Over the past several decades, the market for derivatives – financial contracts that derive their value based on the value of a referenced rate or product – has grown exponentially, in terms of the number and types of market participants, the variety and complexity of derivative transactions and the total notional value of those transactions. Not surprisingly, litigation related to derivatives has also increased dramatically, particularly in the wake of major market disruptions and financial crises, such as the 2008 financial crisis. While litigation from that crisis is now ebbing, though it is by no means over, recent financial scandals, including alleged manipulation of interbank offered rates (such as LIBOR) and in the foreign exchange markets, have brought another wave of derivatives-related litigation. In light of the size and complexity of the derivatives market, we can expect litigation in this area to continue.

Common types of claims

Litigation related to derivatives most frequently arises when one counterparty to the derivatives is unable or unwilling to make required payments, particularly as a result of insolvency or a significant market disruption. Derivatives-related actions typically consist of traditional breach of contract claims or disclosure claims, such as fraud, misrepresentation or breach of fiduciary duty, including claims related to the suitability of the financial product. Litigants also frequently seek to render the contract void or unenforceable based on arguments of lack of authority, illegality, mistake or waiver.

Oct-Dec 2017 issue

Cleary Gottlieb Steen & Hamilton, LLP