Close-Out Netting, Conflict of Laws and Insolvency

Abstract

Close-out netting is a risk mitigation tool used by financial institutions. It is comparable to set-off and in insolvency situations any solvent counter-party that is able to use it obtains a very strong position as compared to other creditors. Therefore, it might conflict with the pari passu principle. Many jurisdictions have solved that conflict and adapted their laws so that close-out netting is enforceable even in the event of insolvency. However, as the financial market is global, the parties, their branches and assets might be located in different jurisdictions. Still, countries failed to agree on a harmonised conflict-of laws rule, despite the obvious need, when they decided not to include a conflict-of-laws principle in the 2013 Unidroit Principles on the Operation of Close-out Netting Provisions. The relevant EU law, though patchy, already addresses this concern. This Article identifies the underlying conceptual difficulties and proposes a solution for an improved framework for both the EU and other financial marketplaces.