International Instruments for Close-out Netting Laws Harmonization

Abstract

The subject matter of the article is the process of harmonizing close-out netting regulation and the most important international standards in this area. Close-out netting is a contractual instrument for the termination of obligations under a range of financial transactions that is widely used in international markets. Mandatory bankruptcy rules in many countries hinder close-out netting operation resulting in the need for adopting national laws aimed at the recognition and enforceability of close-out netting. Supported by international bodies in the field of financial markets regulation, international standards for the harmonization of close-out netting legislation were adopted. The main objective of these instruments is the formation of model rules and guidelines to be used by legislators and regulators in their activities. Model Netting Act, drafted and published by the International Swaps and Derivatives Association in 1996, became the first in a range of such documents. Subsequently, the organization has published updated model netting laws in 2002 and 2006. For eight years, these model acts were the only standards in that area and have been used for implementing netting laws in several key jurisdictions. Subsequently, renowned international organizations in the field of unification of private law joined the harmonization process. UNCITRAL Legislative Guide on Insolvency Law (2004) and UNIDROIT Principles of Close-out Netting (2013) were adopted to put close-out netting relations in order. All close-out netting instruments have similar scope (financial contracts) and are focused on the restriction of certain institutions of insolvency law, such as the prohibition of set-off shortly before and amidst the bankruptcy process, the right to challenge or reject the execution of transactions as well as imposing a moratorium on the termination of obligations. However, the UNIDROIT Principles can be considered as the most preferred tool for legislators and regulators since the document takes into account the interests of all the parties involved as well as the latest developments in the field of financial markets regulation and financial institutions resolution.