Central Bank of Bahrain launches consultation on draft netting law to replace the 2014 close-out netting regulation

The Central Bank of Bahrain has opened a consultation on a proposed “Netting Law”, based on the International Swaps and Derivatives Association’s Model Netting Act, to establish a statutory framework for netting and related collateral arrangements for “qualified financial contracts” and to supersede the Central Bank’s 2014 regulation on close-out netting under a market contract. The draft law defines a wide perimeter of qualified financial contracts, covering derivatives and financing transactions across asset classes, including swaps and foreign exchange transactions, equity and credit derivatives, repos and securities lending, commodities transactions, clearing and settlement agreements, carbon credit derivatives and digital assets derivatives, as well as Shari’a-compliant equivalents structured via murabaha, musawama or wa’ad. It would treat a netting agreement and all covered contracts as a single agreement, provide that close-out netting is enforceable according to its terms against an insolvent party and related guarantors and collateral providers, and limit the ability of insolvency and bankruptcy rules and officeholders to stay, unwind or otherwise restrict netting and associated collateral enforcement. Specific provisions address suspect-period challenges, permit realization or appropriation of collateral without prior notice or consent unless agreed, and preserve the possibility of a stay of up to 48 hours where the counterparty is a financial institution subject to resolution procedures. The Central Bank invited comments from all licensees, audit firms and law firms, including nil responses, by 12 January (stated in the consultation letter as 12 January 2024).