Enforceability of Close-Out Netting: Draft UNIDROIT Principles to Set New International Benchmark
Butterworths Journal of International Banking and Financial Law, (2013) 1 JIBFL 13
Posted: 15 Feb 2013
Date Written: January 28, 2013
UNIDROIT has recently launched an intergovernmental process intended to set an international non-binding standard for close-out netting legislation — and hopes to conclude its work in the course of 2013.
The colossal exposures inherent in the derivatives, securities lending, repo, forex and similar markets are generally covered by close-out netting provisions, which are contained in the relevant master agreements. Close-out netting reduces mutual exposure by about 80-90%. The ‘net’ exposure is taken as a basis for the calculation of collateral and underlying capital, thus being vital for market participants' risk management, as well as for prudential supervision. Even though most developed markets have adopted netting-friendly legislation, the international nature of the modern financial market complicates enforceability of close-out netting in cross-jurisdictional situations, in particular in insolvency scenarios. International principles on the enforceability of close-out netting have been developed by a UNIDROIT study group and are currently being considered by a committee of governmental experts. This Article explains the current difficulties in transposing the concept of close-out netting across jurisdictional borders and advocates a functional approach. Further, it sheds light on the concepts underlying the current UNIDROIT draft principles.
Keywords: close out netting, set off, settlement netting, novation, master agreement, principles, harmonisation, Unidroit
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