UAE President His Highness Sheikh Khalifa bin Zayed Al Nahyan has issued the Federal Law on ‘Netting’, its provisions shall apply to all qualified financial contracts and netting agreements specified under this law which are entered into by any person in the state.
The law seeks to strengthen the legislative framework for the settlement of qualified financial contracts through set-off, offset, or net out obligations.
Netting is a general concept that has specific uses, specifically in the financial markets. In its literal sense it entails offsetting the value of multiple positions or payments due to be exchanged between two or more parties. It is designed to lower the number of transactions required. For example, if Bank A owes Bank B $100,000, and Bank B owes Bank A $25,000, the value after netting would be a $75,000 transfer from Bank A to Bank B ($100,000 – $25,000).
Exemption of Financial Free Zones
It is important to note that the said law does not apply to financial free zones and financial institutions licensed to the extent where similar legislation exists governing comparable cases mentioned under in this law.
Netting shall include cases of termination, liquidation and/or acceleration of any payment, obligation to deliver entitlement or obligation to make, receive or require payments or deliveries, under a Qualified Financial Contract entered into under a Netting Agreement or to which a Netting Agreement applies.
Enforceability of Netting during Insolvency and Bankruptcy Proceedings
The law also provides that during Insolvency and Bankruptcy Proceedings relating to a party to a Netting Agreement, the obligations of any party to make payments or deliveries, which pursuant to that agreement are converted into net claims or obligations or otherwise netted shall take effect, in accordance with the terms of the applicable Netting Agreement. The same applies to Qualified Financial Contracts and to financial contracts and transactions to which a Netting Agreement applies.
The provisions of a Netting Agreement, which provides for the determination of a net balance of the close-out values, shall also be enforced in respect of an Insolvent and any other party in accordance with its terms. The same shall apply in respect of market values, liquidation values and replacement values calculated in respect of accelerated and/or terminated payment or delivery obligations or entitlements under one or more Qualified Financial Contract entered into under or in connection with a Netting Agreement.
The provisions of a Netting Agreement shall not be suspended, resolved, made conditional or not performed in any manner based on the provisions of the Insolvency and Bankruptcy laws in force, which limit the exercise of rights to set-off, offset or net out obligations, entitlements, payment amounts, or termination values owed between an Insolvent and another party.
Scope of Powers of the Liquidator
In accordance with the provisions of this law, the Liquidator shall not annul, stop or refuse the performance of any of the following operations, on the grounds of it constituting a preference due to a non-Insolvent: (a) any payment, transfer, delivery, substitution or exchange of cash, collateral or any other interests, property, asset, or financial instruments, both conventional and Shari’ah-compliant, under or in connection with a Netting Agreement made from the Insolvent party to the non- Insolvent party; (b) any obligations incurred under or in connection with a Netting Agreement by the Insolvent and owing to the non-Insolvent to make any payment, transfer, delivery, substitution or exchange of cash, collateral or any other interest or property; or (c) any transaction entered into by the Insolvent in accordance with the terms of any Netting Agreement in order to give effect to the netting provisions of this agreement.
The law also refers that the liability of a Foreign Party’s Branch/Agency, in case of insolvency, or the liability of its Liquidator in the State under a Multi-Branch Netting Agreement shall be calculated as of the date of the termination of the Qualified Financial Contracts entered into under a Multi-Branch Netting Agreement in accordance with the terms of this agreement. The non-Insolvent’s right to receive payments shall be limited to the lesser of either “the Foreign Party Net Payment Obligation” or “the Foreign Party’s Branch/Agency Net Payment Obligation”.
Also, the liability of the liquidator of an Insolvent branch or agency of a Foreign Party to the non-Insolvent under a Multi-Branch Netting Agreement shall be reduced by the fair market value of, or the amount of any proceeds of, collateral that secures or supports the obligations of the Foreign Party under the Multi-Branch Netting Agreement and has been applied to satisfy the obligations of the Foreign Party pursuant to the Multi-Branch Netting Agreement to the non- Insolvent.
Seemingly, the most significant feature of this law is that the all Qualified Financial Contracts referred to in Article 5 of this law shall be final and enforceable and shall not be considered void, unenforceable, or not final for any reason related to aleatory contracts (Gharar) provisions referred to in the Civil Transactions law.
Further, in accordance with Article 7 of this law, the Ministry of Finance will issue a decision a resolution to form a committee named the ‘Committee for Designation of Qualified Financial Contracts’, chaired by a representative of the Ministry and includes in its membership two representatives of each of the Regulatory Authority in the State (the Central Bank, Securities & Commodities Authority, and the Insurance Authority). The Committee shall designate Qualified Financial Contracts that are not referred to in this law, in addition to its jurisdiction to remove, add, or replace any financial agreement, contract or transaction from the list of Qualified Financial Contracts referred to in this law.