Post by congregatio on Jan 15, 2019 22:49:13 GMT 4
The UAE Netting Law, Federal Decree-Law No. 10/2018 was issued on 20 September 2018. Its provisions will apply to all Qualified Financial Contracts and Netting Agreements specified under the law, which are entered into by any person in the UAE. The law seeks to strengthen the legislative framework for the settlement of Qualified Financial Contracts through set-off, offset, or net out obligations.
Analysis
Netting is a general concept which has specific uses, mainly in the financial markets. In its literal meaning, it entails offsetting the value of multiple positions or payments to be exchanged between two or more parties. It is designed to lower the number of transactions required. For example, if Party A owes Party B $100,000, and Party B owes Party A $25,000, the value after netting would be a $75,000 transfer from Party A to Party B ($100,000–$25,000).
Before the issuing of the Federal Netting Law, which is more or less based on the ISDA Model Netting law, netting laws had already been issued in the DIFC and ADGM applicable to the parties incorporated in these Free zones.
Parties previously relied on the provisions of 'set-off' prescribed under Federal Decree-Law No. 9/2016 (Bankruptcy Law) which allows for the setting-off of debts which are contractually agreed on before insolvency. However, the provisions for setting off-of debts post-insolvency were seemingly inadequate.
Exemption for financial Free zones
The Federal Netting Law expressly does not apply to financial institutions in financial freezones like the DIFC and the ADGM.
Netting and Netting Agreements
Under Article 3 of Federal Decree-Law No. 10/2018, netting includes cases of termination, liquidation and/or acceleration of any payment, obligation to deliver entitlement or obligation to make, receive or require payments or deliveries under a Qualified Financial Contract entered into under a Netting Agreement or to which a Netting Agreement applies.
It also includes calculation, estimation, in addition to conversion of the calculated or estimated values into a single currency, or adoption according to an index of a close-out or termination value, market value, liquidation value, replacement value or any other relevant value. This includes the value of any damages, which may arise from a party's failure to enter into or perform a transaction required to be entered into under or under provisions of a Netting Agreement of the kind as referred to in the law. This occurs in respect of each obligation, entitlement, or group of obligations or entitlements terminated, liquidated and/or accelerated under a Qualified Financial Contract entered into under a Netting Agreement or to which a Netting Agreement applies.
Netting also includes determination of the net balance of the values calculated and converted as above, whether by operation of a set-off, offset, net out of obligations or otherwise.
Where the parties enter into a transaction under or by virtue of which a net balance becomes payable directly or as part of the consideration for a specific asset or the provision for payment of damages relating to non- performance of any transaction is also included under netting.
With regard to Netting Agreements, under Article 4 of Federal Decree-Law No. 10/2018 an agreement is considered a Netting Agreement in any of the following cases:
a. Any agreement between two parties which provides for Netting of present or future payment or delivery obligations or entitlements or obligations, or entitlement to make, receive or require payment or delivery, arising under or in connection with one or more Qualified Financial Contracts entered into under such agreement by the parties to the agreement referred to as a 'Master Netting Agreement'.
b. Any master agreement between two parties which provides for Netting of the amounts due under two or more Master Netting Agreements.
c. Any Collateral Arrangement like credit support annexes or credit support deed related to or forming part of one or more of the agreement referred to in paragraphs (a) and (b) of this Article. Any arrangement is considered a Collateral Arrangement if it includes agreements, contracts or transactions which fall within the framework of Qualified Financial Contracts referred to in Article 5 of Federal Decree-Law No. 10/2018 or within the definition of Netting Agreements referred to in under Article 4 of Federal Decree-Law No. 10/2018.
d. Any agreement or arrangement in line with Sharia rules, with a view to having similar purposes as any Netting Agreements or arrangement referred to in the previous paragraphs.
e. If it includes agreements, contracts or transactions, which fall within the framework of Qualified Financial Contracts referred to in Article 5 of Federal Decree-Law No. 10/2018.
Any Netting Agreement and all Qualified Financial Contracts to which the netting agreement applies, constitutes a single agreement.
A 'Netting Agreement' includes a 'Multi-Branch Netting Agreement'. However, the provisions of the Multi-Branch Netting Agreement referred to in this law are enforceable on the Foreign Party's Branch/Agency, in case of its separate insolvency.
Qualified Financial Contracts
Although the scope of Qualified Financial Contracts under this Federal Law broadly follows the ISDA Model Netting Law, Sharia-compliant contracts have been expressly included.
Without prejudice to the provisions of Article 7 of Federal Decree-Law No. 10/2018 by virtue of which the 'Committee for Designation of Qualified Financial Contracts' are set-up, under Article 5 of Federal Decree-Law No. 10/2018, Qualified Financial Contracts are final and enforceable and include the following:
1. All types of swaps in relation to currencies, interest rate, basis rate, or commodities.
2. Foreign exchange, securities, or commodities transactions, whether spot, future, forward or other such transactions.
3. A cap, collar or floor transaction.
4. A forward rate agreement.
5. A currency or interest rate future.
6. A currency or interest rate option.
7. Equity derivatives, like an equity or equity index swap, equity forward, equity option or equity index option.
8. A derivative relating to bonds or other debt securities or to a bond or debt security index, like a total return swap, index swap, forward, option or index option.
9. A credit derivative, like a credit default swap, credit default basket swap, total return swap or credit default option.
10. An energy derivative, like an electricity derivative, oil derivative, coal derivative or gas derivative.
11. A weather derivative, like a weather swap or weather option.
12. A bandwidth derivative.
13. A freight derivative.
14. An emissions derivative, such as emissions allowance or emissions reduction transaction.
15. An economic statistics derivative, such as an inflation derivative.
16. A property index derivative.
17. A securities contract, including (a margin loan and an agreement to buy, sell, borrow or lend securities), like a securities repurchase or reverse repurchase agreement, a securities lending agreement or a securities buy/sell back agreement, including any contract or agreement relating to a loan based on mortgage loans, interests in mortgage loans or mortgage related securities.
18. A commodities related contract, including agreements (to buy, sell, borrow or lend commodities), like a commodities repurchase or reverse repurchase agreement, a commodities lending agreement or a commodities buy/sell back agreement.
19. A collateral arrangement.
20. An agreement to clear or settle securities transactions or to act as a depository for securities.
21. Any agreement, contract or transaction similar to any agreement, contract or transaction referred to in items (1) to (20) of Article 5 of Federal Decree-Law No. 10/2018, with respect to one or more reference items or indices relating to interest rates, currencies, commodities, energy products, electricity, equities, weather, bonds and other debt instruments, precious metals, quantitative measures associated with an occurrence, extent of an occurrence, or contingency associated with a financial, commercial or economic consequence, or economic or financial indices or measures of economic or financial risk or value.
22. Any derivative like swap, forward, option, contract for differences or other derivative in respect of, or combination of, one or more agreements or contracts referred to in items (1) to (21) and item (23) of Article 5 of Federal Decree-Law No. 10/2018.
23. Any Sharia compliant contract or undertaking, which individually or together with any other contract or undertaking has or is entered into with a view to having an economic effect similar to any instrument of a kind described in any of items (1) to (22) of Article 5 of Federal Decree-Law No. 10/2018, including a Murabaha contract, Musawama contract, master collateralised Murabaha agreement, restricted and unrestricted Wakala agreement, alternative profit rate swap, alternative cross currency swap, alternative foreign exchange forward, other alternative hedging and investment instruments, Arboun principle, or unilateral Wa'ad and single Wa'ad.
One of the significant features of this law is all Qualified Financial Contracts referred to in Article 5 of Federal Decree-Law No. 10/2018 are final and enforceable and are not considered void, unenforceable, or not final for any reason related to aleatory contracts (Gharar) provisions referred to in the Civil Transactions Law.
Another significant feature of this law is setting up of a committee in line with Article 7 of Federal Decree-Law No. 10/2018, named the 'Committee for Designation of Qualified Financial Contracts'. This committee is chaired by a representative of the Finance Ministry including two representatives each from the Regulatory Authorities in the State like the Central Bank, Securities & Commodities Authority and the Insurance Authority.
In addition to its jurisdiction to remove, add, or replace any financial agreement, contract or transaction from the list of Qualified Financial Contracts referred to in this law, the Committee also designates Qualified Financial Contracts which are not referred to in this Law.
The Committee provides an opinion on topics related to Qualified Financial Contracts; designate any additional financial agreement, contract or transaction as a Qualified Financial Contract; remove or add any financial agreement, contract or transaction from the list of Qualified Financial Contracts referred to in Article 5 of Federal Decree-Law No. 10/2018, replace any financial agreement, contract or transaction in the list of Qualified Financial Contracts referred to in Article 5 of Federal Decree-Law No. 10/2018 with any another financial agreement, contract or transaction; or undertake any other functions as designated by the Cabinet.
Enforceability of Netting during insolvency and bankruptcy proceedings
Federal Decree-Law No. 10/2018 also provides that during insolvency and bankruptcy proceedings relating to a party to a Netting Agreement, the obligations of any party to make payments or deliveries, which under that agreement are converted into net claims or obligations or otherwise netted will take effect, in line with the terms of the applicable Netting Agreement. The same applies to Qualified Financial Contracts and to financial contracts and transactions to which the Netting Agreement applies.
The provisions of a Netting Agreement, which provide for the determination of a net balance of the close-out values will also be enforced in respect of an Insolvent and any other party in line with its terms. The same will apply in respect of market values, liquidation values and replacement values calculated in respect of accelerated and/or terminated payment or delivery obligations or entitlements under one or more Qualified Financial Contract entered into under or in connection with a Netting Agreement.
The provisions of a Netting Agreement will not be suspended, resolved, made conditional or not performed in any manner based on the provisions of the Insolvency and bankruptcy laws in force, which limit the exercise of rights to set-off, offset or net out obligations, entitlements, payment amounts, or termination values owed between an Insolvent and another party.
The liquidator's scope of powers
In line with the provisions of this Law, the Liquidator will not annul, stop or refuse the performance of any of the following operations, on the grounds of it constituting a preference due to a non-Insolvent:
a. any payment, transfer, delivery, substitution or exchange of cash, collateral or any other interests, property, asset, or financial instruments, both conventional and Sharia-compliant, under or in connection with a Netting Agreement made from the Insolvent party to the non-insolvent party;
b. any obligation incurred under or in connection with a Netting Agreement by the Insolvent and owing to the non-Insolvent to make any payment, transfer, delivery, substitution or exchange of cash, collateral or any other interest or property; or
c. any transaction entered into by the Insolvent in line with the terms of any Netting Agreement in order to give effect to the netting provisions of this agreement.
This Law also refers to the liability of a Foreign Party's Branch/Agency, in case of insolvency, or the liability of its Liquidator in the State under a Multi-Branch Netting Agreement, which is calculated as of the date of the termination of the Qualified Financial Contracts entered into under the Multi-Branch Netting Agreement in line with the terms of this agreement. The non-Insolvent's right to receive payments are limited to the lesser of either 'the Foreign Party Net Payment Obligation' or 'the Foreign Party's Branch/Agency Net Payment Obligation'.
The liability of the liquidator of an Insolvent branch or agency of a Foreign Party to the non-Insolvent under a Multi-Branch Netting Agreement are reduced by (i) the fair market value of, or the amount of any proceeds or collateral which secures or supports the obligations of the Foreign Party under the Multi-Branch Netting Agreement and (ii) that has been applied to satisfy the obligations of the Foreign Party under the Multi-Branch Netting Agreement to the non- Insolvent.
Analysis
Netting is a general concept which has specific uses, mainly in the financial markets. In its literal meaning, it entails offsetting the value of multiple positions or payments to be exchanged between two or more parties. It is designed to lower the number of transactions required. For example, if Party A owes Party B $100,000, and Party B owes Party A $25,000, the value after netting would be a $75,000 transfer from Party A to Party B ($100,000–$25,000).
Before the issuing of the Federal Netting Law, which is more or less based on the ISDA Model Netting law, netting laws had already been issued in the DIFC and ADGM applicable to the parties incorporated in these Free zones.
Parties previously relied on the provisions of 'set-off' prescribed under Federal Decree-Law No. 9/2016 (Bankruptcy Law) which allows for the setting-off of debts which are contractually agreed on before insolvency. However, the provisions for setting off-of debts post-insolvency were seemingly inadequate.
Exemption for financial Free zones
The Federal Netting Law expressly does not apply to financial institutions in financial freezones like the DIFC and the ADGM.
Netting and Netting Agreements
Under Article 3 of Federal Decree-Law No. 10/2018, netting includes cases of termination, liquidation and/or acceleration of any payment, obligation to deliver entitlement or obligation to make, receive or require payments or deliveries under a Qualified Financial Contract entered into under a Netting Agreement or to which a Netting Agreement applies.
It also includes calculation, estimation, in addition to conversion of the calculated or estimated values into a single currency, or adoption according to an index of a close-out or termination value, market value, liquidation value, replacement value or any other relevant value. This includes the value of any damages, which may arise from a party's failure to enter into or perform a transaction required to be entered into under or under provisions of a Netting Agreement of the kind as referred to in the law. This occurs in respect of each obligation, entitlement, or group of obligations or entitlements terminated, liquidated and/or accelerated under a Qualified Financial Contract entered into under a Netting Agreement or to which a Netting Agreement applies.
Netting also includes determination of the net balance of the values calculated and converted as above, whether by operation of a set-off, offset, net out of obligations or otherwise.
Where the parties enter into a transaction under or by virtue of which a net balance becomes payable directly or as part of the consideration for a specific asset or the provision for payment of damages relating to non- performance of any transaction is also included under netting.
With regard to Netting Agreements, under Article 4 of Federal Decree-Law No. 10/2018 an agreement is considered a Netting Agreement in any of the following cases:
a. Any agreement between two parties which provides for Netting of present or future payment or delivery obligations or entitlements or obligations, or entitlement to make, receive or require payment or delivery, arising under or in connection with one or more Qualified Financial Contracts entered into under such agreement by the parties to the agreement referred to as a 'Master Netting Agreement'.
b. Any master agreement between two parties which provides for Netting of the amounts due under two or more Master Netting Agreements.
c. Any Collateral Arrangement like credit support annexes or credit support deed related to or forming part of one or more of the agreement referred to in paragraphs (a) and (b) of this Article. Any arrangement is considered a Collateral Arrangement if it includes agreements, contracts or transactions which fall within the framework of Qualified Financial Contracts referred to in Article 5 of Federal Decree-Law No. 10/2018 or within the definition of Netting Agreements referred to in under Article 4 of Federal Decree-Law No. 10/2018.
d. Any agreement or arrangement in line with Sharia rules, with a view to having similar purposes as any Netting Agreements or arrangement referred to in the previous paragraphs.
e. If it includes agreements, contracts or transactions, which fall within the framework of Qualified Financial Contracts referred to in Article 5 of Federal Decree-Law No. 10/2018.
Any Netting Agreement and all Qualified Financial Contracts to which the netting agreement applies, constitutes a single agreement.
A 'Netting Agreement' includes a 'Multi-Branch Netting Agreement'. However, the provisions of the Multi-Branch Netting Agreement referred to in this law are enforceable on the Foreign Party's Branch/Agency, in case of its separate insolvency.
Qualified Financial Contracts
Although the scope of Qualified Financial Contracts under this Federal Law broadly follows the ISDA Model Netting Law, Sharia-compliant contracts have been expressly included.
Without prejudice to the provisions of Article 7 of Federal Decree-Law No. 10/2018 by virtue of which the 'Committee for Designation of Qualified Financial Contracts' are set-up, under Article 5 of Federal Decree-Law No. 10/2018, Qualified Financial Contracts are final and enforceable and include the following:
1. All types of swaps in relation to currencies, interest rate, basis rate, or commodities.
2. Foreign exchange, securities, or commodities transactions, whether spot, future, forward or other such transactions.
3. A cap, collar or floor transaction.
4. A forward rate agreement.
5. A currency or interest rate future.
6. A currency or interest rate option.
7. Equity derivatives, like an equity or equity index swap, equity forward, equity option or equity index option.
8. A derivative relating to bonds or other debt securities or to a bond or debt security index, like a total return swap, index swap, forward, option or index option.
9. A credit derivative, like a credit default swap, credit default basket swap, total return swap or credit default option.
10. An energy derivative, like an electricity derivative, oil derivative, coal derivative or gas derivative.
11. A weather derivative, like a weather swap or weather option.
12. A bandwidth derivative.
13. A freight derivative.
14. An emissions derivative, such as emissions allowance or emissions reduction transaction.
15. An economic statistics derivative, such as an inflation derivative.
16. A property index derivative.
17. A securities contract, including (a margin loan and an agreement to buy, sell, borrow or lend securities), like a securities repurchase or reverse repurchase agreement, a securities lending agreement or a securities buy/sell back agreement, including any contract or agreement relating to a loan based on mortgage loans, interests in mortgage loans or mortgage related securities.
18. A commodities related contract, including agreements (to buy, sell, borrow or lend commodities), like a commodities repurchase or reverse repurchase agreement, a commodities lending agreement or a commodities buy/sell back agreement.
19. A collateral arrangement.
20. An agreement to clear or settle securities transactions or to act as a depository for securities.
21. Any agreement, contract or transaction similar to any agreement, contract or transaction referred to in items (1) to (20) of Article 5 of Federal Decree-Law No. 10/2018, with respect to one or more reference items or indices relating to interest rates, currencies, commodities, energy products, electricity, equities, weather, bonds and other debt instruments, precious metals, quantitative measures associated with an occurrence, extent of an occurrence, or contingency associated with a financial, commercial or economic consequence, or economic or financial indices or measures of economic or financial risk or value.
22. Any derivative like swap, forward, option, contract for differences or other derivative in respect of, or combination of, one or more agreements or contracts referred to in items (1) to (21) and item (23) of Article 5 of Federal Decree-Law No. 10/2018.
23. Any Sharia compliant contract or undertaking, which individually or together with any other contract or undertaking has or is entered into with a view to having an economic effect similar to any instrument of a kind described in any of items (1) to (22) of Article 5 of Federal Decree-Law No. 10/2018, including a Murabaha contract, Musawama contract, master collateralised Murabaha agreement, restricted and unrestricted Wakala agreement, alternative profit rate swap, alternative cross currency swap, alternative foreign exchange forward, other alternative hedging and investment instruments, Arboun principle, or unilateral Wa'ad and single Wa'ad.
One of the significant features of this law is all Qualified Financial Contracts referred to in Article 5 of Federal Decree-Law No. 10/2018 are final and enforceable and are not considered void, unenforceable, or not final for any reason related to aleatory contracts (Gharar) provisions referred to in the Civil Transactions Law.
Another significant feature of this law is setting up of a committee in line with Article 7 of Federal Decree-Law No. 10/2018, named the 'Committee for Designation of Qualified Financial Contracts'. This committee is chaired by a representative of the Finance Ministry including two representatives each from the Regulatory Authorities in the State like the Central Bank, Securities & Commodities Authority and the Insurance Authority.
In addition to its jurisdiction to remove, add, or replace any financial agreement, contract or transaction from the list of Qualified Financial Contracts referred to in this law, the Committee also designates Qualified Financial Contracts which are not referred to in this Law.
The Committee provides an opinion on topics related to Qualified Financial Contracts; designate any additional financial agreement, contract or transaction as a Qualified Financial Contract; remove or add any financial agreement, contract or transaction from the list of Qualified Financial Contracts referred to in Article 5 of Federal Decree-Law No. 10/2018, replace any financial agreement, contract or transaction in the list of Qualified Financial Contracts referred to in Article 5 of Federal Decree-Law No. 10/2018 with any another financial agreement, contract or transaction; or undertake any other functions as designated by the Cabinet.
Enforceability of Netting during insolvency and bankruptcy proceedings
Federal Decree-Law No. 10/2018 also provides that during insolvency and bankruptcy proceedings relating to a party to a Netting Agreement, the obligations of any party to make payments or deliveries, which under that agreement are converted into net claims or obligations or otherwise netted will take effect, in line with the terms of the applicable Netting Agreement. The same applies to Qualified Financial Contracts and to financial contracts and transactions to which the Netting Agreement applies.
The provisions of a Netting Agreement, which provide for the determination of a net balance of the close-out values will also be enforced in respect of an Insolvent and any other party in line with its terms. The same will apply in respect of market values, liquidation values and replacement values calculated in respect of accelerated and/or terminated payment or delivery obligations or entitlements under one or more Qualified Financial Contract entered into under or in connection with a Netting Agreement.
The provisions of a Netting Agreement will not be suspended, resolved, made conditional or not performed in any manner based on the provisions of the Insolvency and bankruptcy laws in force, which limit the exercise of rights to set-off, offset or net out obligations, entitlements, payment amounts, or termination values owed between an Insolvent and another party.
The liquidator's scope of powers
In line with the provisions of this Law, the Liquidator will not annul, stop or refuse the performance of any of the following operations, on the grounds of it constituting a preference due to a non-Insolvent:
a. any payment, transfer, delivery, substitution or exchange of cash, collateral or any other interests, property, asset, or financial instruments, both conventional and Sharia-compliant, under or in connection with a Netting Agreement made from the Insolvent party to the non-insolvent party;
b. any obligation incurred under or in connection with a Netting Agreement by the Insolvent and owing to the non-Insolvent to make any payment, transfer, delivery, substitution or exchange of cash, collateral or any other interest or property; or
c. any transaction entered into by the Insolvent in line with the terms of any Netting Agreement in order to give effect to the netting provisions of this agreement.
This Law also refers to the liability of a Foreign Party's Branch/Agency, in case of insolvency, or the liability of its Liquidator in the State under a Multi-Branch Netting Agreement, which is calculated as of the date of the termination of the Qualified Financial Contracts entered into under the Multi-Branch Netting Agreement in line with the terms of this agreement. The non-Insolvent's right to receive payments are limited to the lesser of either 'the Foreign Party Net Payment Obligation' or 'the Foreign Party's Branch/Agency Net Payment Obligation'.
The liability of the liquidator of an Insolvent branch or agency of a Foreign Party to the non-Insolvent under a Multi-Branch Netting Agreement are reduced by (i) the fair market value of, or the amount of any proceeds or collateral which secures or supports the obligations of the Foreign Party under the Multi-Branch Netting Agreement and (ii) that has been applied to satisfy the obligations of the Foreign Party under the Multi-Branch Netting Agreement to the non- Insolvent.