Close-out netting in the European Union: contract practice and unification of legal regulation

Abstract

The article focuses on the general characteristics of the European Union legal framework pertaining to close-out netting; it offers analysis of standard documentation provisions used within European Union for netting. Close-out netting is the process of termination of financial transactions by the parties in case of violation of obligations under master agreements, often with participation of banks and other financial institutions. Currently, EU legislation on netting consists of two major parts (regulatory regimes): the prudential regime and the insolvency regime. The former addresses banks and financial institutions regulating requirements for financial ratios and capital adequacy of these organizations. The insolvency framework is the most complex of the said legal regimes as it is comprised of various directives and regulations affecting performance of netting in the course of bankruptcy procedures. In recent years, the insolvency regime has undergone immense change marking the transition from unconditional legislative support of netting without any exemptions to a more balanced approach aimed at limiting close-out netting possibilities with respect to systematically important financial organizations.