The legal implications of the European Monetary Union under U.S. and New York Law
Author(s): Niall Lenihan
The legal implications of the European Monetary Union under U.S. and New York Law (2 MB)
This study will address the issues raised by the Commission's Green Paper. Thus study reaches the following conclusions regarding the legal implications of EMU for transactions governed by the laws of U.S. jurisdictions, regardless of whether legislation ensuring the continuity of contracts is passed in particular American jurisdictions and regardless of whether such legislation applies prospectively or retroactively.
The legal implications of the European economic and monetary union (EMU) under the laws of New York State and other U.S. jurisdictions is one of the most important legal questions facing the international financial markets today. The Bank for International Settlements estimates that at the end of March 1995 the OTC derivatives market stood at $47.5 trillion. Approximately half of all derivatives contracts worldwide are believed to be governed by New York law, including most U.S. swap contracts, up to half of the swap contracts in the London derivatives market and a significant proportion of swap contracts in other offshore financial centers (e.g., Frankfurt, Paris, Tokyo, Hong Kong and Singapore). The Deutsche mark is the world’s second most widely used currency after the U.S. dollar, and taken together the 15 currencies of the European Union and the ECU basket currency form a powerful currency bloc.
Aside from the derivatives market, eurobonds denominated in EU currencies are frequently issued by U.S. corporations in offshore transactions governed by New York law. As with derivatives contracts, many of these transactions involve long-term obligations. Finally, long-term loan agreements and cross-border commercial transactions governed by the laws of U.S. jurisdictions also involve obligations denominated in EU currencies.
In May 1995 the European Commission’s Green Paper on the Practical Arrangements for the Introduction of the Single European Currency predicted that under the laws of non-EU jurisdictions the proposed single currency would be recognized as the successor to existing EU national currencies at the fixed conversion rates at which the single currency will substitute EU national currencies. The Commission’s Green Paper thus concluded that under the laws of non-EU jurisdictions the continuity of monetary obligations and other terms of a contract such as interest rates and other ancillary obligations could be expected.
This study will address the issues raised by the Commission’s Green Paper. Thus study reaches the following conclusions regarding the legal implications of EMU for transactions governed by the laws of U.S. jurisdictions, regardless of whether legislation ensuring the continuity of contracts is passed in particular American jurisdictions and regardless of whether such legislation applies prospectively or retroactively.
- All long-term debts denominated in EU currencies must be discharged in the new single European currency – the euro – at the official conversion rates at which the euro will substitute existing EU currencies.
- All foreign exchange transactions (e.g., FX forwards, cross currency swaps and currency options) in which an EU currency is used on one side of the transaction (e.g., a US$/DM swap) must be discharged in the euro at the applicable conversion rates.
- All foreign exchange transactions involving the exchange of two currencies participating in EMU (e.g., a DM/FFr swap) should also be discharged in the euro at the applicable conversion rates. In the case of contracts involving periodic payments (i.e., a cross currency interest rate swap) the economic effect will be to impose an obligation on one party to make net payments for the remaining life of the contract, similar to an annuity. It may be necessary to explore the tax implications of this with the U.S. tax authorities.
- All fixed interest rate obligations (including fixed rate swaps) must be discharged at the rate specified in the contract.
- All floating interest rate obligations linked to particular EU national currencies should be discharged in accordance with the interest rates established by successor price sources for the euro in the event that existing price sources are no longer available after EMU.
- Force majeure clauses used in debt transactions which call for the discharge of EU currency debts in U.S. dollars or some other currency in the event that the currency of the contract is no longer available due to circumstances beyond the party’s control will not be triggered by EMU.
- Impossibility clauses used in debt transactions which call for the discharge of EU currency debts in U.S. dollars or some other currency in the event that the currency of the contract is no longer used by the government of the country issuing such currency should not be triggered by EMU.
- All obligations denominated in the ECU basket currency should be discharged in the euro at the rate of one euro for one ECU, unless the terms of the contract and the surrounding circumstances establish a clear intention to the contrary.
Substantially identical legislation confirming the continuity of contracts in accordance with the above principles has been proposed in the three leading U.S. trading jurisdictions — New York, Illinois and California. This legislation has been enacted into law in New York and Illinois. This study reaches the following conclusions with respect to this legislation.
- Notwithstanding certain possible discrepancies, the New York and Illinois legislation confirms the continuity of contracts after EMU in a manner that is broadly consistent with the continuity regulations endorsed by the Council of the European Union.
- Any discrepancies between the EU Council regulations and the New York or Illinois legislation must be resolved by applying the applicable rules established under the EU Council regulations.
- Assuming that the New York and Illinois legislation applies retroactively, the legislation does not contravene the provisions of the United States Constitution prohibiting the states from enacting legislation that impairs the obligation of contracts. This is because state legislation confirming the continuity of contracts after EMU in a manner that is broadly consistent with the EU Council regulations is declaratory of existing law and does not impair pre-existing contractual obligations in any manner. In any case, such legislation has been enacted to protect a broad societal interest (i.e., the avoidance of needless litigation after EMU), and would therefore be upheld by American courts in deference to the judgment of the state legislatures.
- Because the New York and Illinois legislation recognizes the continuity of contracts in a manner that is broadly consistent with the monetary sovereignty of the European Union over the currencies of EU member states, the legislation does not infringe the U.S. Federal Government’s undisputed authority over international monetary relations.
(European Economy. Economic Papers 126. January 1998.
Brussels. 263pp. Tab. Graph. Bibliogr. Free.)