In September 2018, the UAE government promulgated first ever Netting law by virtue of Federal Law Number 10 of 2018. The Law is applicable to all the financial contracts entered into by parties within the country or any netting agreement. Having said that, netting is a standard procedure utilized in banking or financial transactions for repayment or payment of contending interests between the counterparties. This happens through a concurred procedure of termination and assessment of such rights or interests and solidification to one single (or ‘net’) instalment starting from one party to another limiting the overall credit risk.

The Netting Law adheres with the guideline issued by the International Swaps and Derivative Association Modelling Netting Act of 2006. Prior to enactment of this law, Civil Code and Bankruptcy law were referred to while resolving the concerned conflict; however, failure to resolve certain critical conflicts, the Netting Law was introduced. Best Lawyers have critically scrutinized the provisions of the Netting law and have laid down certain significant clauses of the Law for our readers understanding.

In accordance with the Law, the basic idea behind netting entails the following:

• Cancellation, liquidation and addition of any instalment, liability to pay, authority or obligation to pay or receive payments under the financial contract or to which the provisions of netting agreement apply;
• The figuring of the net parity in regard to such termination, liquidations well as commitments or privileges; and
• The conversion of such value into one currency.

Applicability of the Law

As aforementioned, the law is applicable to two specific contracts as follows:

1. Netting Agreement: any agreement signed by two or more parties which allow netting in relation with qualified financial contracts in connection with principal netting agreement.
2. Qualified Financial Contracts: such contracts includes a non-exhaustive list of contracts such as follows:

• All kinds of contracts for swapping currency, interest rate, and commodities;
• Securities and commodities contract or currency exchange contracts;
• Forward rate agreements;
• The contract for securities;
• Agreement to settle securities
• Collateral agreement;
• Property index derivative;
• Floor, cap or collar transactions.

Implementation

Pursuant to the Netting Law, all Qualified Financial Contracts shall be considered final and binding, even if the contract is speculative in nature. On the contrary, the provisions of the Law shall countermand the theory of Gharar which is restricted under the Civil Law of UAE.

In addition to the foregoing, the Law additionally gives that amid insolvency proceedings of a party involved in a netting agreement, the commitments of that party to make instalments or conveyances, will be converted into net claims, otherwise netted will come into effect. The equivalent applies to Qualified Financial Contracts and transaction to which the Netting Agreement applies. The arrangements of a Netting Agreement won’t be suspended, settled, made contingent or not performed in any way dependent on the arrangements of the Insolvency and liquidation laws in power, which limit the activity of rights to set-off, balance or net out commitments, privileges, instalment sums, or end esteems owed between the insolvent party or another party.

Preceding the enforcement of the Netting Law, financial institutions utilized the derivative contracts to fulfil their requirements. Whereas bearing in mind the legal structure of UAE, such agreements include transactions which are generally not acceptable under UAE law. The Netting Law is a positive advancement in clearing up and offering assurances to national and international markets that the central parts of netting and subordinate contracts will be perceived in the UAE. It speaks for another welcome and dynamic step in the UAE’s fastest-growing lawful framework to encourage more prominent financial movement in the nation and fortify the nation’s situation as a commercial hub.