‘Netting of Financial Arrangements Bill’: Local, foreign FIs get green light for their contracts

ISLAMABAD: The “Netting of Financial Arrangements Bill” will improve ease of doing business by facilitating international and local financial institutions in enforcing their netting contracts.

According to a brief of Finance Division on the “Netting of Financial Arrangements Bill 2024” submitted before the National Assembly Standing Committee on Finance, the development of domestic financial markets in Pakistan led to the introduction of innovative financial products and increased bilateral exposures of banks and other financial market participants.

The financial services industry typically uses contractual netting arrangements on bilateral basis to manage risks of bilateral exposures. These arrangements allow the parties to settle their dues on a “net” basis i.e. arriving at a single receivable or payable amount. However, in Pakistan enforceability of such netting rights are not always certain as currently there is no clear law that could provide a legal cover to the netting arrangements. To address the issue, the State Bank of Pakistan (SBP) proposed the Netting of Financial Arrangements Bill for enactment.

The proposed law removes any uncertainty in enforcing the netting rights in case of a termination event, bankruptcy, or insolvency proceedings, limits the powers of the liquidators to prevent any cherry picking of qualified financial arrangements, and allows financial collateral arrangement under such netting rights.

The Netting Act will be applicable: (i) if there is a prior agreement between the parties to settle the transaction(s) on the basis of netting: and (ii) on the list of Qualified Financial Arrangements.

The Law empowers Minister In-charge to add or remove any contract to/from this list on recommendation of SBP in concurrence of SECP. e. Internationally, around 70 countries have active netting laws.

The absence of a netting law places the Pakistan’s financial market at a disadvantage to other competitive jurisdictions in terms of safety and efficiency and managing risks emanating from bilateral exposures, Finance Division said.

The SBP views on the proposed legislation:

a. To provide a legal cover for enforcement of netting arrangements and allowing the parties thereto to settle their dues against each other on a “net” basis, the SBP proposes the Netting of Financial Arrangements Bill for enactment.

b. Rationale: i. Introducing a netting law in Pakistan would bring the country at par with other competitive financial jurisdictions.

The law will help remove uncertainty in enforceability of netting rights and collateral arrangements, prevent any cherry-picking by the liquidator in enforceability of Qualified Financial Arrangements, promote safety and efficiency in financial markets and manage risks emanating from bilateral exposures. The law will also improve ease of doing business by facilitating international and local financial institutions in enforcing their netting contracts, the Finance Division added.

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