Significant changes to the financial collateral regime and netting options
Substantial amendments are planned with respect to the range of persons who will be entitled to enter as parties to financial collateral agreements, as well as the scope of netting clauses

A draft Law on Amendments and Supplements to the Law on Financial Collateral Agreements (the "Law") has been entered in the National Assembly. The collaterals under the Law already included (i) pledges over assets or (ii) transfers of assets under the condition of their re-purchase ("repo-deals"), and are often used by credit institutions in their day-to-day activity. The incorporation of these collaterals is done by means of execution of a so-called financial collateral agreement.


The draft Law provides for a change in the range of persons who may be parties to financial collateral agreements. In the current version of the Law, it is permissible for a natural person to enter into such agreement, in case the other party to it is one of the entities listed exhaustively in Article 3 thereof (a public authority, a bank, insurance company, etc.). However, the proposed changes would exclude entirely natural persons from the scope of the Law. At the same time, financial collateral could be established by a non-personified entity - a civil law partnership under the Law on Obligations and Contracts or a consortium.


Extended is also the scope of the so-called "netting clause", which already existed in the previous version of the Law. In particular, this is a contractual clause by means of which, in event of default by one of the parties, the counterparties' obligations become due before their maturity date, are converted into obligations for payment of money and/or are set-off. Until now, a netting clause could have been included only in financial collateral agreements. According to the proposed draft Law, the netting clause will now be referred to as "close-out netting" and could be envisaged (always in writing) not only in a financial collateral agreement, but also in framework contracts, contracts with general terms and conditions, and other types of contracts, if certain preconditions are met.


Similar to financial collateral agreements, any contract with a close-out netting provision shall not be declared null and void, terminated or cancelled solely on the ground that it was executed within a certain period before a so-called "winding-up procedure", i.e. insolvency or liquidation proceedings or before remedying procedure (e.g., stabilization proceedings). This is to ensure the normal functioning of the financial markets and economic and legal stability for entities.


The words 'close-out netting' will be added to the title of the Law, indicating that the netting should now be considered as additional and independent collateral, besides the financial collaterals in strict sense (e.g. those under a credit agreement).