October 28, 2018

UAE Federal Netting Law

The UAE's new Netting Law (Federal Law No. 10 of 2018) (the Federal Netting Law) was issued on 20 September 2018 and will come into force one month following publication in the UAE Official Gazette. The Federal Netting Law allows for the recognition of netting agreements, close out netting provisions and related collateral arrangements, particularly in an insolvency scenario.

The Federal Netting Law provides the necessary certainty for parties, particularly for European financial institutions that must comply with the EMIR Margin Rules.

While netting laws have been issued in the Dubai International Financial Centre and the Abu Dhabi Global Market, these laws only benefitted counterparties incorporated in the relevant free zone.

Prior to the issuance of the Federal Netting Law, parties relied upon article 183 of the Federal Bankruptcy Law (Federal Law No. 9 of 2016) that allows for the setting off of debts that are contractually agreed prior to insolvency. The provisions for post-insolvency set off, particularly in the context of close out netting, were insufficiently certain for parties transacting with UAE counterparties.

The Federal Netting Law provides the necessary certainty for parties, particularly for European financial institutions that must comply with the EMIR Margin Rules. It was previously market practice for financial institutions incorporated in non-netting jurisdictions in the region to establish special purpose vehicles in offshore netting-friendly jurisdictions, through which they would transact derivatives with international counterparties on a net basis.

The Federal Netting Law is based on the ISDA Model Netting law, but with some important amendments. The scope of Qualified Financial Contracts broadly follows the ISDA Model Netting Law, although Shariah-compliant contacts are expressly included. In particular, a committee shall be formed by the UAE Ministry of Finance comprising representatives from the UAE Central Bank, the Securities & Commodities Authority and the Insurance Authority, with the authority to vary the scope of Qualified Financial Contracts.

Furthermore, Qualified Financial Contacts that comply with the provisions of the Federal Netting Law are stated to be valid and enforceable where they could be construed as speculative contracts, as proscribed by articles 1012 to 1021 of the UAE Civil Code (Federal Law No. 5 of 1985, as amended).

Confirmation is provided in the Federal Netting Law that netting agreements and Qualified Financial Contracts to which such netting agreements apply shall constitute a single agreement, which was a prevailing concern in the market following the repeal of article 688 of the UAE Commercial Transactions Law (Federal Law No. 18 of 1993, as amended) by the Federal Bankruptcy Law.

Providing the required clarity referred to above in a post-insolvency scenario, the Federal Netting Law prevails over any other conflicting laws in the United Arab Emirates, which would include the Federal Bankruptcy Law.

The Federal Netting Law expressly does not apply to financial institutions in financial free zones such as the Dubai International Financial Centre and the Abu Dhabi Global Market.

In the context of collateral arrangements, these are not exempted from Federal Law No. 20 of 2016 regarding the Mortgaging of Moveable Assets as Security for Debts, which, depending on the nature of the collateral provided, would require the involvement of the courts to enforce.

We would expect that ISDA will commission a netting legal opinion for the UAE following the new Federal Netting Law, but in the meantime parties may rely on the Federal Netting law once it becomes effective.