Derivatives and structured product litigation represents one of the most complex areas within Banking & Finance Disputes, involving sophisticated financial instruments whose valuation, risk allocation and contractual terms can become highly contentious when markets shift or transactions underperform. These disputes commonly arise from interest rate swaps, FX derivatives, commodity hedges, credit default swaps, Islamic hedging structures, structured notes and bespoke investment products sold to corporates, banks, family offices and high net worth investors. Because these instruments rely on intricate pricing models, disclosure obligations and regulatory frameworks, litigation requires a deep understanding of financial engineering, market volatility and the contractual structures that govern risk transfer. Mispricing, misrepresentation, unsuitable product recommendations or disputes over settlement obligations often lead to high stakes claims in both courts and arbitration.
Derivatives are contracts whose value is derived from an underlying asset, index or interest rate. Structured products bundle derivatives with traditional instruments to create customised risk profiles. While they can hedge commercial exposures or generate yield, their complexity creates room for misunderstanding, miscommunication and contractual ambiguity. When markets become volatile or counterparties face liquidity pressure, disputes emerge over valuation methods, margin calls, close out amounts, termination rights and the accuracy of pre transaction disclosures.
Litigation in this area typically arises in several recurring contexts.
Investors may allege that banks sold them high risk derivatives or structured products without properly explaining downside risks, leverage, break costs or mark to market volatility. Claims often focus on whether the bank assessed the investor’s risk appetite, financial sophistication and hedging needs. Signed risk disclosures, advisory frameworks and client classifications (retail, professional, eligible counterparty) play a central role in determining liability.
Disagreements frequently arise over how derivatives and structured notes are valued, especially during market disruption. Parties may challenge the valuation models used, inputs selected, bid ask spreads applied or whether prices reflect good faith, commercially reasonable calculations. These disputes often require expert evidence and forensic analysis of market conditions.
ISDA based agreements and structured product term sheets set out how transactions are to be closed out upon default or early termination. Litigation arises when parties disagree on calculation statements, replacement cost methodologies, notice procedures or whether the terminating party acted reasonably and in accordance with the contract’s discretion limits.
Derivatives often require ongoing margining to manage counterparty risk. Disputes emerge when margin calls are issued unexpectedly, calculated incorrectly or when one party alleges wrongful failure to transfer collateral. Market volatility can trigger rapid changes in exposure, making accurate and timely margining essential.
Sharia compliant hedging products introduce additional layers of complexity. Disputes may arise over the compliance of structures, the enforceability of wa’ad (unilateral undertakings) or the treatment of deferred payment obligations. Courts and tribunals must balance contractual certainty with the principles underpinning Islamic finance.
These disputes often turn on technical evidence, contractual interpretation and regulatory obligations. Courts will examine:
The burden is often on the claimant to demonstrate that misrepresentation or negligence occurred, while banks must show that they followed regulatory standards, documented risks adequately and calculated values using commercially reasonable methods.
Banks typically argue that clients were sophisticated, understood market risks and agreed to express contractual terms that govern valuation and close out. They rely on signed confirmations, disclaimers and communications evidencing informed consent. Investors, by contrast, may present expert evidence showing mispricing, improper risk classification or unreasonable exercise of discretion during termination. Both parties frequently use independent valuation experts to support their position.
Many cross border derivatives transactions are resolved through arbitration rather than litigation due to confidentiality, speed and the ability to appoint tribunals with financial expertise. Arbitration is particularly common where ISDA Master Agreements specify DIFC or ADGM law and institutional rules.
UAE Central Bank regulations, SCA rules, and global frameworks such as EMIR or Basel requirements influence how products are sold and managed. Regulatory breaches can support mis selling claims or invalidate aspects of a bank’s defence. Meanwhile, increased emphasis on risk governance and transparency is shaping how banks design and distribute structured products.
Derivatives and structured product litigation requires a blend of legal, financial and technical expertise due to the complexity of instruments, pricing methodologies and contractual frameworks. Whether arising from mis selling, valuation disputes or close out disagreements, these cases demand precise documentation, rigorous analysis and specialised expert testimony. As UAE markets continue to develop and corporate hedging activity grows, disputes in this area will remain an important and evolving part of Banking and Finance Disputes.
