The UAE has issued by Decree Federal Law No. (10) of 2018 on Netting (the UAE Netting Law), with the aim of strengthening the regulatory framework for the settlement of obligations arising from qualified financial contracts. Parties to a contract previously relied on Article 183 of Federal Law No. (9) of 2016 on Bankruptcy (the Bankruptcy Law) to settle debts agreed to under a contract, provided that it is within the context of insolvency and that such contract does not fall within the claw-back provisions (Article 168 of the Bankruptcy Law).
A long overdue development, the standalone UAE Netting Law provides clarity to parties wishing to enter into netting arrangements, ultimately reducing and potentially eliminating credit and settlement risks.
What is the UAE Netting Law?
The UAE Netting Law is based on the internationally-recognized International Swaps and Derivatives Association (ISDA’s) Model Netting Law and includes clear definitions of a “qualified financial contract” and a “netting agreement”, the latter of which includes derivatives master agreements, collateral agreements and other similar arrangements.
Under the UAE Netting Law, netting agreements and all qualified financial contracts to which such netting agreements apply, are considered final and enforceable and cannot be suspended by any other conflicting contractual or legal provisions in the UAE.
What are its benefits?
The UAE Netting Law introduces some important enhancements including:
- System of novation: This key concept, which is introduced under Articles 9 and 10 of the UAE Netting Law, involves enforcing a netting agreement despite the potential insolvency of a party to such netting agreement. The concept of novation will facilitate the issuance and clearing of several financial products such as Sukuks, securitized assets and other derivatives.
- Bankruptcy remoteness: Under Article 12 of the UAE Netting Law, a financial institution can establish a Special Purpose Vehicle (SPV) to sell assets and issue Sukuks or notes, without incurring the liability of its originator which may be subject to bankruptcy. The SPV is immune from the insolvency or bankruptcy of the originating financial institution, and thus shields the Sukuk-holders or noteholders. This key concept is critical to the function of any active and developed capital market, to allow transactions to flow smoothly and efficiently. To our knowledge, the regulatory authorities in the UAE are working on developing SPV-specific regulations for the purposes of issuing capital markets instruments.
To date, the UAE did not have standalone legislation regulating netting, which put the country at a disadvantage compared to advanced financial centres and portrayed it as having a relatively ‘underdeveloped’ capital markets system. The UAE Netting Law provides much needed clarity for parties to avoid or manage potential credit or settlement risks and for financial institutions to effectively facilitate transactions even under insolvency and bankruptcy scenarios involving the parties to the netting agreement.