Lok Sabha passes Bilateral Netting of Qualified Financial Contracts Bill 2020

Lok Sabha passed the Bilateral Netting of Qualified Financial Contracts Bill, 2020, which allows for enforcement of netting for qualified financial contracts. This bill is passed with aim to bring financial stability. 

‘Bilateral netting’ refers to offsetting claims arising from dealings between two parties to determine the net amount payable or receivable from one party to the other.
Netting when applied to a single transaction is effectively a set-off of claims. However, the concept of close-out netting is slightly different. A close-out netting term in a netting agreement allows the parties to net out all claims irrespective of whether they are due or not. This would effectively mean terminating the contract by accelerating all obligations under the contract and arriving at a final single settlement to be made by one party to another

“....(the bill) is going to reduce the net exposure and reduces the credit exposure of banks and other financial institutions,” said Anurag Thakur, minister of finance, while moving the bill to be passed in the House.” as said by Ministry of Finance. 

What is the bill about? 

Under the bill, a qualified financial contract (QFC) is a bilateral contract notified as a QFC by a relevant authority such as the Reserve Bank of India, Securities and Exchange Board of India, Insurance Regulatory and Development Authority of India, Pension Fund Regulatory and Development Authority or International Financial Services Centres Authority. These authorities may designate entities, such as non-banking financial companies or insurance or pension firms functioning under its jurisdiction, as qualified financial market participants to deal in QFCs.

The bill provides the enforcement of netting of QFCs if the contract has a netting agreement. Such an arrangement may involve collateral in the form of securities, pledge of assets or the transfer of the title of collateral to a third-party guarantor. Some of the key propositions of the bill include provisions for close-out netting and limitations on administration practitioners
Close-out netting refers to the termination of obligations under the QFC in the event of a default. This requires the parties to a QFC to ensure that obligations owed are replaced by a single net amount which can be enforced during close-out netting.

From October 1, The Centre has operationalized all the provisions of the Bilateral Netting of Qualified Financial Contracts Act. “ This is so necessary for stability of financial market. Money in banks are not available while the economy starves for fund. This shall enhance the liquidity as per the Finance minister.