Netting Law in the DIFC

 

 

 

 

The Dubai International Financial Centre (DIFC) recently undertook a significant development with the enactment of DIFC Law No. 2/2014 (the ‘Netting Law’). The main aim of the legislation is to create legal certainty regarding the enforceability of close-out netting agreements in the case of a party’s insolvency. The law is based on the International Swaps and Derivatives Association’s (ISDA) Model Netting Act 2006, amended to include Shari’a compliant transactions.

 

 

Close-out netting

 

Close-out netting and set-off (‘close-out netting’) are effective tools that reduce exposure to risk. Upon the default or insolvency of one party to a qualified financial instrument, the non-defaulting party may terminate all transactions. Subsequently, any unperformed obligations on either side are then valued and netted against each other to determine a single net value owed by one party to the other.

 

 

How the law operates

 

The Netting Law gives legislative underpinning to close-out netting provisions in Qualified Financial Instruments (as defined in the Netting Law, which are broad range of instruments, including certain Shari’a compliant contracts), where either the agreement is governed by DIFC law or where one of the parties is registered in the DIFC.

 

The close-out netting process involves a series of steps, which the various provisions of the Netting Law seek to validate, thus ensuring that netting can occur both pre-insolvency to post-insolvency.

 

The first step in the close-out netting process, in which the non-defaulting party calls for the termination of the contract, cannot be prevented by a liquidator’s power to assume or repudiate the contract. That power will apply only after effect has been given to the terms of the netting agreement (Article 10).

 

Following termination of the contract, the value of unperformed obligations of both parties to the contract is determined. These values are then aggregated and netted against each other to determine a single close-out amount owed by one party to the other. The Netting Law gives specific effect to provisions for the determination of close-out values, as well as for payments or transfers made pursuant to netting agreements.

 

The law also specifically addresses the issue of preferential payments in anticipation of insolvency. Payments or transfers made during the suspect period (the period immediately preceding a company’s insolvency) cannot be set-aside by a liquidator unless specifically proven to have been fraudulently made or made with intention to deprive other creditors (Article 12).

 

Gambling prohibition in the UAE

 

The Netting Law also seeks to address any potential conflicts with gambling and wagering prohibitions under the UAE Penal Code, which might otherwise operate to invalidate such transactions.

 

Gambling is strictly prohibited in the UAE under principles of Shari’a law. As the principle of stare decisis does not exist in the UAE, it always remains uncertain whether a court will void a financial instrument by reason of it having gambling-like characteristics, even if such instrument has been held legally valid in past judgments.

 

The Netting Law explicitly states that qualified financial instruments shall not be deemed void by reason of having the characteristics of a wager, lottery, gambling or gaming contract (Article 7). Although DIFC law cannot override the UAE Penal Code, the inclusion of Article 7 gives market participates reasonable comfort regarding the validity of such contracts.

 

 

Regional implications

 

The Netting Law is an important step forward in the development of the DIFC into a full-service financial center.

 

The DIFC joins forty-five other jurisdictions worldwide that have enacted specific netting legislation, while in a number of other jurisdictions netting exists as a general principle of law. Overall, netting analysis conducted by ISDA has been positive for approximately sixty jurisdictions worldwide.

 

The DIFC was the first jurisdiction in the GCC to enact specific netting legislation, and was closely followed by Bahrain with the passing of Central Bank of Bahrain (CBB) Resolution No. (44) of 2014.

 

These are very positive developments for the region. Prior to the enactment of these laws, regional lenders and their clients faced a higher price of doing business as a result of the higher risk that was assumed in exposure to third parties. Regional banks have previously conduct netting transactions through off shore jurisdictions, but were at a disadvantage to those banks headquartered in jurisdictions with had adequate netting laws.

 

The Netting Law has now made the DIFC a more attractive place to do business and has set a regional standard that other jurisdictions in the Middle East will hopefully seek to emulate.

 

 

 

 

 

 

 

Please put the below in a smaller and different font

Sources:

 

 

http://www.difc.ae/news/difc-posts-consultation-papers-public-comment-difc-netting-law

 

http://www.difc.ae/sites/default/files/Proposed-DIFC-Netting-Law-Consultation-Paper-No.2_July-2014.pdf

 

http://www.difc.com/sites/default/files/Annexure_A.pdf

 

http://www.cliffordchance.com/briefings/2014/12/enactment_of_nettinglawfortheduba.html

 

http://www.thenational.ae/business/industry-insights/economics/uae-bankruptcy-law-needed-to-develop-financial-markets

 

 

About Clint Dempsey

 

Clint Dempsey is a Principal Associate in the Banking and Finance team in the Dubai office at Eversheds. He deals with all aspects of banking and finance. He acts for a range of lenders, as well as advising borrowers on their loan and security documentation.

In 2011, Clint completed a nine-month secondment with Barclays Bank plc in London, working in the Lending and Security team and the Debt Finance team.

Related



Your email address will not be published. Required fields are marked *






SUBSCRIBE TO OUR NEWSLETTER