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Derivatives 2021 – Finance and Banking – Cayman Islands – Mondaq News Alerts

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1 Documentation and Formalities

1.1 Please provide an overview of the documentation (or
framework of documentation) on which derivatives transactions are
typically entered into in your jurisdiction. Please note whether
there are variances in the documentation for certain types of
derivatives transactions or counterparties; for example,
differences between over-the-counter (“OTC”) and
exchange-traded derivatives (“ETD”) or for particular
asset classes.

Cayman Islands entities tend to use market-standard
documentation for all types of derivatives transactions. The 1992
and 2002 ISDA Master Agreements, including the appropriate
Schedules and credit support documentation, are commonly used to
document OTC derivatives transactions by Cayman Islands entities.
There are no variances in contractual documentation for different
types of Cayman Islands counterparties and there is typically no
use of any Cayman Islands lawgoverned documentation.

1.2 Are there any particular documentary or execution
requirements in your jurisdiction? For example, requirements as to
notaries, number of signatories, or corporate authorisations.

No. Cayman Islands law will respect the governing law of the
contract to determine execution requirements. The constitutional
documents of each Cayman Islands entity will determine the legal
authority to execute and deliver binding agreements. It is normal
for Cayman Islands entities to authorise entry into the derivatives
agreements by way of board resolution (or equivalent) and, where
those agreements are executed and delivered by way of deed, to note
that such agreement is executed and delivered by way of deed.

1.3 Which governing law is most often specified in ISDA
documentation in your jurisdiction? Will the courts in your
jurisdiction give effect to any choice of foreign law in the
parties’ derivatives documentation? If the parties do not
specify a choice of law in their derivatives contracts, what are
the main principles in your jurisdiction that will determine the
governing law of the contract?

New York law and English law are the principal governing laws
specified in derivatives transactions. Cayman Islands courts will
generally recognise the choice of governing law by the parties,
assuming such governing law is legal, valid and binding as a matter
of such law. The courts of the Cayman Islands will not observe and
give effect to a choice of the laws of a particular jurisdiction as
the governing law of a document if to do so would be contrary to
the public policy of the Cayman Islands.

2 Credit Support

2.1 What forms of credit support are typically provided for
derivatives transactions in your jurisdiction? How is this
typically documented? For example, under an ISDA Credit Support
Annex or Credit Support Deed.

All generally accepted market-standard credit support is
generally recognised in the Cayman Islands, including collateral in
the form of cash and securities. A large number of derivatives
transactions use an ISDA Credit Support Annex or Deed, although
other forms of bespoke documentation can be used, depending on the
nature of the transaction and commercial needs of the parties.

2.2 Where transactions are collateralised, would this typically
be by way of title transfer, by way of security, or a mixture of
both methods?

This is dependent on the type of derivatives transaction and the
governing law of the arrangements. Cayman Islands entities enter
into derivatives transactions using both outright title transfer
with a right of re-transfer and the grant of security over assets.
However, in line with market trends, more derivatives transactions
utilise a grant of security over assets.

2.3 What types of assets are acceptable in your jurisdiction as
credit support for obligations under derivatives documentation?

There are no specific prohibitions under Cayman Islands law in
this regard. Most derivatives transactions involve liquid assets
that are easy to take security over, such as cash or securities,
but any asset capable of being secured can be used as credit
support for obligations under derivatives documentation.

2.4 Are there specific margining requirements in your
jurisdiction to collateralise all or certain classes of derivatives
transactions? For example, are there requirements as to the posting
of initial margin or variation margin between counterparties?

There are no specific margining requirements in the Cayman
Islands as there are no specific derivatives regulations that are
generally applicable locally. Certain regulated entities, such as
banks and insurance companies, may have requirements imposed by the
local regulator under their business plans.

2.5 Does your jurisdiction recognise the role of an agent or
trustee to enter into relevant agreements or appropriate
collateral/enforce security (as applicable)? Does your jurisdiction
recognise trusts?

Yes, to both parts of the question. Such arrangements are
typically governed by laws other than the laws of the Cayman
Islands and so Cayman Islands law will recognise those
arrangements, assuming the same are validly made under the
applicable governing law. A trust is not a separate legal entity as
a matter of Cayman Islands law and it is typical, although not
necessary, for a trustee to delegate certain functions to advisors,
managers or other agents who have the authority to act on behalf of
the trustee and execute documents on its behalf.

2.6 What are the required formalities to create and/ or perfect
a valid security over an asset? Are there any regulatory or similar
consents required with respect to the enforcement of security?

Under Cayman Islands conflicts of law principles, the creation
of the security interests would be determined by the governing law
of the applicable credit support agreement. The law that determines
the proprietary aspects of a security interest will depend, in
part, upon the nature of the assets being secured. There are no
specific perfection or priority formalities required by local law
simply because the collateral provider is a Cayman Islands

3 Regulatory Issues

3.1 Please provide an overview of the key derivatives
regulation(s) applicable in your jurisdiction and the regulatory
authorities with principal oversight.

There are no current derivatives exchanges or OTC markets being
made from the Cayman Islands and consequently, no specific
derivatives or swaps legislation in force. The main financial
regulator is the Cayman Islands Monetary Authority
(“CIMA”) who is directly responsible for the licensing
and regulation of various financial services businesses such as
banks, insurance companies, trust companies and funds. Those
regulatory laws relate to the regulation of the various entities
and for banks, insurance companies and trust companies that are
licensed or registered with CIMA, there may be restrictions that
relate to the entry of derivatives transactions by such entity.
There are no such potential regulatory restrictions under the
Mutual Funds Act (As Revised) for funds as licensed and registered
funds are not required to file a business plan, but rather it is
expected that any entry into derivatives transactions will be
disclosed in offering documents to investors.

3.2 Are there any regulatory changes anticipated, or incoming,
in your jurisdiction that are likely to have an impact on entry
into derivatives transactions and/ or counterparties to derivatives
transactions? If so, what are these key changes and their timeline
for implementation?

There are no developments pending that the current regulatory or
legal environment relating to derivatives transactions may be
expected to change in the foreseeable future.

3.3 Are there any further practical or regulatory requirements
for counterparties wishing to enter into derivatives transactions
in your jurisdiction? For example, obtaining and/or maintaining
certain licences, consents or authorisations (governmental,
regulatory, shareholder or otherwise) or the delegating of certain
regulatory responsibilities to an entity with broader regulatory

It is common in derivatives documentation for Cayman Islands
counterparties to provide representations and warranties with
respect to their regulated status and compliance with any
applicable regulations.

3.4 Does your jurisdiction provide any exemptions from
regulatory requirements and/or for special treatment for certain
types of counterparties (such as pension funds or public

No; see our response to question 3.1.

4 Insolvency / Bankruptcy

4.1 In what circumstances of distress would a default and/or
termination right (each as applicable) arise in your

With respect to Companies, Limited Liability Companies
(“LLCs”) and Exempted Limited Partnerships
(“ELPs”), rights in favour of the liquidators arise upon
an insolvency of such entity. However, most derivatives
transactions, particularly those governed by ISDA Master
Agreements, will provide for wider contractual rights of
termination based on wider, contractually agreed defaults.

4.2 Are there any automatic stay of creditor action or
regulatory intervention regimes in your jurisdiction that may
protect the insolvent/bankrupt counterparty or impact the recovery
of the close-out amount from an insolvent/bankrupt counterparty? If
so, what is the length of such stay of action?

Although there is an automatic stay of proceedings against a
Company, LLC or ELP when an order for winding up has been made and
there is a discretionary stay on the appointment of a provisional
liquidator, the stay does not prevent any contractually agreed
netting arrangements or any secured creditor from enforcing its
security or collateral interest.

4.3 In what circumstances (if any) could an insolvency/
bankruptcy official render derivatives transactions void or
voidable in your jurisdiction?

There are very limited circumstances in which a liquidator could
void a derivatives transaction. Entry by a Company, LLC or ELP into
a derivatives transaction at any time within the six months
immediately preceding a liquidation, where such entity is unable to
pay its debts as they become due from its own monies and there is
deemed an intention to give such counterparty a preference over
other creditors, will be invalid. In practice, we believe it is
unlikely that the Company’s, LLC’s or ELP’s entry into
a derivatives transaction on an arm’s length basis would be
regarded as a voidable preference.

4.4 Are there clawback provisions specified in the legislation
of your jurisdiction that could apply to derivatives transactions?
If so, in what circumstances could such clawback provisions

In the event of the insolvency of a Cayman Islands entity, the
rights of a non-defaulting party may be affected by certain
insolvency provisions of Cayman Islands law, including voidable
preferences, transactions at an undervalue, fraudulent trading,
fraudulent preference and fraudulent disposition.

4.5 In your jurisdiction, could an insolvency/
bankruptcy-related close-out of derivatives transactions be deemed
to take effect prior to an insolvency/ bankruptcy taking

No, it could not.

4.6 Would a court in your jurisdiction give effect to
contractual provisions in a contract (even if such contract is
governed by the laws of another country) that have the effect of
distributing payments to parties in the order specified in the

Absent insolvency (when the requirement for pari passu basis of
distribution would apply), a Cayman Islands court would recognise
the contractual right of parties to agree subordination and other
types of contractual payment arrangements, assuming the same are
legal, valid and binding as a matter of the governing law of the

5 Close-out Netting

5.1 Has an industry-standard legal opinion been produced in your
jurisdiction in respect of the enforceability of close-out netting
and/or set-off provisions in derivatives documentation? What are
the key legal considerations for parties wishing to net their
exposures when closing out derivatives transactions in your

Yes, Maples and Calder (Cayman) LLP prepare the industrystandard
opinion for ISDA.

5.2 Are there any restrictions in your jurisdiction on close-out
netting in respect of all derivatives transactions under a single
master agreement, including in the event of an early termination of

Generally, the Cayman Islands is viewed as a creditor- and
netting-friendly jurisdiction. For detailed specifics on netting,
it is best to refer to the industry-standard opinion for ISDA.

5.3 Is Automatic Early Termination (“AET”) typically
applied/disapplied in your jurisdiction and/or in respect of
entities established in your jurisdiction?

Not typically, but effective contractual arrangements for both
AET and non-AET would be recognised and respected by Cayman Islands

5.4 Is it possible for the termination currency to be
denominated in a currency other than your domestic currency? Can
judgment debts be applied in a currency other than your domestic

A claim can be made in any proceedings in the Cayman Islands
courts for an amount in a currency other than Cayman Islands
dollars. A Cayman Islands court has jurisdiction to give judgments
expressed in foreign currencies

6 Taxation

6.1 Are derivatives transactions taxed as income or capital in
your jurisdiction? Does your answer depend on the asset class?

There are no income or capital gains taxes applicable to Cayman
Islands entities and therefore, as a matter of Cayman Islands law,
this question is not applicable.

6.2 Would part of any payment in respect of derivatives
transactions be subject to withholding taxes in your jurisdiction?
Does your answer depend on the asset class? If so, what are the
typical methods for reducing or limiting exposure to withholding

There are no withholding taxes applicable in the Cayman

6.3 Are there any relevant taxation exclusions or exceptions for
certain classes of derivatives?

This is not applicable; see our responses to questions 6.1 and

7 Bespoke Jurisdictional Matters

7.1 Are there any material considerations that should be
considered by market participants wishing to enter into derivatives
transactions in your jurisdiction? Please include any cross-border
issues that apply when posting or receiving collateral with foreign
counterparties (e.g. restrictions on foreign currencies) or
restrictions on transferability (e.g. assignment and novation,
including notice mechanics, timings, etc.).

The Cayman Islands is generally regarded as a creditor- and
netting-friendly jurisdiction for derivatives counterparties to
enter into transactions with Cayman Islands entities, such as funds
and structured finance vehicles. There are no jurisdiction-specific
cross-border issues and there are no specific Cayman Islands
legislative restrictions. Any such restrictions would be
assetspecific as opposed to jurisdictional. Market participants
wishing to enter into derivatives transactions should have regard
generally to cross-border issues such as anti-money laundering and
beneficial ownership regimes.

8 Market Trends

8.1 What has been the most significant change(s), if any, to the
way in which derivatives are transacted and/ or documented in
recent years?

From a Cayman Islands perspective, none. As noted in our answer
to question 1.1, the majority of derivatives transactions are
documented under ISDA Master Agreements. Accordingly, developments
in ISDA documentations, particularly with regard to new protocols
to deal with new evolutions in the market, are generally

8.2 What, if any, ongoing or upcoming legal, commercial or
technological developments do you see as having the greatest impact
on the market for derivatives transactions in your jurisdiction?
For example, developments that might have an impact on commercial
terms, the volume of trades and/or the main types of products
traded, smart contracts or other technological solutions.

Ongoing regulation of, in particular, OTC derivatives
transactions by EU and US regulatory authorities will likely have
the greatest impact on derivatives transactions entered into by
Cayman Islands entities. The role the Cayman Islands plays in the
international derivatives market is essentially through Cayman
Islands entities (in particular, funds and structured finance
vehicles), being counterparties, rather than as a market or
governing law applicable to such derivatives transactions. Due to
the nature of this role, we see the Cayman Islands continuing to be
a creditor- and netting-friendly jurisdiction, receptive to market
developments and, ultimately, a jurisdiction of choice for both
financial institutions and counterparties in this commercial

Originally Published by ICLG

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.