Amendments To German Insolvency Law Provide Clarity On Status Of Netting Agreements

Author:Jones Day
Profession:Jones Day

In December 2016, the German legislature amended the German Insolvency Code (the "Insolvency Code") to clarify the status of netting arrangements in financial transactions. Doubts about that status were raised by a June 9, 2016, ruling by the German Federal Court of Justice (Docket No. IX ZR 314/14) invalidating netting provisions used throughout the financial industry (patterned, for example, on the German Master Agreement for Financial Derivatives Transactions and the International Swaps and Derivatives Association Master Agreement) if they deviate from the requirements set forth in section 104 of the Insolvency Code, which are mandatory pursuant to section 119 of the Insolvency Code. Specifically, the court invalidated the contractual calculation method for claims of nonperformance in the case of insolvency by either party. The decision left open whether a contractually agreed-upon early termination right violates section 104.

The amendments were published in the Federal Gazette on December 28, 2016. Among other things, the amendments:

Clarify and clearly differentiate between the statutory resolution rules for financial contracts and the scope of permissible contractual departures from the statutory rules; Leave largely intact the existing statutory model for resolving and settling financial contracts in case of insolvency; and Update the list of covered financial transactions to reflect the current status of financial services supervision...

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