(a) the institution has entered into a contractual clearing agreement with its counterparty which creates a single legal obligation covering all transactions included, so that, in the event of default by the counterparty, it would be entitled to receive or pay only the net amount of the positive and negative market values of the various transactions included; This article reflects the situation at the time of publication and will not be updated later. Please read the General Terms and Conditions of Use. (b) the institution has provided the competent authorities with written and reasoned legal opinions demonstrating that, in the event of a legal challenge to the set-off agreement, the claims and obligations of the institution would not exceed the claims and obligations referred to in point (a). The legal opinion concerns the applicable law: 3. The legal opinions referred to in point (b) may be based on the types of contractual set-off. The following additional conditions are met by contractual inter-product clearing agreements: Also known as a balance of payments, settlement compensation aggregates the amount due between the parties and the net cash flow into a payment. In other words, only the net difference in the total amounts is provided or exchanged by the party with the net obligation due. As a general rule, a payment clearing contract must be concluded before the settlement date. Otherwise, each of the individual payments to and from all parties involved would be due. Contractual clearing arrangements shall be taken into account in the own funds requirement for the risk of default of the counterparty in accordance with Articles 295 to 298 of the CRR. the entity must have procedures under Article 13.7.6 R(3) of the BIPRU to verify that any transaction to be included in a netting clause is covered by legal advice; and a change in the applicable law of an already recognized type of netting agreement would result in that type of netting agreement being treated as a new type of netting agreement and triggering notification. In the second part of the notification document, institutions enter information on the type of netting agreement, the applicable law and the jurisdiction of the counterparty, including any supporting legal advice. Information on the type of counterparty initially requested in the draft consultation is not required in the new notification document.

In accordance with the CRR, the legal validity and applicability of netting agreements in the various jurisdictions are supported by legal opinions of the institutions. For netting agreements to be recognised, an institution must also carry out the monitoring and control tasks set out in the CRR. In this context, Article 297(1) to (3) of the CRR is of particular importance, which provides that institutions are to establish and maintain procedures to ensure that the validity and enforceability of their contractual set-offs are reviewed in the light of changes in the law of the courts concerned referred to in Article 296(2), point (b) of the CRR. The CRR applies directly to EU financial institutions and is in force on 1. Entered into force in January 2014. The purpose of this note is to recall the types of credit risk mitigation envisaged under the CRR and the specific legal advice requirements introduced by the CRR. In addition, the requirement for legal review under the CRR also extends to the issue of the enforceability of collateral arrangements in all relevant jurisdictions (Article 207(3) as regards financial guarantees and gold and Article 209(2)(c) of the CRR as regards claims) and the enforceability of guarantees and credit derivatives (Article 213, paragraph 3 of the CRR), which supplement all obligations under Article 194. If there are changes to certain set-off conditions in a clearing agreement already notified and those changes do not cause any inconvenience to any of the parties concerned, no separate notification shall be required. The prerequisite is that the institution certifies that an individual audit has been carried out internally or that a corresponding additional opinion has been obtained externally. other bilateral agreements between an enterprise and its counterparty; and the impact of clearing shall be taken into account when the entity assesses the overall credit risk of each counterparty and the entity shall manage its JRC on that basis; and the law applicable to contracts or agreements necessary for the performance of contractual set-off; The credit institution should send the cover letter to the ECB to confirm that it complies with the requirements of Articles 296 and 297 of Regulation (EU) No 575/2013. Such a letter shall not be considered as a notice from the credit institution confirming that the nature of the notified netting agreements is enforceable.

Choice of law is decisive In principle, the effects of insolvency proceedings on agreements are subject to the law of the State in which the proceedings are commenced. In the case decided by the BGH, the insolvent party was a unit of Lehman which was the subject of an administrative procedure under English law before the High Court of Justice in London. However, for netting contracts, an exception in German law applies to the implementation of the relevant EU Directive.1 The effects of insolvency proceedings are governed by the law of the netting contract, as the BGH has just confirmed. In the present case, the netting contract is subject to German law, so that German insolvency law is applicable. In other words, the choice of law applicable by the parties to the conclusion of the derivative transaction also determines the insolvency law applicable to the contract in the event of default by one of the parties. Consideration for each company (including natural persons) entitled to enter into a contractual netting contract; and no. Netting arrangements of a type that the credit institution has already treated as mitigating the risks to the type of counterparty in the jurisdiction concerned (either before the application of the notification procedure or already under the new notification procedure) may be concluded with new counterparties of the same type and under the same law without notification. A legal opinion required under Article 13.7.6 R (2) BIPRU may take the form of a reasoned legal opinion based on the nature of the contractual set-off. Significant changes to the basic netting provisions should be notified as if the netting arrangement containing those significant changes constituted a new type of netting agreement. The notification should therefore include all relevant opinions, including the requested opinion on those substantial amendments to a particular type of framework agreement.

It is up to the institutions concerned that wish to reduce the risk capital requirements for credit assets to ensure that they have the necessary legal advice and, if not, to consider which advice needs to be obtained. Where opinions are needed, it should be determined whether they can be adapted to repeat transactions – with or without supplements – or whether they can rely on generic and/or internal opinions. 2 That may refer, in particular, to the well-known expert report of Potts, which effectively concludes that transactions in credit default swaps do not constitute insurance under English law. However, Potts` opinion is not without criticism, although the market operates by relying on it. See also Article 213(3) of the CRR on the requirement of legal scrutiny of credit guarantee agreements not covered in general (including credit derivatives). The main change introduced by the CRR with regard to the CRM, whether funded or not, is set out in Article 194(1) of the CRR. It states that `the lending institution shall provide, at the request of the competent authority, the latest version of the independent, written and reasoned legal opinion or opinions establishing whether its credit guarantee agreements fulfil the condition [that such contracts be effective and enforceable in all the jurisdictions concerned]`. This represents a significant departure from the pre-CRR position, where financial institutions may not have taken legal advice regarding CRM for granted – rather, it relies on in-house legal reviews, analogous opinions, individual experience and market practices.