| VI. Documentation |
- Legal risk
Legal risk is the risk that the financial intermediary will suffer financial loss either because contracts or individual provisions thereof are unenforceable or inadequately documented, or because the precise relationship with the counterparty is unclear. It is the ultimate responsibility of the Legal Department, to determine issues of principle and of major importance relating to legal risk.
Sales personnel should be aware of: (i) the main legal risks inherent in the products, (ii) the legal risks associated with each of the counterparties they deal with, and (iii) the governing law under which the products were issued.
- Master Agreements and Documentation of Transactions
In order to minimize the exposure to the financial intermediary in the event of a dispute arising with a counterparty over a deal or in the event of a counterparty becoming insolvent and seeking legal protection, all transactions must be conducted under the protection of legally binding documents. Derivative deals should preferably be documented under a master agreement. Oral agreements must be confirmed by means of a formal written confirmation acceptable to the financial intermediary without delay.
Whenever possible, and unless otherwise approved by the appropriate legal department, the agreements used should be unaltered, recognized, standard industry agreements. Regardless of whether they are industry standards, all such standard agreements and documentation for products are ultimately determined and approved by the Financial Institution's legal department.
Confirmation Documents should include as a minimum:
- Type of Confirmation Document (Confirmation of Sale/Purchase, etc.)
- Counterparty Name & Address
- Specific Terms (e.g. If the transaction is on an outright and "without recourse" basis, this should be prominently indicated)
- Underlying Security, where applicable
- Trade Date
- Settlement Date
- Maturity Date
- Price
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