Elgar Financial Law and Practice series
Chapter 10: CLOSE-OUT NETTING PROVISIONS AND THE FINANCIAL COLLATERAL REGULATIONS
The recitals to the Financial Collateral Directive (‘FCD’) explain that one ofthe purposes of the FCD is to improve legal certainty by ensuring that certain provisions of insolvency law do not apply to financial collateral arrangements, in particular those that would cast doubt on the validity of current techniques such as bilateral close-out netting. The rationale is that: Sound risk management practices commonly used in the financial market should be protected by enabling participants to manage and reduce their credit exposures arising from all kinds of financial transactions on a net basis, where the credit exposure is calculated by combining the estimated current exposures under all outstanding transactions with a counterparty, setting off reciprocal items to produce a single aggregated amount, that is compared with the current value of the collateral. In order to ensure that a close-out netting provision is legally robust, article 7 of the FCD requires Member States to ensure that it can take effect in accordance with its terms: (a) notwithstanding the commencement or continuation of winding-up proceedings or reorganisation measures in respect of the collateral-provider and/or the collateral-taker; and/or (b) notwithstanding any purported assignment, judicial or other attachment or other disposition of or in respect of such rights. Article 7 was implemented in the UK by regulation 12 of the Financial Collateral Arrangements (No. 2) Regulations 2003 (‘FCARs’).
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