Section 5 of The Bilateral Netting of Qualified Financial Contracts Act, 2020
Enforceability of netting.
- (1)Netting of the qualified financial contract shall be enforceable---
- (a)where such contract is entered into with a netting agreement, in accordance with the terms of the netting agreement: Provided that the inclusion of any non-qualified financial contract in a netting agreement shall not invalidate the enforceability of netting of qualified financial contract under such agreement; or
- (b)where such contract is entered into without a netting agreement, in accordance with the provisions of section 6.
- (2)A qualified financial contract shall not be void and shall be deemed never to have been void or unenforceable by reason of any law for the time being in force.
- (3)Close-out netting of a qualified financial contract shall be enforceable against an insolvent party, and, wherever applicable, against a guarantor or other person providing collateral or security for a party and shall not be affected or stopped or otherwise limited by:---
- (i)the appointment of, or any application for the appointment of, an administration practitioner, or
- (ii)applicability of any provision of law relating to administration, or
- (iii)any other provision of law that may be applicable to an insolvent party
- (4)Where a qualified financial market participant is subject to administration, then notwithstanding---
- (i)any stay, injunction, avoidance, moratorium or similar proceedings or any other order of a court, tribunal or authority, or
- (ii)any order of adjudication or dissolution or winding up or resolution or insolvency, or
- (iii)any rule, regulation, scheme, direction, guideline, circular or order, made or issued under any law for the time being in force, close-out netting shall be applicable and nothing contained therein shall affect the validity of close-out netting under this Act.
- (5)The amount payable or other claims to be made in accordance with the close-out netting under this Act shall be final, irrevocable and binding upon the parties to a qualified financial contract and upon the administration practitioner, of the party in administration.
Summary
- It makes the netting of qualified financial contracts legally enforceable according to the terms of their netting agreement.
- It ensures that adding a non-qualified financial contract to a netting agreement does not ruin or invalidate the netting of the qualified ones.
- It establishes that if there is no netting agreement, netting is still enforceable in accordance with Section 6.
- It declares that qualified financial contracts are not void and must be treated as never having been void under any law.
- It protects close-out netting from being stopped, limited, or affected by insolvency proceedings, court stays, or the appointment of an administration practitioner.
- It rules that the final close-out netting amounts are final, irrevocable, and completely binding on both parties and their liquidators.
Practical examples
FAQ
1. What happens if a netting agreement contains both qualified and non-qualified financial contracts?
Under Section 5, the inclusion of a non-qualified financial contract does not invalidate the enforceability of the netting of the qualified financial contracts under that agreement.
2. Can a qualified financial contract be declared void or unenforceable by other laws?
No, Section 5 states that a qualified financial contract shall not be void and shall be deemed never to have been void or unenforceable by reason of any other law in force.
3. Is close-out netting enforceable against a guarantor or person providing collateral?
Yes, close-out netting is enforceable against an insolvent party and, wherever applicable, against a guarantor or any other person providing collateral or security.
4. Can a court-issued stay or moratorium stop close-out netting if a participant is put under administration?
No, Section 5 explicitly states that close-out netting shall apply notwithstanding any stay, injunction, moratorium, or court order under any law.
5. Are the amounts calculated under close-out netting final?
Yes, the amount payable under close-out netting is final, irrevocable, and binding on the parties and the administration practitioner.
Test yourself
Q1.Under Section 5 of The Bilateral Netting of Qualified Financial Contracts Act, 2020, how is netting enforced if a qualified financial contract was entered into without a netting agreement, and how does Section 6 apply?
Q2.Under Section 5 of The Bilateral Netting of Qualified Financial Contracts Act, 2020, what is the legal status of close-out netting when an administration practitioner is appointed for an insolvent party?
Q3.Under Section 5 of The Bilateral Netting of Qualified Financial Contracts Act, 2020, what happens to the netting of qualified contracts if a non-qualified financial contract is included in the same netting agreement?
Q4.Under Section 5 of The Bilateral Netting of Qualified Financial Contracts Act, 2020, how binding are the amounts payable or claims made under close-out netting?
Q5.Under Section 5 of The Bilateral Netting of Qualified Financial Contracts Act, 2020, what is the effect of court-ordered stays, injunctions, or moratoria on close-out netting?
Q6.Under Section 5 of The Bilateral Netting of Qualified Financial Contracts Act, 2020, what is the legal position regarding the validity of a qualified financial contract under other laws?