The outbreak of the novel coronavirus COVID-19 has implications for derivatives contracts. For example, some companies are asserting that the reported disruptions in the global supply-chain and travel restrictions constitute a force majeure, which is a legal basis for excusing non-performance and a right to terminate under contracts. Below are certain issues market participants may wish to consider when evaluating the potential impacts of the COVID-19 outbreak on their outstanding derivatives contracts.
Force majeure clauses in contracts generally address circumstances beyond the contracting parties’ control, which may render performance under a contract substantially difficult or impossible. Market participants should consider whether certain implications of the COVID-19 outbreak could constitute a force majeure or similar event of default or termination event under various derivatives contracts including International Swaps and Derivatives Association, Inc. (“ISDA”) or other market standard master agreements. While the specific terms of agreements and relevant circumstances will ultimately determine parties’ rights and obligations under such agreements, market participants should consider the following when evaluating their derivatives documentation:
Parties should consider the effect of any unscheduled holidays on their derivatives transactions. For example, the extension of the Lunar New Year holiday from January 24, 2020 to February 2, 2020 (inclusive) impacted valuations, settlements and other actions required to be made or taken on such dates. In general, market participants should evaluate the terms of their various derivatives contracts, including equity, commodity, interest and foreign exchange derivatives contracts, in order to determine whether market, banking or payment system closure in any applicable jurisdictions (as a result of an unscheduled holiday) would affect valuation, settlement or payment dates including accrual periods for payment of interest.
Market participants should consider whether events relating to COVID-19 trigger any relevant definitions relating to market, trading, pricing, liquidity and settlement disruptions. If an event that would otherwise constitute a Force Majeure Event in the 2002 ISDA Master Agreement also constitutes a disruption event under the 2005 ISDA Commodity Definitions or the 1998 ISDA FX and Currency Option Definitions, the relevant Disruption Fallbacks would apply rather than the Force Majeure provisions. Market participants are therefore encouraged to prioritize review of any terms in their derivatives agreements addressing disruption and similar events and to note that such terms will differ based on product type, the ISDA and other definitions included in the documentation and the elections chosen by the parties in the relevant documentation. Market participants should also consider the implications of such disruptions that may not be addressed in relevant documentation, as well as potential alternatives for pricing, payment or settlement that could be considered in the event of disruption.
Review of equity derivatives documentation should include an evaluation of whether events related to COVID-19 could result in delayed or substitute valuation, pricing or settlement mechanics. To illustrate, with respect to the 2002 ISDA Equity Derivatives Definitions, events related to COVID-19 could constitute a failure to open or Market Disruption Event. The latter occurs as a result of three possible classes of events: (1) Trading Disruption, (2) Exchange Disruption or (3) early closing. Trading Disruption refers to a suspension or limitation of trading in shares (or, in some cases, a proportion of shares in an index) or in related listed derivatives. For example, fluctuations in share prices on an exchange listed in Mainland China, Italy or other relevant jurisdiction as a result of the COVID-19 beyond the limits set by such exchange outbreak could result in suspension or limitation of trading in such shares. With respect to the 2011 ISDA Equity Derivatives Definitions, the COVID-19 outbreak could result in a Pricing Disruption, Settlement Disruption, Extraordinary Event or Additional Disruption Event. The share prices example provided earlier in this paragraph could constitute a Pricing Disruption under the 2011 ISDA Equity Derivatives Definitions. If a disruption occurs, applicable Disruption Fallbacks will apply as an alternative for determining settlement rates or an alternative basis for settling transactions.
In addition, with respect to equity derivatives generally, market participants should make sure to review the terms of any master confirmation agreements.
For commodity derivatives transactions, market participants should review relevant documentation in order to evaluate whether COVID-19 could affect payment or valuation dates, or pricing, including with respect to Unscheduled Holidays as discussed in Part II herein. Note that the 2005 ISDA Commodity Definitions include a No Fault Termination Disruption Fallback. If No Fault Termination is specified in a relevant transaction confirmation, affected transactions will be terminated as if a Force Majeure Event and Early Termination Date had occurred on the day the No Fault Termination became the applicable Disruption Fallback.
With respect to FX and currency options transactions, events related to COVID-19 could constitute a Disruption Event as defined in the 1998 ISDA FX and Currency Option Definitions. Market participants should carefully review transaction confirmations to understand the Disruption Events that apply with respect to outstanding transactions. For example, the 1998 ISDA FX and Currency Option Definitions include a Material Change in Circumstance Disruption Event; if applicable this Disruption could provide a catch-all ability for parties to terminate transactions if an event not specified in the definitions and beyond the control of the parties makes it impossible for a party to: (i) fulfill their obligations under a transaction, and (ii) fulfill obligations similar to such party’s obligations under that transaction. Note that the 1998 ISDA FX and Currency Option Definitions also include a No Fault Termination Disruption Fallback.
 China National Offshore Oil Corp., one of the world’s largest buyers of liquefied natural gas, invoked force majeure and told some suppliers that it would not take delivery of shipments because of difficulties caused by COVID-19. See https://www.bloomberg.com/news/articles/2020-02-06/chinese-gas-buyer-cnooc-declares-force-majeure-on-lng-contracts.
 42 U.S. Code § 264.
 ISDA has released market guidance on the impact of the Lunar New Year holiday extension on interest rate, equity, foreign exchange and commodity derivatives contracts at the following website. See https://www.isda.org/2020/01/30/market-closure-announcement-chinese-new-year/.