This article will be talking about the practice of netting which involves the reduction of credit and settlement risks in financial contracts by the combination of 2 or more obligations to result into a reduced obligation. This article will be focused on the definition of relevant concepts associated with netting, the powers of relevant financial regulatory agencies, and the enforceability of qualified financial agreements.

Definition of Applicable Concepts

The Companies & Allied Matters Act CAMA 2020 defines the following concepts associated with netting as follows :- 

– “Financial regulatory authority” means:

(a) the Central Bank of Nigeria ;

(b) the Securities and Exchange Commission ;

(c) the National Insurance Commission(NAICOM) ;

(d) the National Pension Commission(PENCOM) ; and

(e) any other financial regulatory authority established by an Act of the National Assembly.

 – “Cash” means money credited to an account in any currency or a similar claim for repayment of money, such as a money market deposit .

– “Collateral” means any:

(a) cash in any currency ;

(b) securities of any kind, including debt and equity securities ;

(c) guarantees, letters of credit and obligations to reimburse ; and

(d) any asset commonly used as collateral in Nigeria .

– “Collateral arrangement” means any margin, collateral, security

arrangement or other credit enhancement related to or forming part of a netting agreement or one or more qualified financial contracts entered into thereunder, including-

(a) a pledge, charge or any other form of security interest in collateral, whether possessory or non-possessory ;(b) a title transfer collateral arrangement ;

(c) a security interest collateral arrangement ; and

(d) any guarantee, letter of credit or reimbursement obligation by or to a party to one or more qualified financial contracts, in respect of those qualified financial contracts .

– “Insolvent party” means the party in relation to which an insolvency proceeding under the laws of Nigeria has been instituted .

-“Liquidator” means the liquidator, administrator, nominee, supervisor, receiver, trustee, conservator or other individual, person or entity which administers the affairs of an insolvent party during an insolvency proceeding under the laws of Nigeria .

– “Netting” means the occurrence of the following:

(a) termination, liquidation or acceleration of any payment or delivery obligation or entitlement under one or more qualified financial contracts entered into under a netting agreement;

(b) calculation or estimation of a close-out value, market value, liquidation value or replacement value in respect of each obligation or entitlement or group of obligations or entitlements terminated, liquidated or accelerated under paragraph (a) ;

(c) conversion of any values calculated or estimated under paragraph (b) into a single currency ; and

(d) determination of the net balance of the values calculated under paragraph (b), as converted under paragraph (c), whether by operation of set-off or otherwise .

– “Netting agreement” means any:

(a) agreement between two parties that provides for netting of present or future payment or delivery obligations or entitlements arising under or in connection with one or more qualified financial contracts entered into under the agreement by the parties to the agreement (a “master netting agreement”) ;

(b) master agreement between two parties that provides for netting of the amounts due under two or more master netting agreements (a “master-master netting agreement”) ; and 

(c) collateral arrangement related to or forming part of one or more of the foregoing .

– “Non-insolvent party” means the party other than the insolvent party; “party” means a person constituting one of the parties to a netting agreement .

-“Person” includes partnerships, companies, regulated entities such as banks, insurance companies and pension fund administrators, or any other body corporate (including statutory corporations or statutory bodies) whether organized under the laws of Nigeria or under the laws of any other jurisdiction, and any international or regional development bank or other international or regional organization .

– “Qualified financial contract” means any financial agreement, contract or transaction, including any terms and conditions incorporated by reference in any financial agreement, contract or transaction, pursuant to which payment or delivery obligations are due to be performed at a certain time or within a certain period of time and whether or not subject to any condition or contingency and includes:

(a) a currency, cross-currency or interest rate swap ;

(b) a basis swap ;

(c) a spot, future, forward or other foreign exchange transaction ;

(d) a cap, collar or floor transaction;

(e) a commodity swap ;

(f ) a forward rate agreement ;

(g) a currency or interest rate future;

(h) a currency or interest rate option;

(i) an equity derivative, such as an equity or equity index swap, equity forward, equity option or equity index option ;

(j) a derivative relating to bonds or other debt securities or to a bond or debt security index, such as a total return swap, index swap, forward, option or index option ;

(k) a credit derivative, such as a credit default swap, credit default basket swap, total return swap or credit default option ;

(l) an energy derivative, such as an electricity derivative, oil derivative, coal derivative or gas derivative ;

(m) a weather derivative, such as a weather swap or weather option ;

(n) a bandwidth derivative ;

(o) a freight derivative ;

(p) an emissions derivative, such as an emissions allowance or emissions reduction transaction ;

(q) an economic statistics derivative, such as an inflation derivative ;

(r) a property index derivative ;

(s) a spot, future, forward or other securities or commodities transaction ;

(t) a securities contract, including a margin loan and an agreement to buy, sell, borrow or lend securities, such as a securities repurchase or reverse repurchase agreement, a securities lending agreement or a securities buy or sell back agreement, including any such contract or agreement relating to mortgage loans, interests in mortgage loans or mortgage-related securities ;

(u) a commodities contract, including an agreement to buy, sell, borrow or lend commodities, such as a commodities repurchase or reverse repurchase agreement, a commodities lending agreement or a commodities buy or sell back agreement ;

(v) a collateral arrangement ;

(w) an agreement to clear or settle securities transactions or to act as a depository for securities(x) any other agreement, contract or transaction similar to any agreement, contract or transaction referred to in paragraphs (a) – (w) with respect to one or more reference items or indices relating to interest rates, currencies, commodities, energy products, electricity, equities, weather, bonds and other debt instruments, precious metals, quantitative measures associated with an occurrence, extent of an occurrence, or contingency associated with a financial, commercial or economic consequence, or economic or financial indices or measures of economic or financial risk or value ; 

(y) any swap, forward, option, contract for differences or other derivative in respect of, or combination of, one or more agreements or contracts referred to in the first 24 paragraphs above ) ; and 

(z) any agreement, contract or transaction designated as such by the financial regulatory authority under this Act . 

-“Security interest collateral arrangement” means “security financial collateral arrangement” as defined in Chapter 9 of CAMA (Debentures) of this Act and includes charges ; and 

-“Title transfer collateral arrangement” means a margin, collateral or security arrangement related to a netting agreement based on the transfer of title to collateral, whether by outright sale or by way of security, including a sale and repurchase agreement, securities lending agreement, or securities buy or sell-back agreement. 

Powers of a financial regulatory authority 

Under the act, a financial regulatory authority may, in relation to the relevant sector it regulates, by notice issued under this section, designate as “qualified financial contracts” any agreement, contract or transaction, or type of agreement, contract or transaction, in addition to those listed in this section. 

What does the CAMA 2020 say about the enforceability of a qualified financial contract? 

A qualified financial contract shall not be and shall be deemed never to have been void or unenforceable by reason of the Gaming Machines(Prohibition) Act or any other laws relating to games, gaming, gambling, wagering or lotteries.

What does the act say about the enforceability of netting agreements? 

-The CAMA 2020 provides that the provisions of a netting agreement is enforceable in accordance with their terms, including against an insolvent party, and, where applicable, against a guarantor or other person providing security for a party and shall not be stayed, avoided or otherwise limited by: 

(a) any action of the liquidator ;

(b) any other provision of law relating to bankruptcy, reorganization,

composition with creditors, receivership or any other insolvency proceeding an insolvent party may be subject to ; or 

(c) any other provision of law that may be applicable to an insolvent party, subject to the conditions contained in the applicable netting agreement.

-After commencement of insolvency proceedings in relation to a party, the only obligation, if any, of either party to make payment or delivery under a netting agreement shall be equal to its net obligation to the other party as determined in accordance with the terms of the applicable netting agreement. 

-After commencement of insolvency proceedings in relation to a party, the only right, if any, of either party to receive payment or delivery under a netting agreement shall be equal to its net entitlement with respect to the other party as determined in accordance with the terms of the applicable netting agreement. 

– Any power of the liquidator to assume or repudiate individual contracts or transactions will not prevent the termination, liquidation or acceleration of all payment or delivery obligations or entitlements under one or more qualified financial contracts entered into under or in connection with a netting agreement, and applies, if at all, only to the net amount due in respect of all of such qualified financial contracts in accordance with the terms of such netting agreement.

– The provisions of a netting agreement which provide for the determination of a net balance of the close-out values, market values, liquidation values or replacement values calculated in respect of accelerated or terminated payment or delivery obligations or entitlements under one or more qualified financial contracts entered into is not affected by any applicable insolvency law limiting the rights to set off, offset or net out obligations, payment amounts or termination values owed between an insolvent party and another party.

-The liquidator of an insolvent party may not avoid:

(a) any transfer, substitution or exchange of cash, collateral or any other interests under or in connection with a netting agreement from the insolvent party to the non-insolvent party ; or

(b) any payment or delivery obligation incurred by the insolvent party and owing to the non-insolvent party under or in connection with a netting agreement on the grounds of it constituting a preference by the insolvent party to the non-insolvent party, unless there is clear and convincing evidence that the non-insolvent party-

(i) made such transfer,

(ii) incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the insolvent party was indebted or became indebted, on or after the date that such transfer was made or such obligation was incurred.

-Reasonable notice to interested parties, individuals, persons or entities shall be required for the realization, appropriation or liquidation of collateral under a collateral arrangement unless otherwise agreed by the parties provided that this provision is without prejudice to any applicable provision of law requiring that realization, appropriation or liquidation of collateral is conducted in a commercially reasonable manner.

-For the purposes of the act –

(a) a netting agreement is deemed to be a netting agreement notwithstanding the fact that the netting agreement may contain provisions relating to agreements, contracts or transactions that are not qualified financial contracts defined in the act, provided, however, that, for the purposes of the relevant section, such netting agreement shall be deemed to be a netting agreement only with respect to those agreements , contracts or transactions that fall within the definition of “qualified financial contract” under the act ;

(b) a collateral arrangement is deemed to be a collateral arrangement notwithstanding the fact that such collateral arrangement may contain provisions relating to agreements, contracts or transactions that are not a netting agreement or qualified financial contracts as defined by the relevant provision of this Act, provided, however, that, for the purposes of this section, such collateral arrangement shall be deemed to be a collateral arrangement only with respect to those agreements, contracts or transactions that fall within the definition of “netting agreement” or “qualified financial contract” as defined in the relevant section of this Act.

– A netting agreement and all qualified financial contracts entered into shall constitute a single agreement.