Cross-Border Bank Resolution and Close-Out Netting

Abstract

The wide use of netting agreements is regarded as highly beneficial, both by financial market participants and by regulatory authorities. One might even say that some of the fundamental mechanisms used to govern modern markets (risk management, establishment of capital requirements) are intimately linked with the functionality of netting. From the regulators’ perspective, netting agreements are top of the list of risk mitigation mechanisms, along with collateralisation, segregation of client assets and standardisation and regulation of derivatives over-the-counter transactions. However, netting can only do its job as long as there is perfect ex ante certainty that netting agreements are enforceable in each of the relevant jurisdictions, in particular in the event of insolvency of one of the parties. This assessment has always been challenging, since netting laws in the various jurisdictions are local in scope and differ widely, whereas the market itself is highly international and homogeneous. However, with anti-crisis measures now being designed and implemented, the more ‘traditional’ difficulties surrounding the cross-jurisdictional enforceability of netting get a new spin: by virtue of the new bank resolution tools, regulators can interfere with the contractual and insolvency law setting, thereby altering the legal analysis as to enforceability. To the extent that safeguards for netting apply, it is highly uncertain whether these are capable of guaranteeing the required level of ex-ante legal certainty in respect of netting agreements, in particular where cross-jurisdictional elements are involved.