3 On Close-Out Netting

Subject(s):

Close-out netting

This chapter describes the various forms that close-out netting may take, including common characteristics and distinctive features of three types of close-out netting. It recounts the widespread use of novel close-out netting provisions that led to uncertainty about their effectiveness under various national systems of law. It also talks about the Model Netting Acts (MNAs) promulgated by the International Swaps and Derivatives Association (ISDA), which is considered prominent among the initiatives directed at netting legislation. The chapter recounts the secular ‘netting-friendly’ trend prior to the global financial crisis that has not yet been reversed in recent years. It points out how internationally accepted resolution principles acknowledge that unconstrained close-out netting increase rather than mitigate systemic risks.