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New German Law on Close-Out Netting in the Event of Insolvency

On 16 December 2016 an act amending the insolvency laws applicable to financial derivatives transactions passed the Bundesrat (the second chamber of the German legislature). The new law was finalised only six months after the German Federal Court of Justice passed its landmark judgment that held a netting provision based on the German Master Agreement for Financial Derivatives Transactions to be partially ineffective in the event of insolvency.

Germany, Derivatives, Insolvency & Restructuring, Reed Smith LLP
Contractual Close-Out Netting Ineffective in the Event of Insolvency

In a decision of 9 June 2016, the German Federal Court of Justice (Bundesgerichtshof, "BGH") has ruled that the determination of the close-out amount in a netting provision based on the German Master Agreement for Financial Derivatives Transactions (Rahmenvertrag für Finanztermingeschäfte or DRV) is not legally effective in the event of insolvency to the extent that it deviates from section 104 of the German Insolvency Code.

Germany, Company & Commercial, Derivatives, Insolvency & Restructuring, Litigation, Reed Smith LLP, Choice of law, High Court of Justice (England & Wales)
Courts in New York and Singapore reach opposite conclusions on the validity of interpleader applications arising out of the OW Bunker bankruptcy

On 7 November 2014, OW Bunker A/S (“OW”), a global supplier and trader of marine fuel, filed for bankruptcy in Denmark. Further bankruptcies of OW subsidiaries and affiliates swiftly followed, including the bankruptcy of certain U.S. and Singapore-based OW entities.

Singapore, USA, Insolvency & Restructuring, Litigation, Reed Smith LLP, Bankruptcy, Injunction
Section 2(a)(iii) of the ISDA Master Agreement, similar clauses and insolvency

There have been so many articles written and opinions expressed on the spate of cases on the effect of how netting provisions in over-the-counter ("OTC") derivative contracts work when a counterparty becomes in default, that you would be forgiven for being confused about the current position. Now that the dust has settled (for the time being at least), this article takes stock and seeks to make matters as straightforward as possible.

United Kingdom, USA, Derivatives, Insolvency & Restructuring, Reed Smith LLP, Bankruptcy, Collateral (finance), Over-the-counter (finance), Debt, Foreclosure, Default (finance), Lehman Brothers
US Bankruptcy Court limits ISDA counterparty rights upon a bankruptcy event of default

In re Lehman Brothers Holdings, Inc., Case No. 08-13555 et seq. (JMP)(jointly administered)

In this US decision, the Bankruptcy Court held that the "safe harbour" protections of the US Bankruptcy Code only protect a non-defaulting party's right to liquidate, terminate or accelerate a swap, to offset and to net termination values and payment amounts and to foreclose on collateral, but do not permit the withholding of performance under a swap if the swap is not terminated.

USA, Derivatives, Insolvency & Restructuring, Litigation, Reed Smith LLP, Bankruptcy, Debtor, Collateral (finance), Interest, Swap (finance), Foreclosure, Withholding tax, Concession (contract), Liquidation, Sunset provision, Default (finance), International Swaps and Derivatives Association, Lehman Brothers, Title 11 of the US Code, United States bankruptcy court