benefit, while financial institutions view the costs of arbitration as their least important benefit.[22]

Banks and financial institutions are sometimes critical of arbitration due to concerns relating to (i) the lack of summary judgments; (ii) the lack of precedents; (iii) the lack of full appeal rights if arbitrators make errors; (iv) a small pool of arbitrators who understand derivatives; and (v) the unavailability of joinder of additional parties or consolidation of disputes in the absence of parties’ agreement.  However, careful drafting of the arbitration agreement and the adoption of an appropriate set of arbitration rules can address many of these issues.  The next section presents a hypothetical case scenario and discusses how HKIAC arbitration addresses these issues and provides a sophisticated procedure that is highly suitable for complex derivatives disputes.


The facts

Party A is a Hong Kong licensed bank and registered institution dealing in derivatives.  Party B, a US citizen, is a high net worth individual and a sole shareholder and director of a Cayman Islands entity.  Party C is a Chinese corporation with B as its director and one of its shareholders.

B established a business relationship with A by opening several personal bank accounts.  C also registered an account with A under its corporate name.  B continuously transferred funds from his personal accounts to C’s account.  C engaged in a series of OTC derivatives transactions with A between December 2013 and April 2014.  These transactions were documented under the 2002 ISDA Master Agreement, which provides for HKIAC arbitration seated in Hong Kong.  B signed the ISDA Master Agreement and the transaction documents on behalf C.

A granted C significant credit backed by the funds in B’s accounts as collateral.  From that point on, the transactions conducted through C drew on this credit.  Initially, most of the transactions resulted in considerable profits.  Later, the tide turned against C, who sustained huge losses.  B then withdrew the collateral funds from his accounts at A and is in the process of transferring them into his company account in the Cayman Islands.  A demanded payments from C for its resulting liabilities.  C refused to pay and contends that B lacked authority to enter into the transactions.  C has also advanced counterclaims against A based on allegations of misselling, negligent misrepresentation and breach of duty of care.

A commenced an arbitration under the HKIAC Rules pursuant to the arbitration clause in the ISDA Master Agreement to recover a sum of US$50 million from C.

HKIAC approach

HKIAC arbitration offers a number of useful tools and procedures the parties could use in arbitrating their dispute cost effectively and efficiently.  These are examined below in the context of complex cross-border derivatives disputes.

  • Confidentiality. The arbitration commenced by A will be private and confidential, as the HKIAC Rules impose a strict duty of confidentiality on the parties not to disclose any information in relation to the arbitration or any award subject to certain exceptions.[23]  The same duty also applies to the arbitral tribunal, HKIAC, any emergency arbitrator, experts and witnesses.[24]  This means no third parties would have access to information regarding the dispute between A and B/C, the detailed terms of the disputed transactions, or A’s internal selling practice and documentation.  As discussed above, confidentiality is important to avoid the risk of negative publicity and contagion claims.  However, if for some reasons the parties wish to perceive the precedent value of an arbitral award, they can request HKIAC to publish a redacted version of the award.[25]


  • Multi-party and multi-contract provisions. The HKIAC Rules contain a series of detailed provisions designed to deal with complex arbitrations involving multiple transactions, contracts and/or parties, for example, the arbitration in the present case which concerns disputes arising out of a series of derivatives transactions and involves A, B and C.  Since B effectively acts as a guarantor for C’s liabilities and the authority of B to enter into the transactions is one of the issues in dispute, it would be desirable to join B to the arbitration between A and C.  The HKIAC Rules allow A to request joinder of B as an additional party, if, prima facie, B is bound by the arbitration agreement giving rise to the arbitration (i.e. the arbitration clause in the ISDA Master Agreement).  Such a request will be decided by the arbitral tribunal or by HKIAC if the issue is raised before the tribunal is formed.[26]  Since A’s claims and C’s counterclaims arise out of several derivatives transactions, A or C can request HKIAC to consolidate all these disputes into a single arbitration instead of having to conduct multiple but related proceedings.[27]  The HKIAC Rules also contain provisions clarifying the consequences of consolidation including the appointment of the arbitral tribunal for the consolidated arbitration and the validity of any orders made by a tribunal or a court in a previous arbitration.[28]  The HKIAC Rules also provide the parties with an alternative method to consolidation.  For claims arising out of a series of related transactions, A may simply commence a single arbitration against B and/or C from the outset, provided that certain conditions are met.[29]


  • Availability of interim measures and emergency relief. An arbitral tribunal in an HKIAC arbitration seated in Hong Kong can issue a wide range of interim relief in various forms, including orders to preserve assets and evidence, injunctions and security for costs.[30]  The HKIAC Rules contain detailed provisions setting out, among other things, the relevant factors to be considered when making interim measures and the modification, suspension and termination of these measures.[31]  This is a useful tool for A, as it can seek an injunction from the arbitral tribunal restraining B from transferring the collateral funds out of Hong Kong, pending the tribunal’s final decision on the merits of the dispute.  If there is an urgent need for such injunctive relief and B is likely to be able to transfer the funds to the Cayman Islands before an arbitral tribunal is constituted, the HKIAC Rules allow A to seek urgent interim or conservatory relief from an emergency arbitrator.[32]  HKIAC will seek to appoint an emergency arbitrator within two days of HKIAC’s acceptance of an application for emergency relief.[33]  In practice, HKIAC has managed to appoint all emergency arbitrators within just a few hours.  After an emergency arbitrator is appointed, the parties can expect a decision on the application within 15 days from the date on which the emergency arbitrator receives the file.[34]


  • Expedited procedure. If A considers that the case involves a simple debt claim and prefers to arbitrate the dispute in an efficient manner, it can apply to HKIAC for the arbitration to be conducted under the expedited procedure.[35]  This procedure allows arbitral proceedings to be conducted on an expedited basis where the amount in dispute does not exceed HK$25,000,000, the parties agree, or the matter is exceptionally urgent.  If the expedited procedure applies, a sole arbitrator will normally be appointed to decide the dispute on a document-only basis and to issue a summary award within 6 months from the date when HKIAC transmitted the file to the arbitrator.


  • Panel of arbitrators with relevant experience. HKIAC maintains a panel of approximately 500 arbitrators and some of them have extensive experience and expertise in resolving disputes involving complex financial products, including derivatives.[36]  Parties are also free to appoint arbitrators outside of HKIAC’s panel if they wish to.  HKIAC arbitration therefore provides A and B/C with an invaluable advantage to have access to highly qualified arbitrators who have relevant industry knowledge and direct experience.


  • Flexible regime for determination of arbitrators’ fees. The HKIAC Rules offer the parties a choice to remunerate the arbitral tribunal either based on the amount in dispute or on an hourly basis.[37]  This allows the parties to effectively strategize costs based on the nature of the claims. If A and B/C consider that the dispute is a high-value yet straightforward one, they can opt for an hourly arrangement to save costs.[38]  The parties can equally choose to determine the tribunal’s fees based on the amount in dispute if they consider that the case is highly complex and would take the arbitral tribunal a considerable amount of time to decide the case.  HKIAC has also introduced standard terms of appointment which apply to all arbitrators appointed under the HKIAC Rules.[39]  These terms simplify and expedite the appointment process and avoid uncomfortable negotiations between parties and arbitrators on fees.


  • Strong record of enforcement. Last but not least, an HKIAC award made in the arbitration will be enforceable in the US (the place of B) and Cayman Islands (the place of B’s company) under the New York Convention, and in mainland China (the place of C) under the 1999 arrangement on mutual enforcement of arbitral awards between the mainland and Hong Kong, which for purposes relevant here, is virtually identical to the terms of the New York Convention.  HKIAC awards maintain an impressive record of enforcement around the world.  For example, between 2009 and 2014, the Chinese courts did not refuse to enforce any HKIAC awards.[40]


HKIAC offers parties an enhanced ability to resolve their disputes effectively and efficiently with its provisions on confidentiality,[41] joinder,[42] consolidation,[43] single arbitration under multiple contracts,[44] interim measures,[45] emergency arbitrator procedures,[46] expedited procedure,[47] and the twin-track fee regime.[48]  With access to an elite pool of arbitrators, HKIAC remains a preferred institution to facilitate the effective and efficient resolution of derivatives and other complex financial disputes.  The HKIAC Rules are innovative and practical and continue to adapt with the needs of parties from a variety of industry sectors including those involving derivatives transactions.

This is an updated version of an article published on Asian-Mena Counsel, Volume 12, Issue 2, 2014-15, pages 28-33; republished with permission.

This article may be cited as follows: Joe Liu, “Arbitrating Complex Cross-Border Derivatives Disputes; the HKIAC Approach”, International Arbitration Asia (1 August 2015) <>.

[1] Corporate choices in International Arbitration: Industry perspectives by Queen Mary University of London and PricewaterhouseCoopers, 2013, available at

[2] Global Arbitration Review, “Vote now for the GAR Awards 2014”, 24 January 2014, available at

[3] 2013 ISDA Arbitration Guide, 9 September 2013, available at

[4] See ISDA Arbitration Guide, Appendix D.

[5] See the Arbitration Club’s Financial Services Expedited Arbitration Procedure, available at

[6] Lomas v JFB Firth Rixson Inc [2012] EWCA Civ 419, para 2.

[7] See International Monetary Fund, “Financial Derivatives”, available at

[8] ISDA, “Non-Cleared OTC Derivatives: Their Importance to the Global Economy”, March 2013.

[9] For example, this argument was raised in Standard Chartered Bank v. Ceylon Petroleum Corporation [2012] EWCA Civ 1049.

[10] PricewaterhouseCoopers, “Structured Credit and Derivative Transaction Reviews”, 2012, p. 5, available at

[11] The issue of misselling has been particularly prevalent with OTC interest rate swaps. From July 2012 to January 2013, the Financial Conduct Authority performed a pilot investigation of banking institutions selling of interest rate swaps and concluded that 91% of the cases reviewed involved a technical misselling.

[12] Some derivative counterparties to an English law governed contract sometimes seek to rely on Ralli Brothers v Compania Naviera Sota y Aznar [1920] 2 KB 287 in resisting performance of its contractual obligations on the basis that the contract is illegal under the law of necessary place of performance.

[13] DBS Bank (Hong Kong Limited) v. San–Hot HK Industrial Company Limited and Hao Ting [2013] HKEC 352.

[14] See, Morgan Stanley & Co International Plc v China Haisheng Juice Holdings Co Ltd [2009] EWHC 2409 (Comm).

[15] Deutsche Bank AG v. Chang Tse Wen and Anor [2013] SGCA 49.

[16] See e.g. Springwell Navigation Corp v. JP Morgan Chase Bank and Ors [2010] EWCA Civ 1221.

[17] See e.g. DBS Bank (Hong Kong Limited) v. San–Hot HK Industrial Company Limited and Hao Ting [2013] HKEC 352.

[18] [2013] SGCA 49.

[19] ISDA Arbitration Guide, pp 3 and 4.

[20] See e.g. Deutsche Bank AG v. Sri Lanka, ICSID Case No. ARB/09/02.

[21] Available at

[22] The Queen Mary Survey, p 8.

[23] Articles 42.1 and 42.3 of the HKIAC Rules.

[24] Article 42.2 of the HKIAC Rules.

[25] Article 42.5 of the HKIAC Rules.

[26] Article 27 of the HKIAC Rules.

[27] Article 28.1 of the HKIAC Rules.

[28] Article 28 of the HKIAC Rules.

[29] Article 29 of the HKIAC Rules.

[30] Articles 23 and 24 of the HKIAC Rules.

[31] Articles 23.4 and 23.5 of the HKIAC Rules.

[32] Article 23.1 of the HKIAC Rules.

[33] Paragraph 5 of Schedule 4 of the HKIAC Rules.

[34] Paragraph 12 of Schedule 4 of the HKIAC Rules.

[35] Article 41 of the HKIAC Rules.

[36] Appropriate arbitrators can be searched for on HKIAC’s online searchable database at

[37] Articles 9 and 10, Schedules 2 and 3 of the HKIAC Rules.

[38] Under the HKIAC Rules, an arbitrator’s hourly rate is subject to a cap, which is currently fixed at HK$6500 per hour.  An arbitrator’s hourly rate shall not exceed the cap unless the parties agree or HKIAC determines otherwise.

[39] Schedules 2 and 3 of the HKIAC Rules.

[40] Teresa Cheng, Joe Liu, “Enforcement of Foreign Awards in Mainland China: Current Practices and Future Trends”, 31 J. Int. Arb. 5.

[41] Article 42 of the HKIAC Rules.

[42] Article 27 of the HKIAC Rules.

[43] Article 28 of the HKIAC Rules.

[44] Article 29 of the HKIAC Rules.

[45] Article 23 of the HKIAC Rules.

[46] Article 23.1 and Schedule 4 of the HKIAC Rules.

[47] Article 41 of the HKIAC Rules.

[48] Articles 9 and 10, and Schedules 2 and 3 of the HKIAC Rules.


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Deputy Managing Counsel
Hong Kong International Arbitration Centre

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