Financial transactions plays the vital role in a financial contract. Multi financial transactions are often clumsy that creates blockages in the smooth functioning of transactions in banks or companies in financial sector but netting is an effective alternative solution adopted in proper functioning avoiding blockages in the financial transactions. Netting is an effective mechanism reducing the costs and time by gathering multi transactions in to single transaction and promotes financial stability. The Bilateral Netting of Financial Contract Act 2020 came into force on 28th September 2020 with five chapters 11 sections and two schedules for ensuring financial stability through bilateral netting of qualified financial contracts.
The act is also referred as netting act as it is adapted it’s model as per the ISDA (international swaps and derivatives Association) regulations. Bilateral netting is the most convenient and effective method of financial balancing of charges, claims and mutual obligations between two parties in financial agreement in one net payment instead of several transactions.
Chapter 2 of the act deals with the applicability of the act particularly based on definition of qualified financial market participants in section 2 of the act. Settlement netting were both parties before the completion of the agreement through novation of the contract agreement is also mentioned in the act.
Another important aspect of the act is detailed in section 6 where procedure of close netting is described subject to the nonperformance of clauses or requirements in the bilateral netting agreement. As per the section the party who had failed to full fill the requirements need to be intimated through notice.
Section 7 states the methodology used for valuation of netting to be adhered to the conditions of the netting agreement between the parties where the qualified financial market participants includes banks, insurance, pension fund, companies and partnership firms.
Section 8 empowers an insolvent person’s collateral or money is enforceable and valid as the insolvency professional, liquidator or trustee do not have the authority to nullify the netting agreement under the act.
Section 10 implies that the act has overriding effects on other existing laws in force as it reduces the counter party risk and increases bond market value and become legally enforceable by virtue of the Act apart from other legal proceedings. Consolidation of multiple bonds are also an impact of the act.
One of the major advantage of the act is the netting agreements between countries in an international perspective. The enforceable legal frame work had given bilateral netting agreement a commercial practice and thereby improving the market conditions. Though the enactment focus on reducing multi transactions and risk factor unlike multilateral agreements, major flaws of possibilities of multiplicity of legal proceedings if the netting agreement contains ambiguous terms on the net payment or any other related matters in complying the agreement between the bilateral parties. Ambiguous conditions may lead to third party involvement or arbitrary proceedings if there any breach of agreement occurs between the parties. It also delays the settlement and transaction costs. The act ought to have given ample importance to the validity of cross border or international bilateral agreement between countries.