Cross-Border Close-Out Netting and the Choice of Applicable Law

Abstract

The subject of this article is the choice of governing law in respect of cross-borderclose-out netting. This instrument is used to reduce the risks associated with derivativefinancial instruments, repurchase agreements, securities lending and foreign exchangetransactions on international financial markets. Cross-border close-out netting is carriedout on the basis of standard master agreements that form a part of standard documentationdeveloped by international associations of financial markets participants. Also, theconduct of close-out netting following the events of default is prescribed by exchangerules. Some definitions of close-out netting contained in legislative and doctrine leadto the conclusion a conflict-of-laws rule on set-off may be applied to close-out netting.Since mutual offsetting of transaction claims is merely the final stage of the entire nettingprocedure, the qualification of the mechanism in question as a contractual method oftermination of obligations is more justified. This approach makes it possible to determinethe applicable law in respect of close-out netting carried out in respect of internationalstandard documentation, as well as of on-exchange close-out netting. However, theissue of governing law in respect of close-out netting in non-standard agreements in caseof absence of the choice of law by the parties remains unresolved. The rule on the choiceof law applicable to close-out netting is currently absent in the domestic legislation onprivate international law. The conflict-of-laws issue related to the application of close-outnetting in cross-border transactions was raised during the preparation of an internationalinstrument in the field of netting by UNIDROIT. However, the recommendations regardingthe applicable law were not included in its last version. Presumably, the lack of progress inthe development of a special conflict-of-laws rule on netting is to be caused by practicalreasons rather than by theoretical ones. Traditionally, over-the-counter close-out nettingis carried out using standard documentation containing provisions on the choice ofapplicable law, which are recognized by all leading jurisdictions.
For citations: Klementiev A.P. (2019) Cross-Border Close-Out Netting and the Choice of Applicable Law. Pravo. Zhurnal Vysshey shkoly ekonomiki, no 2, pp. 209–232 (in Russian) DOI: 10.17-323/2072-8166.2019.2.209.232