Bilateral Netting of Qualified Financial Contracts

May 2021

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In this edition, we will be seeing about the Bilateral Netting of Qualified Financial Contracts. We will have our usual Legal terms and News Bites related to notifications by MCA, SEBI, RBI, IT and GST following the article.

CEO CS Saranya Deivasigamani,

CEO

Bilateral Netting of QFC

To ensure financial stability and promote competitiveness in Indian financial markets, the Central Government has enacted and Act by providing enforceability of bilateral netting of qualified financial contracts and for matters connected to it. This Act came into effect on 1st October 2020. The SEBI recently specified the following entities as qualified financial market participants, which subject to the provisions as may be specified by the SEBI, may enter into qualified financial contracts notified by any regulatory authority as specified in the First Schedule:

  1. Mutual Fund registered with Securities and Exchange Board of India; and
  2. Alternative Investment Fund registered with Securities and Exchange Board of India.

Applicability

The provisions of this Act shall apply to a qualified financial contract entered into on a bilateral basis between qualified financial market participants, either under a netting agreement or otherwise, where at least one of such participants shall be an entity regulated by an authority specified in the First Schedule.

The relevant authority may, by notification,

(a) designate any bilateral agreement or contract or transaction, or type of contract regulated by it, as qualified financial contract:

(i) entered into between such parties and on such terms as the Central Government may, by notification, specify; or

(ii) entered into on multilateral basis in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 and the Payment and Settlement Systems Act, 2007;

(b) specify any entity regulated by it, as a qualified financial market participant to deal in qualified financial contracts.

Enforceability

Netting of the qualified financial contract shall be enforceable— (a) where such contract is entered into with a netting agreement, in accordance with the terms of the netting agreement. or (b) where such contract is entered into without a netting agreement, in accordance with the provisions of section 6.

A qualified financial contract shall not be void and shall be deemed never to have been void or unenforceable by reason of any law for the time being in force.

Close-out netting of a qualified financial contract shall be enforceable against an insolvent party, and, wherever applicable, against a guarantor or other person providing collateral or security for a party and shall not be affected or stopped or otherwise limited by:—

(i) the appointment of, or any application for the appointment of, an administration practitioner, or

(ii) applicability of any provision of law relating to administration, or

(iii) any other provision of law that may be applicable to an insolvent party.

The amount payable or other claims to be made in accordance with the close-out netting under this Act shall be final, irrevocable and binding upon the parties to a qualified financial contract and upon the administration practitioner, of the party in administration.

Invocation of Close-out Meeting

Close-out netting may be commenced by a notice given by one party to the other party of a qualified financial contract upon the occurrence of an event of default with respect to the other party or a termination event that may, in certain circumstances, occur automatically as specified in the netting agreement.

Close-out netting shall be applicable to all qualified financial market participants who are parties to a qualified financial contract notwithstanding anything to the contrary contained in any law specified in the Second Schedule or any other law pursuant to which any qualified financial market participant has been incorporated, constituted or is regulated.

Limitations of Power of Administration Practitioner

The administration practitioner shall not render or seek to render ineffective,—

(a) any transfer, substitution or exchange of cash, collateral or any other interests under or in connection with a netting agreement between the insolvent party and the non-insolvent party to a qualified financial contract; or

(b) any payment or delivery obligation incurred by the insolvent party and owing to the non-insolvent party under or in connection with a netting agreement on the grounds of it constituting a preference including a fraudulent preference or a transfer for undervalue, including during a suspect period by the insolvent party to the non-insolvent party.

If the Central Government is satisfied that it is necessary or expedient so to do, it may, by notification, add to or otherwise amend the First Schedule or the Second Schedule and thereupon, the First Schedule or the Second Schedule, as the case may be, shall be deemed to have been amended accordingly.

The provisions of this Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.

If any difficulty arises in giving effect to the provisions of this Act, the Central Government may, by order, published in the Official Gazette, make such provisions not inconsistent with the provisions of this Act as may appear to it to be necessary or expedient for removing the difficulty.

Legal Terms

Vadium vivum  

A living pledge, which exists where an estate is granted until a debt is paid out of its proceeds.

NewsBites

MCA Updates

SEBI Updates

RBI Updates

IT Updates

  • No Major Updates.

GST Updates

  • No Major Updates.