Draft Principles Regarding the Enforceability of Close-Out Netting Provisions

UNIDROIT Study Group on Principles and Rules on the Netting of Financial Instruments, Study LXXVIII C – Doc. 13, Third Meeting, Rome, 7-9 February 2012

26 Pages Posted: 15 Feb 2013

See all articles by Philipp Paech

Philipp Paech

London School of Economics - Law Department

Date Written: April 1, 2012

Abstract

This paper sets out eight principles designed to ensure the cross-jurisdictional enforceability of close out-netting. Close-out netting is heavily used by the financial industry and used in many regulatory mechanisms like in particular bank’s capital requirements (Basel II). However, as soon as banks located in different jurisdictions agree to apply close-out netting between them, they risk that the relevant provisions are unenforceable in the event of insolvency of either of them. About 40 countries do allow close-out netting, however on differing terms. The Principles shall provide guidelines to legislators on how to amend national insolvency laws so as to be compatible with each other. Principle 1 defines close out netting. Principles 2 and 3 set a standard regarding the circle of netting-eligible parties and netting-eligible financial transactions. Principles 4-6 deal with formal requirements, promoting in particular the idea that unenforceability as a consequence of non-compliance with formal requirements is not the right means to achieve regulatory goals. Principle 7 is the core rule and defines the relationship between close-out netting and insolvency avoidance rules. Principle 8 clarifies the role of Principle 7 in respect of bank resolution procedures as recently promoted by the Financial Stability Board. Each Principle is accompanied by a detailed commentary explaining its background and reasoning. The paper is the final one in a sequence of four that the Author has produced for the International Institute for the Unification of Private Law (Unidroit 2012 Study 78C – Doc. 13). It has greatly benefited from the input of other Members of the Unidroit Study Group.

Keywords: close-out netting, set-off, settlement netting, bank resolution, harmonisation, master agreement, principles, Unidroit

Suggested Citation

Paech, Philipp, Draft Principles Regarding the Enforceability of Close-Out Netting Provisions (April 1, 2012). UNIDROIT Study Group on Principles and Rules on the Netting of Financial Instruments, Study LXXVIII C – Doc. 13, Third Meeting, Rome, 7-9 February 2012, Available at SSRN: https://ssrn.com/abstract=2216682 or http://dx.doi.org/10.2139/ssrn.2216682

Philipp Paech (Contact Author)

London School of Economics - Law Department ( email )

Houghton Street
London WC2A 2AE, WC2A 2AE
United Kingdom

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