Clearing and Netting Legislation
In December 2008, the Russian Government adopted a policy paper called “Strategy for the Development of Russian Federation’s Financial Markets until 2020”. One of the topics discussed in this paper was the development of the derivatives market in Russia and introduction of netting concept into Russian law. In light of such new strategy, Russian Government introduced in November 2009 two bills to the State Duma, the lower chamber of the Russian Parliament — a draft of “Clearing and clearing activity law” (the Clearing Law) and “Law implementing corresponding amendments to certain existing Russian laws” (the Implementing Law, and together with the Clearing Law, the New Laws).1
On 28 January 2011, the New Laws were adopted by the State Duma. These draft bills are now subject to approval by the Federal Council, the upper chamber of the Russian Parliament, following which they will need to be signed by the President and officially published.2
The concept of “netting” for OTC transactions is being introduced primarily through amendments to the Securities Market Law3 and the Bankruptcy Law4 described below, in the context of a broader reform introducing central clearing in Russia.
Securities Market Law
Pursuant to the Securities Market Law, as amended by the Implementing Law, parties who wish to enter into multiple repo transactions, derivative instruments5 or other transactions dealing with securities or foreign currency, may do so on the basis of a master agreement, which may incorporate by reference certain model terms. Model terms can be adopted by a self-regulated securities markets participants body but need to be approved by the Federal Service for Financial Markets (the FSFM) (the Russian securities market regulator).
Any model terms must set out, inter alia, (i) the termination triggers outside of bankruptcy leading to termination of some or all of the transactions governed by the master agreement and procedure for termination of such transactions at the request of one of the parties; and (ii) the procedure for termination of all transactions in cae of bankruptcy of a party to the master agreement and, in each case, calculation of the net cash obligation payable as a result of such termination.
Where one of the entities entering into the master agreement is a foreign entity, the relevant master agreement may incorporate by reference certain model terms developed by foreign organisations, provided that such organisation appears on the list approved by the FSFM.
Finally, the law requires that parties to a master agreement provide certain information regarding OTC transactions governed by such master agreement to a repository who will be required to maintain a register with details regarding such transactions and will make the information available to the FSFM.
The Bankruptcy Law, as amended by the Implementing Law, provides that obligations of parties pursuant to multiple transactions governed by a single master agreement can be terminated and that a single cash payment obligation may be payable pursuant to the master agreement by one party to the other. To be eligible for such “netting”, transactions have to be entered into prior to the earliest of: (i) commencement of administration, (ii) arbitrazh court’s decision to initiate any bankruptcy procedure or (iii) revocation of a banking license, if applicable. In addition, such transactions must be included in the register held by the repository.
Finally, in order for transactions governed by a master agreement to be eligible for “netting”, both parties to such transactions must belong to one of the categories set out below and at least one of the parties has to fall into category listed under 1 to 5 below:
1. Russian credit organization or a professional securities market participant;
2. Central Bank of the Russian Federation;
3. Foreign bank or securities market participant qualified to act in such capacity under local law, incorporated in a country which is:
a. A member state of the Organization for Economic Cooperation and Development (OECD);
b. A member state or observer member state of the Financial Action Task Force (FATF);
c. A member state of Moneyval, the Council of Europe Committee of Experts on the Evaluation of Anti-Money Laundering Measures; or
d. A country whose securities market regulator or similar body has entered into an agreement with the FSFM (the above jurisdictions being the Approved Jurisdictions)6;
4. Central or national bank of an Approved Jurisdiction;
5. International financial organization;
6. Russian legal entity;
7. Russian Federation, its constituent sub-federal unit or a municipality;
8. Holders of interest in mutual funds;
9. Foreign state, its constituent sub-federal unit or municipality (provided that it qualifies as Approved Jurisdiction);
10. Legal entity incorporated in an Approved Jurisdiction.
The market views the introduction of “netting” into Russian law as a very positive development for the Russian financial system. The New Laws are, in many aspects, open to interpretation and we do expect FSFM to issue some guidance on the open points once the relevant provisions of the New Laws become effective. We intend to monitor the implementation process and will report on further developments in future Client Alerts.