Systemic risk, regulatory powers and insolvency law –The need for an international instrument on the private law frameworkfor netting

This study examines the legal environment of netting agreements covering financial contracts. Itconcludes that an international instrument should be developed capable of improving theeffectiveness of netting agreements in mitigating systemic risk. To this end, two different aspectsof the enforceability of netting agreements are considered: (i) the general enforceability ofnetting, and (ii) the possibility of precluding the operation of netting a mechanism by way of aregulatory moratorium for considerations of systemic stability.The first part of the study presents the use of netting and the various forms it may take beforegoing on to explain the benefits and drawbacks of enforceable netting agreements. Benefits forindividual firms consist in lower counterparty risk and more favourable capital requirements.Benefits for the financial market as a whole flow from greater financial market stability since thecontagion of systemically relevant institutions by the default or insolvency of another institutionis limited, thus helping to avoid systemic effects. Additionally, the use of netting arrangementscan improve overall market liquidity....