THE BILATERAL NETTING QUALIFIED FINANCIAL CONTRACTS BILL, 2020

A. Introduction - 

On September 14, 2020, The Bilateral Netting of Qualified Financial Contracts Bill, 2020, was introduced in Lok Sabha. It aims at providing a structured legal framework for or bilateral netting of qualified financial contracts (over-the-counter derivatives contracts).

Bilateral netting refers to the settlement of claims that arise from dealings between two parties to the contract. This Bill permits the enforcement of netting for qualified financial contracts.

The provisions of the Bill shall be applicable to QFCs between two qualified financial market participants, where at least one party is an entity regulated by the specified authorities such as RBI, SEBI, IRDAI, PFRDA, or the IFSCA.

B. Key Highlights

The Key Highlights of this Bill are:
Enforceability of Netting: The Bill states that the netting of Qualified financial contracts shall be enforceable if the contract has a netting clause in it. A collateral clause can also be included here, and it may include a pledge of an asset or any arrangement to transfer any title to a third party or guarantor. 

Close-out netting arrangement: A party can commence this in case of - 

a. A default (failure to honor the obligations of a QFC) by the other party, or
b. A termination event, as specified in the netting agreement, gives one
or both parties the right to terminate transactions under the agreement. 

Where any of the parties to the agreement is under administration, then such party’s consent or the consent of its administration practitioner is not mandatory. Administration refers to proceedings of winding up, insolvency, bankruptcy, moratorium, etc.

The parties to QFC shall be obliged to ensure that all that is owned by one party to another is replaced by one net amount. Such netting will set off the present and future obligations arising out of QFCs to which such an agreement applies. such netting amount can be arrived at: by the netting agreement entered into by the parties, if one exists, or through an agreement between the parties, or through arbitration

It shall be beyond the powers of the administrative practitioner to render any transfer of cash, collateral, or other interests which is made regarding the netting agreement ineffective.

C. Our Word - 

The Bill covers the financial contracts being entered into on a bilateral basis,
which is out of the clearing system. This Bill shall empower financial regulators such as RBI, SEBI, IRDAI, etc. The financial regulators can notify such contracts to fall under their purview as qualified financial contractors. This Bill can act as an anchor to establish financial stability and provide buoyancy to the Indian market. This shall result in the business having access to a greater and affordable resource. 

Author: Shrishti Zaveri