Bilateral Netting of Qualified Financial Contracts Act, 2020: Enforcement of netting of a qualified financial contract

The Bilateral Netting of Qualified Financial Contracts Bill, 2020 received Presidential Assent on 28-09-2020.

The Bilateral Netting of Qualified Financial Contracts Act, 2020

Purpose:

Bilateral Netting of Qualified Financial Contracts Act, 2020 will ensure stability and promote competitiveness in Indian financial markets by providing enforceability of bilateral netting of qualified financial contracts and for matters connected therewith or incidental thereto.

Meaning of Netting:

Netting enables two counterparties in a bilateral financial contract to offset claims against each other to determine a single net payment obligation due from one counterparty to other in the event of default.

In the absence of a legal framework for bilateral netting, banks are forced to measure credit exposure to a counterparty for over-the-counter (OTC) derivative contracts based on a gross basis and not a net basis.

Benefit of law on bilateral netting?

The law on bilateral netting would be a significant enabler for efficient margining. The capital saving would enable banks to provide price efficiency in offering hedging instruments to businesses in India and catalyse the corporate bond market through developing the credit default swap market. It is expected that a law on bilateral netting of financial transactions would further develop the financial market in India.

The said Act will provide for the following:

(a) designation of any bilateral agreement or contract or transaction, or type of contract, as qualified financial contract by the Central Government or any of the regulatory authorities as specified in the First Schedule;

(b) enforceability of netting of a qualified financial contract;

(c) invocation of close-out netting which may be commenced by a notice given by one party to the other party of a qualified financial contract upon the occurrence of an event of default with respect to the other party or a termination event that may, in certain circumstances, occur automatically as specified in the netting agreement;

(d) determination of the net amount payable under the close-out netting in accordance with the terms of the netting agreement entered into by the parties and in the absence of the netting agreement, where the parties to a qualified financial contract fail to agree on the sum with regard to the net amount payable under the close-out netting, determination of such sum through arbitration;

(e) imposing certain limitations on powers of administration practitioner

Read the ACT here: Bilateral Netting of Qualified Financial Contracts Bill, 2020


Ministry of Law and Justice

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