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Ukraine Recognizes Close-Out Netting of Derivative Transactions

As part of the undergoing reform of its capital market rules, Ukraine has amended its legislation to recognize the close-out netting of derivative transactions executed with Ukrainian companies.

Background

The close-out netting mechanism was introduced by the recently adopted Capital Markets Law (Draft Law No. 2284 "On Amending Certain Legislative Acts of Ukraine in relation to Investment Attraction and Introduction of New Financial Instruments"), which was adopted by Ukraine's parliament, the Verkhovna Rada of Ukraine, on 19 June 2020 and signed by the President of Ukraine on 12 August 2020. The Capital Markets Law is based on key EU directives and regulations governing the rules for capital and financial markets, including MiFID II, EMIR and MiFIR.

The relevant provisions of the Capital Markets Law introducing the close-out netting mechanism in Ukraine will become effective once the law is officially published (promulgated), which is expected in the week of 17 August 2020.

In more detail

With close-out netting, parties will be able to finalize settlements under derivative transactions in case a pre-defined event occurs, such as the default or insolvency of a counterparty.

To achieve this, the Capital Markets Law introduces amendments to the Ukrainian insolvency rules governing the insolvency of Ukrainian banks and other legal entities. These amendments allow, in the event of the insolvency of a Ukrainian counterparty, to terminate all derivative transactions covered by a close-out netting provision, to determine the value for each terminated transaction and then to aggregate the sum value of all such transactions in a single net payment obligation. Such net payment obligation will become due after being determined and will not be subject to a statutory moratorium on creditor claims.

To enable the implementation of the close-out netting mechanism in Ukraine, the concepts of master agreement and settlement finality were introduced in Ukrainian law.

The recognition of close-out netting in Ukraine is a breakthrough for the development of the derivatives market and should facilitate more active cross-border OTC derivative trading with Ukrainian companies.

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