On 9 June 2016, the German Civil Supreme Court (Bundesgerichtshof) decided that close-out netting provisions contained in German law-governed framework agreements for financial derivative transactions (Finanztermingeschäfte), which provide for automatic termination and settlement of underlying contracts in the case of insolvency of one counterparty (close-out netting), are invalid because they deviate from the mandatory Section 104 of the German Insolvency Code (Insolvenzordnung - InsO). In the case at hand, the netting clause was contained in a German law-governed future contract dealing with share options.
The court decision prompted, amongst others, the German Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht - BaFin) to issue a general ruling (Allgemeinverfügung) on the subject, stating that for the time being all existing netting clauses are to be executed as set out in the respective agreements. The general ruling remains in force only until 31 December 2016.
With a view to achieving a permanent solution, a draft bill amending the German Insolvency Code was presented in early September 2016, pursuant to which netting clauses contained in framework agreements, or as part of the rules of a central counterparty as defined in Section 1 Paragraph 31 of the German Banking Act (Kreditwesengesetz), would be, again, in compliance with Section 104 of InsO. However, as the process is at an early stage and the draft bill is still subject to review by the German Parliament, it is too early to predict any details of the future legislation and its impact on contractual close-out netting as well as how German courts would react to the new legislation.
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