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.”
