- Bilateral netting refers to offsetting the claims arising from dealings between two parties to determine the net amount payable or receivable from one party to the other.
- Bilateral Netting of Qualified Financial Contracts Bill, 2020, allows for enforcement of netting for qualified financial contracts.
- Under existing laws, banks have to make higher provisions for such bilateral contracts which are outside the Clearing Corporation of India’s framework since calculations are done on a gross basis rather than a net basis.
- This bilateral netting legislation will help in evaluating risks far more in real-time basis and actual risk assessment will happen rather than a notional risk assessment based on the gross figures.
- Under the bill, a qualified financial contract (QFC) is a bilateral contract notified as a QFC by a relevant authority such as
- the Reserve Bank of India,
- Securities and Exchange Board of India,
- Insurance Regulatory and Development Authority of India,
- Pension Fund Regulatory and
- Development Authority or International Financial Services Centres Authority.
- These authorities may designate entities, such as non-banking financial companies or insurance or pension firms functioning under its jurisdiction, as qualified financial market participants to deal in QFCs.
- The bill provides the enforcement of netting of QFCs if the contract has a netting agreement.
- Such an arrangement may involve collateral in the form of securities, pledge of assets or the transfer of the title of collateral to a third-party guarantor.
- The bill was based on the model netting act of the International Swaps and Derivatives Association.
- Some of the key propositions of the bill include provisions for close-out netting and limitations on administration practitioners.
- Close-out netting refers to the termination of obligations under the QFC in the event of a default.
- This requires the parties to a QFC to ensure that obligations owed are replaced by a single net amount which can be enforced during close-out netting.
- If the insolvent party of a close-out netting agreement is placed under control of an administration practitioner (AP), the bill limits the AP from rendering ineffective the transfer of cash or collateral despite the imposition of a moratorium by any court under any law.
