Central Bank of Bahrain redefines netting agreement enforcement

Central Bank of Bahrain
Central Bank of Bahrain
The Central Bank of Bahrain (CBB) has a revised regulation on the enforceability of netting agreements on the books and has issued what it hopes will be an illuminating document able to serve multiple parties effectively.

The bank issued Regulation No. 44 of 2014 regarding closeout netting under market contracts with the overall goals of reinforcing and clarifying the legal foundation for enforcing netting agreements in the kingdom regardless of whether the parties are insolvent or bankrupt.

The regulation’s outstanding characteristic, said the bank, is its solution to create a netting agreement distinct from that introduced under the old Bahrain Civil Code of 2001, which lacked a unified system capable of encompassing the entire liquidation process from termination to closeout and currency conversion.

With the change it is hoped that inconsistencies in parties’ understanding of insolvency law provisions will be resolved. The new regulation provides for a clearer definition of “market contract,” identifies financial transaction terms and relies on language modeled by the ISDA Model Act. 

As in any contractual document, misinterpretation or circumstances exceeding the provision’s scope is always possible; but the overall goal to achieve effective netting is considered a vital step forward in the financial sector. 

Corporate law firm Al Ruwayeh & Partners (ASAR), attorneys and legal consultants operating in both Bahrain and Kuwait expressed confidence in the update but said much work still needs to be done and challenges remain regarding collateral provision bylaws. 

“It is hoped that the CBB will make use of the powers delegated under … the CBB Law in order to overcome many of the problems likely to be faced by a party seeking to post its Bahrain issued securities as collateral,” ASAR said. “(Financial) institutions must now reconsider their jurisdictional analysis on Bahrain in relation to the effectiveness of closeout netting and to adjust the attribution of their exposures vis-a-vis Bahraini counterparties for capital adequacy purposes.”

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Al Ruwayeh & Partners Central Bank of Bahrain

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