What Is A Netting Agreement

Posted on October 14, 2021

Prior to the introduction of the Clearing Act, the use of derivative contracts by financial institutions was common. However, the legal analysis of the Water underlying these agreements included a number of reservations that meant that the UAE could not be classified as a jurisdiction where the applicability of compensation was ensured. There was even a precedent that ruled derivative contracts unenforceable. The Clearing Act is a positive step towards clarifying local and international markets and gives them confidence that the fundamental aspects of clearing and derivative contracts will be recognised in the UAE. It represents another welcome and dynamic step in the UAE`s legal system that is rapidly maturing to promote greater financial activity in the country and strengthen the country`s position as a leading global commercial and financial center. One of the main benefits of compensation is to reduce the risk for a particular party. If an investor owes money for one trading position and needs to receive money for another trading position, clearing allows them to reduce the risk of interaction with two counterparties and help them offset the loss with profits (or vice versa). Clearing is very common in swap markets. Suppose two parties enter into a swap agreement on a particular security, where they owe each other money. At the end of the swap period, the following are due: Eligible financial contracts are considered final and enforceable. In addition, a qualified financial contract is not invalid or unenforceable if these contracts are considered speculative.

In other words, the provisions of the Compensation Act regarding netting agreements may prevail over the concept of Gharar (which is prohibited) in the Civil Code of the United Arab Emirates. Uae Decree Federal Law No. 10 of 2018 regarding the Compensation Act was enacted on September 20, 2018, which regulates clearing for the first time in the UAE on an autonomous basis and places the UAE between the affirmative clearance jurisdictions of sophisticated jurisdictions following the guidelines of the International Swaps and Derivatives Association (ISDA) Model Clearing Act of 2006. Possible conflicts with bankruptcy law and the Civil Code in the United Arab Emirates are addressed in the wording of the Compensation Act. The recognition of clearing is also included in federal decree law No. 14 of 2018 on the Central Bank and the organization of financial institutions and activities (the new Banking Act). The new Banking Act also supports the applicability of set-off, as it clarifies that if set-off has taken place, (a) the obligations imposed will not be taken into account in bankruptcy or liquidation proceedings; and (b) any net obligation that has not been fulfilled is due. Clearing also has the advantage of simplifying transactions involving multiple parties. Instead of processing many invoices or accounts, clearing allows you to convert them into a single invoice or transaction. .

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