http://www.arthapedia.in/index.php?title=The_Bilateral_Netting_of_Qualified_Financial_Contracts_Act,_2020&feed=atom&action=historyThe Bilateral Netting of Qualified Financial Contracts Act, 2020 - Revision history2024-03-29T06:32:45ZRevision history for this page on the arthapediaMediaWiki 1.17.0http://www.arthapedia.in/index.php?title=The_Bilateral_Netting_of_Qualified_Financial_Contracts_Act,_2020&diff=4142&oldid=prevArthapedia at 14:57, 13 October 20202020-10-13T14:57:36Z<p></p>
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<tr><td class='diff-marker'> </td><td style="background: #eee; color:black; font-size: smaller;"><div><p>Financial institutions and other financial intermediaries employ a number of risk mitigating mechanisms to reduce their risk exposure in their business transactions. The two most commonly used mechanisms are collateral arrangements and close-out netting<sup class="reference"> [[#ref1|[1]]]</sup>. These risk-mitigating mechanisms ensure that that risk arising from one party’s exposure to the solvency of the counterparty and to fluctuations in the value of the relevant assets are tightly controlled. Both mechanisms help the financial institutions to manage the counterparty risk as well as market risk. </p></div></td><td class='diff-marker'> </td><td style="background: #eee; color:black; font-size: smaller;"><div><p>Financial institutions and other financial intermediaries employ a number of risk mitigating mechanisms to reduce their risk exposure in their business transactions. The two most commonly used mechanisms are collateral arrangements and close-out netting<sup class="reference"> [[#ref1|[1]]]</sup>. These risk-mitigating mechanisms ensure that that risk arising from one party’s exposure to the solvency of the counterparty and to fluctuations in the value of the relevant assets are tightly controlled. Both mechanisms help the financial institutions to manage the counterparty risk as well as market risk. </p></div></td></tr>
<tr><td class='diff-marker'>−</td><td style="background: #ffa; color:black; font-size: smaller;"><div><del class="diffchange diffchange-inline"><p>&nbsp;</p></del></div></td><td class='diff-marker'>+</td><td style="background: #cfc; color:black; font-size: smaller;"><div> </div></td></tr>
<tr><td class='diff-marker'> </td><td style="background: #eee; color:black; font-size: smaller;"><div><p>There are two types of netting<sup class="reference"> [[#ref2|[2]]]</sup>. Payment netting refers to a process coalescing offsetting cash flow obligations between two parties into a single net payable or receivable in the usual course of business when both parties are solvent. [https://www.unidroit.org/overview-netting Close-out netting] is applicable to transactions between a defaulting firm and a non-defaulting firm. Close-out netting refers to a process involving termination of obligations with a defaulting party under a bilateral contract and subsequent merging of positive (receivable) and negative replacement values (payables) into a single net payable or receivable. The policymakers and international standard setting bodies have strongly recommended that legal framework for close-out netting must be established in the interest of [http://arthapedia.in/index.php?title=Financial_Stability financial stability]. The Financial Stability Board recommended as part its recommendations of the [https://www.fsb.org/work-of-the-fsb/policy-development/effective-resolution-regimes-and-policies/key-attributes-of-effective-resolution-regimes-for-financial-institutions/ Key Attributes of Effective Resolution Regimes for Financial Institutions]<sup class="reference"> [[#ref3|[3]]]</sup> that the legal framework governing set-off rights, contractual netting and collateralisation agreements should be clear, transparent and enforceable during a crisis or resolution of firms, and should not impede the effective implementation of resolution measures. Several global standards on insolvency law prescribe specific recommendations for the enactment of safeguards for financial contracts, particularly netting<sup class="reference"> [[#ref4|[4]]]</sup> and collateral arrangements to provide certainty to financial transactions and to maintain financial stability. The recommendations number 101-107 of the [https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/05-80722_ebook.pdf UNCITRAL Guide on Insolvency] emphasise<sup class="reference"> [[#ref5|[5]]]</sup> that netting and set-off may reduce the potential for systemic risk that could negatively affect the stability of financial markets by providing certainty with respect to the rights of parties to a financial contract when one of those parties defaults.</p></div></td><td class='diff-marker'> </td><td style="background: #eee; color:black; font-size: smaller;"><div><p>There are two types of netting<sup class="reference"> [[#ref2|[2]]]</sup>. Payment netting refers to a process coalescing offsetting cash flow obligations between two parties into a single net payable or receivable in the usual course of business when both parties are solvent. [https://www.unidroit.org/overview-netting Close-out netting] is applicable to transactions between a defaulting firm and a non-defaulting firm. Close-out netting refers to a process involving termination of obligations with a defaulting party under a bilateral contract and subsequent merging of positive (receivable) and negative replacement values (payables) into a single net payable or receivable. The policymakers and international standard setting bodies have strongly recommended that legal framework for close-out netting must be established in the interest of [http://arthapedia.in/index.php?title=Financial_Stability financial stability]. The Financial Stability Board recommended as part its recommendations of the [https://www.fsb.org/work-of-the-fsb/policy-development/effective-resolution-regimes-and-policies/key-attributes-of-effective-resolution-regimes-for-financial-institutions/ Key Attributes of Effective Resolution Regimes for Financial Institutions]<sup class="reference"> [[#ref3|[3]]]</sup> that the legal framework governing set-off rights, contractual netting and collateralisation agreements should be clear, transparent and enforceable during a crisis or resolution of firms, and should not impede the effective implementation of resolution measures. Several global standards on insolvency law prescribe specific recommendations for the enactment of safeguards for financial contracts, particularly netting<sup class="reference"> [[#ref4|[4]]]</sup> and collateral arrangements to provide certainty to financial transactions and to maintain financial stability. The recommendations number 101-107 of the [https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/05-80722_ebook.pdf UNCITRAL Guide on Insolvency] emphasise<sup class="reference"> [[#ref5|[5]]]</sup> that netting and set-off may reduce the potential for systemic risk that could negatively affect the stability of financial markets by providing certainty with respect to the rights of parties to a financial contract when one of those parties defaults.</p></div></td></tr>
<tr><td class='diff-marker'> </td><td style="background: #eee; color:black; font-size: smaller;"><div><p>Therefore, while there is a resounding support by the policymakers to close-out netting, the empirical evidence clearly indicates that there are solid reasons for this support. That is why most of the major countries for OTC derivatives market (50 countries) have established a legal framework for bilateral netting of financial agreements. The statistics published each year by the Bank for International Settlements (BIS) consistently show that close-out netting reduces the gross mark-to-market value of outstanding derivative transactions across all asset classes. For example, netting benefit, measured as the difference between gross mark-to-market value and credit exposure after netting, was over 79 per cent (USD 9.2 trillion) as of December 31, 2019<sup class="reference"> [[#ref6|[6]]]</sup>. The mark-to-market exposure of all OTC derivatives globally is reduced from USD 11.4 trillion to USD 2.4 trillion as a result of close-out netting. So, the netting benefit is not inconsequential.</p></div></td><td class='diff-marker'> </td><td style="background: #eee; color:black; font-size: smaller;"><div><p>Therefore, while there is a resounding support by the policymakers to close-out netting, the empirical evidence clearly indicates that there are solid reasons for this support. That is why most of the major countries for OTC derivatives market (50 countries) have established a legal framework for bilateral netting of financial agreements. The statistics published each year by the Bank for International Settlements (BIS) consistently show that close-out netting reduces the gross mark-to-market value of outstanding derivative transactions across all asset classes. For example, netting benefit, measured as the difference between gross mark-to-market value and credit exposure after netting, was over 79 per cent (USD 9.2 trillion) as of December 31, 2019<sup class="reference"> [[#ref6|[6]]]</sup>. The mark-to-market exposure of all OTC derivatives globally is reduced from USD 11.4 trillion to USD 2.4 trillion as a result of close-out netting. So, the netting benefit is not inconsequential.</p></div></td></tr>
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<tr><td class='diff-marker'> </td><td style="background: #eee; color:black; font-size: smaller;"><div><p>The present legal framework in India does not allow netting of bilateral financial contracts {over-the-counter derivatives (OTC)}, while it is allowed for multilateral transactions. Therefore, the financial contracts intermediated through the central counter-parties, like clearing corporations, get the benefit of netting under the Payment and Settlement Systems Act, 2007 and under the securities laws. However, in the absence of any legally unambiguous basis for finality of bilateral netting for certain entities, the Reserve Bank of India (RBI) currently does not allow bilateral netting of mark-to-market values arising on account of OTC derivatives, forcing the banks to provide capital on gross basis for such derivatives, trapping large amount of capital unproductively with banks. However, calculating the regulatory capital on gross-exposure basis is inefficient over calculating that on net-exposure basis.</p></div></td><td class='diff-marker'> </td><td style="background: #eee; color:black; font-size: smaller;"><div><p>The present legal framework in India does not allow netting of bilateral financial contracts {over-the-counter derivatives (OTC)}, while it is allowed for multilateral transactions. Therefore, the financial contracts intermediated through the central counter-parties, like clearing corporations, get the benefit of netting under the Payment and Settlement Systems Act, 2007 and under the securities laws. However, in the absence of any legally unambiguous basis for finality of bilateral netting for certain entities, the Reserve Bank of India (RBI) currently does not allow bilateral netting of mark-to-market values arising on account of OTC derivatives, forcing the banks to provide capital on gross basis for such derivatives, trapping large amount of capital unproductively with banks. However, calculating the regulatory capital on gross-exposure basis is inefficient over calculating that on net-exposure basis.</p></div></td></tr>
<tr><td class='diff-marker'> </td><td style="background: #eee; color:black; font-size: smaller;"><div><p>Further, due to the emerging global consensus of imposition of margins for non-centrally cleared OTC derivatives, it has become necessary for India to implement exchange of margin system for OTC derivatives to improve stability and resilience of our financial system. However, imposition of margin on gross basis would make the OTC derivative market very costly and may cause serious disruption in its functioning, as such derivatives account for a significant part of the total derivatives market. Recognising that a law on bilateral netting would be a significant enabler for efficient margining, RBI has announced, in its Statement on Developmental and Regulatory Policies dated February 6, 2020, introduction of margin system for OTC derivatives in line with the emerging international norms to mitigate the systemic risk and strengthen the resilience of the financial sector. Allowing for the close-out netting could result in substantial savings for the banks and other financial institutions in two ways, i.e., (i) by decreasing the regulatory capital requirements for OTC derivatives; and (ii) by decreasing margin requirements for non-centrally cleared derivatives (NCCDs).</p></div></td><td class='diff-marker'> </td><td style="background: #eee; color:black; font-size: smaller;"><div><p>Further, due to the emerging global consensus of imposition of margins for non-centrally cleared OTC derivatives, it has become necessary for India to implement exchange of margin system for OTC derivatives to improve stability and resilience of our financial system. However, imposition of margin on gross basis would make the OTC derivative market very costly and may cause serious disruption in its functioning, as such derivatives account for a significant part of the total derivatives market. Recognising that a law on bilateral netting would be a significant enabler for efficient margining, RBI has announced, in its Statement on Developmental and Regulatory Policies dated February 6, 2020, introduction of margin system for OTC derivatives in line with the emerging international norms to mitigate the systemic risk and strengthen the resilience of the financial sector. Allowing for the close-out netting could result in substantial savings for the banks and other financial institutions in two ways, i.e., (i) by decreasing the regulatory capital requirements for OTC derivatives; and (ii) by decreasing margin requirements for non-centrally cleared derivatives (NCCDs).</p></div></td></tr>
</table>Arthapediahttp://www.arthapedia.in/index.php?title=The_Bilateral_Netting_of_Qualified_Financial_Contracts_Act,_2020&diff=4141&oldid=prevArthapedia at 14:34, 13 October 20202020-10-13T14:34:11Z<p></p>
<a href="http://www.arthapedia.in/index.php?title=The_Bilateral_Netting_of_Qualified_Financial_Contracts_Act,_2020&diff=4141&oldid=4140">Show changes</a>Arthapediahttp://www.arthapedia.in/index.php?title=The_Bilateral_Netting_of_Qualified_Financial_Contracts_Act,_2020&diff=4140&oldid=prevArthapedia: Created page with "<p>[http://www.ibbi.gov.in/Law/IBC%202016.pdf Insolvency and Bankruptcy Code] represents the legal and institutional mechanisms in India for dealing with debt defaultof companie..."2020-10-13T14:07:12Z<p>Created page with "<p>[http://www.ibbi.gov.in/Law/IBC%202016.pdf Insolvency and Bankruptcy Code] represents the legal and institutional mechanisms in India for dealing with debt defaultof companie..."</p>
<p><b>New concept</b></p><div><p>[http://www.ibbi.gov.in/Law/IBC%202016.pdf Insolvency and Bankruptcy Code] represents the legal and institutional mechanisms in India for dealing with debt defaultof companies and limited liability entities, partnership firms and individuals.However, this does not automatically cover default by financial service providers, unless notified by the Government.</p><br />
<p>&nbsp;</p><br />
<p><strong>Background</strong></p><br />
<p>[http://pib.nic.in/newsite/PrintRelease.aspx?relid=110730 A Bankruptcy Law Reforms Committee] (BLRC) was set up on 22.8.2014 for providing an entrepreneur friendly legal bankruptcy framework for India as announced in the [http://indiabudget.nic.in/ Budget Speech (2014-15)], Para 106 - &ldquo;Entrepreneur friendly legal bankruptcy framework will also be developed for SMEs to enable easy exit…&rdquo; Further, the Government identified Bankruptcy Law Reform as a key priority for improving the ease of doing business and had announced in the [http://indiabudget.nic.in/ Budget Speech 2015-16]that a comprehensive Bankruptcy Code, meeting global standards and providing necessary judicial capacity, will be brought in fiscal 2015-16.</p><br />
<p>The BLRC[http://finmin.nic.in/reports/BLRCReportVol1_04112015.pdf submitted its Report and draft Bill] on 4.11.2015. Based on this, as well as public/stakeholder consultation, the Insolvency and Bankruptcy Code, 2015 was finalized. The Bill was introduced in the Lok Sabha on 21.12.2015and referred to a Joint Committee of Parliament. The Joint Committee of Parliamentsubmitted its report on 28.4.2016.[http://www.ibbi.gov.in/Law/IBC%202016.pdf The Insolvency and Bankruptcy Code, 2016] was passed by Parliament on 11.5.2016 and published in the Official Gazette on 28.5.2016. </p><br />
<p>&nbsp;</p><br />
<p><strong>Objective of the Code</strong></p><br />
<p>The new law aims to consolidate the laws relating to insolvency of companies and limited liability entities (including limited liability partnerships and other entities with limited liability), unlimited liability partnerships and individuals, contained in a number of legislations<sup class="reference"> [[#ref1|[1]]]</sup>, into a single legislation and provide for their reorganisation and resolution in a time bound manner for maximisation of value of their assets. Such consolidation will provide for a greater clarity in law and facilitate the application of consistent and coherent provisions to different stakeholders affected by business failure or inability to pay debt. </p><br />
<p>&nbsp;</p><br />
<p><strong>Benefits of the Code</strong></p><br />
<p>The law will thus promote entrepreneurship, availability of credit and balance the interest of all stakeholders. The vision of the new law is to encourage entrepreneurship and innovation. It is true that some business ventures will fail, but such failures will be handled rapidly and swiftly. Entrepreneurs and lenders will be able to move on, instead of being bogged down with decisions taken in the past. The Code empowers the operational creditors (workmen, suppliers etc.) also to initiate the insolvency resolution process upon non-payment of dues. In order to develop the credit market in India, in case of liquidation, financial debts owed to unsecured creditors have been kept above the Government&rsquo;s dues in the list of priorities (waterfall).</p><br />
<p>Facilitating early resolution and exit is as important as facilitating investment. The essential idea of the new law is that when a corporate entity defaults on its debt, control shifts from the shareholders / promoters to a committee of creditors, who have 180 days (extendable by 90 days in deserving cases) to evaluate proposals from various players about resuscitating the company or taking it into liquidation. When decisions are taken in a time-bound manner, there is a greater chance that the corporate entity can be saved as a going concern, and the productive resources of the economy (labour and capital) can be put to the best use. This is in complete departure from regime under the [http://lawmin.nic.in/ld/P-ACT/2004/The%20Sick%20Industrial%20Companies%20(Special%20Provisions)%20Repeal%20Act,%202003.pdf Sick Industrial Companies (Special Provisions) Act, 1985 (SICA)] where there were delays leading to destruction of the value of the firm. </p><br />
<p>The Insolvency and Bankruptcy Code is thus a comprehensive and systemic reform, which will give a quantum leap to the functioning of the credit market. It would take India from among relatively weak insolvency regimes to becoming one of the world's best insolvency regimes. It lays the foundations for the development of the corporate bond market, which would finance the infrastructure projects of the future. The passing of this Code and implementation of the same will give a big boost to ease of doing business in India.</p><br />
<p>&nbsp;</p><br />
<p><strong>Salient Features of the Code</strong></p><br />
<p>The Code separates commercial aspects of the insolvency proceedings from judicial aspects. While <strong>Insolvency Professionals</strong> (IPs)<sup class="reference"> [[#ref2|[2]]]</sup> will deal with commercial aspects such as management of the affairs of the corporate debtor, facilitating formation of committee of creditors, organising their meetings, examination of the resolution plan, etc., judicial issues will be handled by proposed Adjudicating Authorities (National Company Law Tribunal / Debt Recovery Tribunal)<sup class="reference"> [[#ref3|[3]]]</sup>. One more important institution created under the Code is the &lsquo;<strong>Information Utility&rsquo;</strong><sup class="reference"> [[#ref4|[4]]]</sup> which would store financial information and data and terms of lending in electronic databases. This would eliminate delays and disputes about facts when default does take place. </p><br />
<p>The Code also provides a fast track insolvency resolution process for corporates and LLPs. This will be an enabler for start-ups and small and medium enterprises (SMEs) to complete the resolution process in 90 days (extendable to 45 days in deserving cases). </p><br />
<p>The Code also addresses the important issue relating to cross border insolvency by providing the enabling mechanism on the subject. The Government, at an appropriate time, may come out with a detailed framework for cross border insolvency.</p><br />
<p>The code proposes setting up a regulator to register and regulate the functioning of insolvency professional agencies, insolvency professionals and information utilities. </p><br />
<p>&nbsp;</p><br />
<p><strong>Present Status of Implementation</strong></p><br />
<p>The Insolvency and Bankruptcy code was spearheaded by Ministry of Finance. However, the administration of the Insolvency and Bankruptcy Code, 2016 has been transferred to the [http://www.mca.gov.in/ Ministry of Corporate Affairs] w.e.f. 29th July,2016 by amending the GoI (Allocation of Business) Rules, 1961. The Ministry of Corporate Affairs has been taking necessary steps for implementation of the Code in terms of creating the required institutional architecture.[http://www.ibbi.gov.in/ The Insolvency and Bankruptcy Board of India]which regulates the IPs Insolvency professional agencies and information utilities was established on 1.10.2016 and has started issuing relevant Regulations. The institutional architecture of IPsand National Company Law Tribunaland National Company Law Appellate Tribunalhas been created for starting the insolvency and bankruptcy process. The regulations for corporate insolvency process have been notified and came into force with effect from 1.12.2016. SICA has been repealed and therefore the adjudicating authorities of [http://www.bifr.nic.in/ Board for Industrial and Financial Reconstruction] and Appellate Authority for Industrial and Financial Reconstruction have been abolished with effect from 1.12.2016 paving the way for starting the resolution process under the Insolvency and Bankruptcy Code, 2016, starting with corporate insolvency process. </p><br />
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<span class="small_footernote" id="ref1"> 1. The recovery proceedings by creditors, either through the Contract Act or through special laws such as the Recovery of Debts due to Banks and Financial Institutions Act, 1993 and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, has not had desired outcomes. Similarly, action through the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) and the winding up provisions of the Companies Act, 1956 have neither been able to aid recovery for lenders nor restructuring of firms. Laws dealing with individual insolvency, the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920, were almost a century old. This has hampered the confidence of the lender and development of the credit markets in India. Resultantly, credit by banks is the largest component of the credit market in India and corporate bond market has not yet developed to the desired level. </span><br />
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<span class="small_footernote" id="ref2"> 2. Insolvency professionals would handle the commercial aspects of insolvency resolution process. Insolvency professional agencies will develop professional standards, code of ethics and will be the first level regulator for insolvency professionals members leading to development of a competitive industry for such professionals. </span><br />
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<span class="small_footernote" id="ref3"> 3. The [https://drt.gov.in/ Debt Recovery Tribunal] (DRT) is the Adjudicating Authority with jurisdiction over individuals and unlimited liability partnership firms. Appeals from the order of DRT shall lie to the Debt Recovery Appellate Tribunal (DRAT). [http://nclt.gov.in/ The National Company Law Tribunal (NCLT)] shall be the Adjudicating Authority with jurisdiction over companies, limited liability entities. Appeals from the order of NCLT shall lie to the National Company Law Appellate Tribunal (NCLAT).NCLAT shall be the appellate authority to hear appeals arising out of the orders passed by the Regulator in respect of insolvency professionals or information utilities.(The National Company Law Tribunal has been constituted w.e.f. 1 June,2016 and by virtue of Section 466(1) of Companies Act,2013, the [http://clb.nic.in/ Company Law Board] stands dissolved.) </span><br />
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<span class="small_footernote" id="ref4"> 4. The Act proposes for insolvency information utilities which would collect, collate, authenticate and disseminate financial information from listed companies and financial and operational creditors of companies. An individual insolvency database is also proposed to be set up with the goal of providing information on insolvency status of individuals. </span><br />
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==References==<br />
*[http://finmin.nic.in/reports/BLRCReportVol1_04112015.pdf Report] of the [http://pib.nic.in/newsite/PrintRelease.aspx?relid=110730 The Bankruptcy Law Reforms Committee] (BLRC)<br />
*Press release of Ministry of Finance dated [http://pib.nic.in/newsite/PrintRelease.aspx?relid=145309 12 May 2016]<br />
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==Also See==<br />
*[http://arthapedia.in/index.php?title=Insolvency,_Resolution,_Bankruptcy_and_Liquidation Insolvency, Resolution, Bankruptcy and Liquidation]<br />
*[http://www.arthapedia.in/index.php?title=Resolution_of_Financial_Firms Resolution of Financial Firms]<br />
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==Contributed by==<br />
[http://ies.gov.in/myaccount-profile-view.php?memid=144 Dr. Shashank Saksena (IES 1987)]<br />
*Email- [mailto:shashank1962@yahoo.com shashank1962@yahoo.com]<br />
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