ISDA: draft legislation in China solves old problem with close-out netting rules

On April 29, the Standing Committee of the National People’s Congress of China published a draft Futures Law for public consultation. Among its provisions, the draft bill appears to explicitly recognize netting enforceability in over-the-counter (OTC) derivatives, which would enable counterparties to close out transactions and calculate a net amount payable in the event of a default. It also expressly states that close-out netting cannot be invalidated or revoked because a party has entered bankruptcy proceedings.

It would be impossible to overstate the significance of this legislation for China’s derivatives market. Netting is the single most important credit risk mitigant, allowing counterparties to reduce their obligations into a single net payment due from one party to another – minimizing market disruption in the event of a default. Managing credit risk on a net rather than a gross basis also increases liquidity and credit capacity.

The full ISDA article is available at https://www.isda.org/2021/05/04/a-netting-milestone-in-china/

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