Change in law on netting
Article from the Annual Report 2016 of the BaFin
On 9 June 2016, the Federal Court of Justice (Bundesgerichtshof – BGH) ruled1 that settlement agreements between parties to share option transactions subject to German law are invalid to the extent that they conflict with section 104 of the German Insolvency Code (Insolvenzordnung). In such cases, section 104 of the Insolvency Code applies directly.
Netting
Netting refers to two business partners offsetting their claims against each other in order to reduce counterparty risk. In such circumstances, the institution is required to maintain capital backing only for the net amount due, provided that the contractual arrangements comply with the requirements of Article 295 et seq. of the CRR. Where that is not the case, the institution is required to treat the amounts due as separate transactions. This could result in significantly higher capital requirements – depending on the institution and the portfolio.
In reaction to the BGH's netting judgment, BaFin issued a general administrative act2 based on section 4a of the German Securities Trading Act (Wertpapierhandelsgesetz) on 9 June 2016 (see info box "Netting”). This provided that netting agreements within the meaning of Article 295 of the Capital Requirements Regulation (CRR) should continue to be settled in accordance with the agreement. BaFin's intention was to remove the uncertainty that had arisen in the wake of the judgment relating to the recognition by the supervisory authorities of netting clauses in master agreements. This affected master agreements for financial derivatives transactions in particular. A further objective was to prevent the negative consequences that were threatening to affect the financial markets.
In response, the federal government put forward draft legislation3 in September 2016, under which section 104 of the Insolvency Code was to be amended to allow netting clauses that continue to apply in the event of insolvency to be agreed once again. Such clauses would also comply fully with the requirements for recognition for supervisory purposes, for example pursuant to Article 296(2a) and Article 178 of the CRR. The amending law, which came into force retrospectively in some respects, was promulgated in the Federal Law Gazette on 28 December 2016.4
Footnotes:
- 1 Judgement of 9 June 2016, case ref. IX ZR 314/14.
- 2 General Administrative Act to ensure legal certainty for netting agreements in the scope of German insolvency law (ref. no.: ED WA-Wp 1000-2016/0001) of 9 June 2016.
- 3 Government draft of a Third Act Amending the Insolvency Code, Bundesrat printed paper 548/16 = Bundestag printed paper 18/9983.
- 4 Act Amending the Insolvency Code and Amending the Act Introducing the Code of Civil Procedure dated 22 December 2016, Federal Law Gazette I, page 3147.
