In December 2016, the German legislature amended the German
Insolvency Code (the "Insolvency Code") to clarify the
status of netting arrangements in financial transactions. Doubts
about that status were raised by a June 9, 2016, ruling by the
German Federal Court of Justice (Docket No. IX ZR 314/14)
invalidating netting provisions used throughout the financial
industry (patterned, for example, on the German Master Agreement
for Financial Derivatives Transactions and the International Swaps
and Derivatives Association Master Agreement) if they deviate from
the requirements set forth in section 104 of the Insolvency Code,
which are mandatory pursuant to section 119 of the Insolvency Code.
Specifically, the court invalidated the contractual calculation
method for claims of nonperformance in the case of insolvency by
either party. The decision left open whether a contractually
agreed-upon early termination right violates section 104.
The amendments were published in the Federal Gazette on December
28, 2016. Among other things, the amendments:
Clarify and clearly differentiate between the statutory
resolution rules for financial contracts and the scope of
permissible contractual departures from the statutory rules;
Leave largely intact the existing statutory model for resolving
and settling financial contracts in case of insolvency; and
Update the list of covered financial transactions to reflect
the current status of financial services supervision.
The core of the reform is revised paragraph 4 of section 104.
This provides that counterparties may contractually agree on
netting provisions which deviate from the statutory provisions
governing termination and settlement of regulated contracts as long
as the deviations are compatible with the essential principles of
section 104, thereby in principle upholding existing standard
industry netting arrangements. On the day the June 9 court ruling
was rendered, the German Federal Financial Supervisory Authority
(Bundesanstalt für Finanzdienstleistungsaufsicht, or the
"BaFin") issued a general decree to the effect that
closeout netting arrangements of the type which were dealt with in
the court ruling would be consummated as agreed upon among the
parties concerned. This administrative decree was effective only
until December 31, 2016. The statutory amendments to section 104 of
the Insolvency Code apply from December 29, 2016, onwards. Thus,
due to the rapid response by the BaFin and the German legislature,
the impact of the Federal Court of Justice's decision is
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