Drafting Eligible Financial Contracts

All businesses know that one key to profitability is risk management. Particularly in such industries as oil and natural gas, eligible financial contracts have emerged as an invaluable tool to hedge the risk associated with volatile foreign currency exchange, interest rates and commodity prices. Indeed, a large business has developed proffering over-the-counter derivatives (or ‘swaps’) and standardized exchange-traded derivatives (or ‘futures’) to do just that.

Given the purpose of the arrangement, both parties must be creditworthy and remain that way for the entire term of the contract in order for derivative and similar contracts to be effective. Therefore, one risk that must also be managed is the potential future insolvency of one or other of the parties.