An introduction to the netting regime in Bahrain
Banking & Finance / Bahrain
Netting is recognised under the laws of Bahrain. In this article, we will provide an introduction to the netting regime in Bahrain.
Law Update: Issue 362 - Sports and Event Management
Natalia KumarSenior Counsel,Banking & Finance
Law No. 64 of 2006 promulgating the Central Bank of Bahrain (“CBB”) and Financial Institutions Law, as amended (“CBB Law”) recognises close out netting and Article 1 of the CBB Law defines a “Market Contract” “as a contract concluded in accordance with the regulations of the CBB and Article 108(b) of this law.”
Resolution No. 44 of 2014 with respect to promulgating a regulation for close-out netting under a Market Contract (“Netting Regulations”) in turn defines a “Market Contract” as “For the purposes of this Regulation only, the expression “Market Contract” as used in Article 1 and Article 108 of the Law shall be reference to “Qualified Financial Contract” as used in this Regulation.”
A "Qualified Financial Contract” is defined as "any financial agreement, contract or transaction, including any terms and conditions incorporated by reference in any such financial agreement, contract or transaction, pursuant to which payment or delivery obligations are due to be performed at a certain time or within a certain period of time and whether or not subject to any condition or contingency. Qualified Financial Contracts include (without limitation): (1) a currency, cross-currency or interest rate swap; (2) a basis swap; (3) a spot, future, forward or other foreign exchange transaction; (4) a cap, collar or floor transaction; (5) a commodity swap; (6) a forward rate agreement; (7) a currency or interest rate future; (8) a currency or interest rate option; (9) an equity derivative, such as an equity or equity index swap, equity forward, equity option or equity index option; (10) a derivative relating to bonds or other debt securities or to a bond or debt security index, such as a total return swap, index swap, forward, option or index option; (11) a credit derivative, such as a credit default swap, credit default basket swap, total return swap or credit default option; (12) an energy derivative, such as an electricity derivative, oil derivative, coal derivative or gas derivative; (13) a weather derivative, such as a weather swap or weather option; (14) a bandwidth derivative; (15) a freight derivative; (16) an emissions derivative, such as an emissions allowance or emissions reduction transaction; (17) an economic statistics derivative, such as an inflation derivative; (18) a property index derivative; (19) a spot, future, forward or other securities or commodities transaction; (20) a securities contract, including a margin loan and an agreement to buy, sell, borrow or lend securities, such as a securities repurchase or reverse repurchase agreement, a securities lending agreement or a securities buy/sell-back agreement, including any such contract or agreement relating to mortgage loans, interests in mortgage loans or mortgage-related securities; (21) a commodities contract, including an agreement to buy, sell, borrow or lend commodities, such as a commodities repurchase or reverse repurchase agreement, a commodities lending agreement or a commodities buy/sell-back agreement; (22) a credit or collateral arrangement; (23) an agreement to dear or settle securities transactions or to act as a depository for securities; (24) any other agreement, contract or transaction similar to any agreement, contract or transaction referred to in paragraphs (1) to (23) of this definition with respect to one or more reference items or indices relating to (without limitation) interest rates, currencies, commodities, energy products, electricity, equities, weather, bonds and other debt instruments, precious metals, quantitative measures associated with an occurrence, extent of an occurrence, or contingency associated with a financial, commercial or economic consequence, or economic or financial indices or measures of economic or financial risk or value; (25) any swap, forward, option, contract for differences or other derivative in respect of, or combination of, one or more agreements or contracts referred to in paragraphs (1) to (24) of this definition; and (26) any agreement, contract or transaction designated as such by the CBB under this Regulation.”
Netting is defined in the Netting Regulations as the occurrence of any or all of the following: (1) the termination, liquidation and/or acceleration of any payment or delivery obligations or entitlements under one or more Qualified Financial Contracts entered into under a netting agreement; (2) the calculation or estimation of a close-out value, market value, liquidation value or replacement value in respect of each obligation or entitlement or group of obligations or entitlements terminated, liquidated and/or accelerated under paragraph (1) of this definition; (3) the conversion of any values calculated or estimated under paragraph (2) of this definition into a single currency; or (4) the determination of the net balance of the values calculated under paragraph (2) of this paragraph, as converted under paragraph (3) of this paragraph, whether by operation of set-off or otherwise.
A netting agreement is defined in the Netting Regulations as (1) any agreement between two parties that provides for netting of present or future payment or delivery obligations or entitlements arising under or in connection with one or more Qualified Financial Contracts entered into under the agreement by the parties to the agreement, (2) any Master Agreement between two parties that provides for netting of the amounts due under two or more master netting agreements; and (3) any collateral arrangement related to or forming part of one or more of the foregoing.
Pursuant to the CBB Law and the Netting Regulations, Qualified Financial Contracts should be enforceable in accordance with its terms. The provision of the CBB Law and the Netting Regulations will not be affected by any applicable law limiting or prohibiting the exercise of the rights of set-off, offset or netting of obligations or payments of any netted value between an insolvent and a non-insolvent party – thus overriding the position in Law No. 22 of 2018, as amended, promulgating the Restructuring and Insolvency Law as well as the insolvency provisions contained in the CBB Law.
Except in cases when the non-insolvent party acted with the intention to hinder, defraud or delay any party to which the insolvent party is indebted, the Liquidator cannot annul, stop or refuse: (a) any payment, transfer, delivery, substitution or exchange of cash, collateral or any other interests, property, asset, or financial instruments under or in connection with a netting agreement made from the insolvent party to the non-insolvent party; (b) any obligations incurred under or in connection with a netting agreement by the insolvent and owing to the non-insolvent to make any payment, transfer, delivery, substitution or exchange of cash, collateral or any other interest or property; or (c) any transaction entered into by the insolvent party in accordance with the terms of any netting agreement to give effect to the netting provisions of the agreement.
The CBB Law and Netting Regulations should provide confidence to market participants in relation to Bahrain being a netting friendly jurisdiction.
For further information,please contact Natalia Kumar.
Published in October 2023
