Introduction

In a significant development, the Bilateral Netting of Qualified Financial Contracts Bill, 2020 (“Bilateral Netting Bill”) was passed by the Lok Sabha on 20 September 2020 and by the Rajya Sabha on 23 September 2020. The Bilateral Netting Bill essentially aims to provide legal sanction for enforceability of bilateral netting of qualified financial contracts (“QFC”) entered into between Qualified Financial Market Participants. Netting enables two counterparties in a bilateral financial contract to offset claims against each other to determine a single net payment obligation due from one counterparty to the other, instead of undertaking multiple payments on a gross basis.

The Bilateral Netting Bill covers trades that are over the counter (“OTC”) derivative contracts, negotiated bilaterally such as cross-currency or interest rate or commodity swaps, currency or interest rate futures or options and spot, future or forward foreign exchange transactions. Under existing laws, banks have to make higher provisions for such bilateral contracts since these are outside the Clearing Corporation of India’s framework and credit exposure is measured for such OTC derivative contracts on gross basis rather than a net basis. This situation significantly increases credit risk exposure and systemic risk in financial market in the event of default of a counterparty, besides trapping significant amount of capital unproductively by banks. As per Economic Survey 2019-20 by the Department of Economic Affairs, Ministry of Finance, based on RBI estimates, bilateral netting arrangements introduced by the Bilateral Netting Bill could have helped 31 major banks participating in India’s OTC derivatives market save about INR 22.58 billion in regulatory capital during FY2017-18.

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