Jersey FSC Issues Consultation Paper On Netting Of Financial Contracts

by Robert Lee, Tax-News.com, London

02 October 2003

In a consultation document published this week, the Jersey Financial Services Commission sets out the case for change to the jurisdiction's legal framework surrounding the netting of financial contracts, which the organisation advocates incorporating into current Bankruptcy Law.

A summary of the JFSC's consulatation paper is detailed below.

"In common with many jurisdictions, Jersey has mandatory rules governing the treatment of the assets and liabilities of an insolvent entity. In Jersey, these rules are primarily set out in the Bankruptcy Law, and are applied in the treatment of companies that are subject to a winding up through the mechanism provided by Article 166 of the Companies Law."

"As well as the move to introducing legislation in this area within the EU, several jurisdictions outside the EU have also introduced legislation, often based upon the Irish Netting of Financial Contracts Act 1995, which was one of the first significant laws providing for the enforceability of Netting Provisions. Australia, the British Virgin Islands, the Cayman Islands, Luxembourg, Malta and New Zealand have all passed or are in the process of passing such legislation.

"The Commission believes that there is a pressing need to introduce legislation governing Netting Provisions. Importantly, such legislation will ensure that the Island meets best international practice in this area, aimed at ensuring that any risks to the stability of financial markets are minimised.

"Although, theoretically, it can be argued that the enforcement of Netting Provisions may place certain creditors in a worse position than they would otherwise be, it is felt that this risk is small, unlikely to arise in practice, and that, in any event, upholding Netting Provisions will lead to a more equitable and orderly distribution of the assets of an insolvent entity.

"Further, the costs of an insolvency are likely to be reduced in the event that Netting Provisions are upheld, which will be of benefit to the creditors of an insolvent company in general.

"The first option is to bring in a new “Netting of Financial Contracts (Jersey) Law”. This would have the advantage of being a stand-alone piece of legislation, which would be short and have a clear purpose. A similar approach has been taken by most jurisdictions that have brought in netting legislation.

"Alternatively, provisions governing netting could be set out as principles of general application in the Bankruptcy Law and applied explicitly to Jersey companies through the mechanism set out in the existing Article 166 of the Companies Law, which applies to Jersey companies the rules applicable to the rights of creditors and the proving of debts that are set out in the Bankruptcy Law. The Bankruptcy Law currently includes many of the provisions applicable to the treatment of assets and liabilities in an insolvency, and there are clear benefits in ensuring that this remains the case.

"Assuming that the responses received to this paper are broadly supportive, it is likely to be possible to include provisions relating to netting within the Bankruptcy Law Amendment. For these reasons, the Commission’s preferred position is to include provisions concerning the efficacy of Netting Provisions as part of the Bankruptcy Law Amendment."

Responses to the consulatation should reach the Jersey Fiancial Services Commission no later than 30 November 2003.

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