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Lok sabha passed the Bilateral Netting of Qualified Financial Contracts bill 2020
Lok Sabha on 20 September 2020 passed the Bilateral Netting of Qualified Financial Contracts Bill 2020 to promote competitiveness and ensure financial stability in the Indian financial market.
The bill aims to provide a proper legal framework for bilateral netting of qualified financial contracts which are over the counter derivatives contract. Drafting of the bill was based on the model of netting act of the International Space and Derivative Association.
Netting refers to the determination of net claims or application after setting off or adjusting all the claims or application arising from dealing between the parties to qualified financial Contracts
Qualified financial contracts (QFC): QFC refers to any bilateral contract notified as a QFC by the relevant authority. The Central government have the power to issue notification, which may exclude contracts between certain parties or containing certain terms from being qualified as QFCs.
Close-out netting means termination of all obligations arising out of relevant QFCs. The process may be initiated by parties of the QFC in the following:
- “a default (failure to honour the obligations of a QFC) by the other party,
- (a termination event, as specified in the netting agreement that gives one or both parties the right to terminate transactions under the agreement”
The provisions of Bill shall apply to a qualified financial contract which is entered on a bilateral basis between qualified financial market participants, under netting agreement, where at least one of such participants shall be an entity regulated by an authority specified in the schedule of the bill.
Specified Authorities can be Reserve Bank of India,(RBI), Stock Exchange Board of India (SEBI) etc, Insurance Regulatory and Development Authority of India (IRDAI), Pension Fund Regulatory and Development Authority (PFRDA).
Bill states that the netting of QFCs is enforceable if the contract has a netting agreement. It may also include a collateral arrangement. A qualified financial contract shall not be considered to void or unenforceable because of any law for the time being in force.
If the Central Government is satisfied that it is necessary, it may, by notification, add to or otherwise amend the list of authorizes & the act, shall be deemed to have been amended accordingly.
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