Federal law 7-FZ "On clearing and clearing activity"
dated 7 February 2011 and Federal law 8-FZ "On implementation
of amendments to certain Russian laws in compliance with the
Federal law "On clearing and clearing activity" dated 7
February 2011 ("the new clearing legislation") have been
adopted by the State Duma, approved by the Federal Council, signed
by the President and officially published. They will enter into
force on 1 January 2012.
The new clearing legislation stipulates the legal basis for
clearing activities (non-cash transactions based on the mutual
settlement of debts, including netting of obligations), including
risk management procedures, requirements for legal entities
performing clearing activities and the functions of the central
counterparty (the clearing entities), as well as the legal
framework for state regulation and supervision of clearing
The main purpose of the new laws is to introduce an efficient
clearing system for exchange and OTC (off-exchange) markets, which
was envisaged in the "Strategy for the Development of Russian
Federation's Financial Markets until 2020" adopted by the
Russian Government in 2008, in order to enhance competitiveness of
the Russian financial market.
Some key requirements for clearing entities are as follows:
Clearing activity is subject to licensing and supervision by
the Federal Service for Financial Markets (the FSFM). Clearing
entities may not engage in certain specified activities, including
production, trading, insurance, or maintenance of securities
registers. If a clearing entity combines clearing activity with
other permitted services it must conduct a conflict of interest
check to avoid potential violation of the rights of clearing
The new law sets out the constraints placed on employees,
governing bodies, the founders of clearing entities and clearing
participants in order to minimise systemic risk. In particular,
clearing entities are required to establish and to maintain
adequate internal accounting and control procedures.
Clearing entities have a minimum capital requirement of 100
Clearing may take place either with the involvement of a
central counterparty ("the CCP") or without. In the
latter case the contract remains in force between the original
counterparties. Otherwise, the original contract is replaced by two
contracts with the CCP.
Clearing entities are obliged to set up a risk management
system which has to be stress-tested on a regular basis. The
information on the results of stress-tests is to be sent to the
Central Bank of Russia and to the FSFM.
One of the most significant changes introduced by the new laws
is the provision of a close-out netting procedure. This is a
process by which, following an event of default (generally
insolvency) on the part of a participant in the system, open
transactions between the parties are terminated, then each
terminating transaction is valued, and all the termination values,
together with any unpaid amounts, are reduced to a single net
amount owed by one party to the others.
In Russia, the concept of close-out netting was introduced
primarily through amendments by the new clearing legislation to the
Federal Law 39-FZ "On Securities Market" dated 22 April
1996 and the Federal law 127-FZ "On Insolvency
(Bankruptcy)" dated 26 October 2002.
According to the amended Federal Law "On securities
market", parties entering into several repo transactions,
derivatives or other transactions with securities or foreign
currency may do so on the basis of a master agreement, which may
incorporate certain model terms by reference. Any such model terms
must include rules for termination of all transactions in case of
bankruptcy of a party to the master agreement and calculation of
the net balance.
According to the amended Federal Law "On Insolvency
(Bankruptcy)" liabilities of parties in compliance with
transactions governed by a master agreement can be terminated by
virtue of the procedure stipulated by this master agreement, giving
rise to a net monetary obligation payable by one party to the
other. In order to be included in the netting calculation, Only
transactions contracted prior to the commencement of
administration, the decision of the arbitration court to initiate
any bankruptcy procedure or if applicable, revocation of a banking
licence (whichever occurs first) may be taken into account in the
The new clearing legislation, and particularly the provisions
concerning close-out netting, have been welcomed as a very positive
development for the Russian financial system. However, the new
legislation merely sets out the legal framework and is subject to
further interpretation by the courts and the supervisory
authorities once it becomes effective.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Under Regulation (EU) No. 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories ("EMIR")...
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