The International Swaps and Derivatives Association (ISDA) creates industry standards for derivatives and provides legal definitions of terms used in contracts. This update details the enforceability of netting and collateral opinions provisions under ISDA and other standard form agreements (including prime brokerage agreements) against counterparties incorporated or registered in Jersey, including the extent to which local laws recognise the enforceability of such provisions in pre-insolvency and post-insolvency circumstances. The relevant parts of the legislation are summarised below.

On April 5 2005 the States of Jersey passed the Bankruptcy (Netting, Contractual Subordination and Non-Petition Provisions) (Jersey) Law 2005, which came into force on August 12 2005. The law ensures certainty for parties entering into agreements involving netting and set-off provisions.

Under Article 2 of the law, notwithstanding any enactment of rule of law to the contrary, any close-out netting provision or set-off provision in any agreement is enforceable in accordance with its terms. This is the case regardless of the bankruptcy of a party to the agreement or of any other person, or the lack of any mutuality of obligation between a party to the agreement and any other person.

The law provides that such provisions are enforceable against:

  • any party to the agreement;
  • any guarantor or person providing security for a party to the agreement; and
  • any creditor of a party to the agreement.

For the purpose of the law, the definition of 'agreement' is widely drafted to include:

  • any agreement between two or more parties;
  • a series of inter-related agreements between two or more parties (whether pursuant to a master netting agreement or otherwise); and
  • an agreement made between parties whether acting through multiple branches or otherwise, and whether operated through a clearing house system or otherwise.

The law defines 'netting' as the conversion into one net claim or one net obligation of all claims and obligations arising under the agreement, to the effect that only a net claim can be demanded or a net obligation is owed.

A 'close-out netting provision' is defined as that part of an agreement which relates to:

  • there ceasing to be any time allowed for the performance of an obligation as specified in the agreement following the occurrence of an event specified in the agreement, including its automatic termination (eg, as provided in the ISDA Master Agreement);
  • an obligation in an agreement to pay a specified amount, but not immediately becoming an obligation to pay an amount determined under the agreement; or
  • any combination of the above, whether through the operation of netting or otherwise.

A 'set-off provision' is defined as that part of any agreement, other than a close-out netting provision, which relates to the netting of amounts due by one party to the agreement to any other party to it.

For further information on this topic please contact Matthew Swan or Chris Byrne at Ogier by telephone (+44 1534 504 000), fax (+44 1534 504 444) or email ([email protected] or [email protected]).