site.btaAmendments on Close-out Netting Mechanism Approved at First Reading by Parliamentary Committee

The National Assembly Budget and Finance Committee on Thursday approved at first reading a Government-proposed Bill to Amend and Supplement the Financial Collateral Arrangements Act introducing a common framework for the close-out netting mechanism.

Similar to financial collateral, close-out netting is a credit risk management  mechanism and an essential tool for reducing credit risks associated with OTC derivatives. The scope of close-out netting is limited in respect of the contractual parties entitled to make certain types of arrangements and in respect of the subject of the arrangement, representatives of the movers explained.  

They added that the proposed legal framework seeks to establish a close-out netting protection regime consistent with the good practices of international financial markets and eliminates a competitive disadvantage of Bulgarian legislation compared to the legislation of the other EU Member States and the member countries of the Organisation for Economic Co-operation and Development (OECD).

The EU lacks a harmonized approach to the common legal framework for close-out netting as a means of terminating and/or redeeming obligations arising from transactions in certain financial instruments between actors on financial markets. The absence of harmonization gives each Member State discretion about whether and how to regulate this mechanism in its national legislation so as to ensure the viability of the arrangements providing for close-out netting in the event any of the parties becomes insolvent. 

Bulgaria is the only EU Member State which does not yet have a common framework for close-out netting in substantive law, the reasons to the bill say.

It also addresses inaccuracies and issues in the conclusion of financial collateral arrangements which have been detected in the course of applying the statutory instrument and synchronizes the close-out netting regime with the financial collateral regime, the movers explained.

The Financial Provisions of the bill propose amendments to the Bank Bankruptcy Act and to the Commerce Act protecting the operation of close-out netting and stabilizing its effects by limiting the powers of the trustee in bankruptcy, the reasons further point out.