Bilateral Netting of Qualified Financial Contracts Bill, 2020 passed

Bilateral Netting of Qualified Financial Contracts Bill, 2020 passed

Part of: GS Prelims and GS-III – Economy

In news

• Parliament has passed the Bilateral Netting of Qualified Financial Contracts Bill, 2020 with the Rajya Sabha approving it.

Key takeaways

• The bill provides a legal framework for bilateral netting of qualified financial contracts.
• Applicable to: Qualified Financial Contracts between two qualified financial market participants where at least one party is an entity regulated by the specified authorities RBI, SEBI, IRDAI, PFRDA or the IFSCA.

Significance

• Without bilateral netting, Indian banks have had to set aside higher capital against their trades in the over-the-counter market, which impacts their ability to participate in the market. Moreover, it also increases the systemic risk during defaults.
• Bilateral netting would also help reduce hedging costs and liquidity needs for banks, primary dealers and other market-makers, thereby encouraging participation in the over-the-counter derivatives market. 
• It would also help develop the corporate default swaps market, which, in turn, would provide support to the development of the corporate bond market.
• It would also improve investor confidence and to expand the scope of credit default swaps.

Do you know?

• Bilateral netting is a legally enforceable arrangement between a bank and a counterparty that creates a single legal obligation covering all included individual contracts. 
• This means that a bank’s obligation, in the event of the default or insolvency of one of the parties, would be the net sum of all positive and negative fair values of contracts included in the bilateral netting arrangement.
• Netting refers to offsetting of all claims arising from dealings between two parties to determine a net amount payable or receivable from one party to another.