Netting opinion
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The Good Lord bless the Netting opinion, for no-one else who yet has spring left in its mortal coil, will.
It is, but is not just, a legal opinion — at the best of times a dreary, charmless and pointless affair — but one addressing one of the most soul-obliterating questions a grown adult could pose: whether an insolvency administrator of an insolvent counterparty of a certain type, in a certain jurisdiction, would be obliged to respect the close-out netting provisions under your master trading agreement should that counterparty go bust.
Because God — manifesting Herself this time in the guise of the Basel Committee on Banking Regulations and Supervisory Practices — has played a cruel cosmic joke on all inhouse lawyers. By diktat of the latest Basel Accord) they must diligently read and draw reasoned conclusions from these God-forsaken tomes for each counterparty type, in each jurisdiction in which they do business, for each master trading agreement they trade under, so that their firm's financial controllers can recognise balance sheet reductions as a result.
Netting opinions tend to be long, academic, laden with hypotheticals, appealing to Latinate principles of civil law and demanding of unusually skilled powers of comprehension and patience — they are required by regulation to be, in fact — but when it comes down to it, they all say the same thing: that close-out netting is, ultimately, enforceable: because a netting opinion would have no reason to exist if it said anything else.
And so, the netting opinion will say what you know to be true, at gruesome length, clothed in ambiguity and decorated with its own peculiary vocabulary. For example, to utter the following confection in any other context would be to invite a bunch of fives, but it will go unchallenged in a Continental netting opinion:
- “According to legal literature, forward contracts (marchés a terme) are synallagmatic (that is, the parties enter into mutual commitments, each binding itself to the other) and onerous contracts (that is, one party gives or promises something as a consideration for the commitment of the other party) and contain an aleatory element (contrat aléatoire).”[1]
Continental lawyers will immediately recognise this terminology. They will tell you it stems from the Roman tradition, or some codex developed by a monk while Hannibal’s elephants trekked through the Dolomites, or something like that. Now we all have our legal folklore, and this is theirs: they learned it during their decades-long internment at the Faculté de droit de Paris. It is their snail in a gingerbeer; their negligent navigation of a flooded roadway by punt; their liability for a naturally ferocious domestic beast which escapes down your mineshaft.
And, make no mistake, there is a strain of continental lawyer who quietly resents the tidal-wave of Anglo Saxon jurisprudence that has deluged the continent for its cross-border business. For such a fellow, that the commercial affairs between a Belgian and an Italian should be adjudicated before the courts of England and Wales is a festering point. And he is just the sort to make his living — and thereby extract his revenge on the common law tradition — writing netting opinions. And be assured that his ressentiment runs deep. For, when even a righteously incensed European must surely have had enough, as you leaf past page 93, hoping for end-of-tunnel light in the form of the first of, undoubtedly, 17 annexes, you will find only a whole new section about the specific rules protecting insurance claims under the Insurance Sector Act. You will see this and you will beat your fists on the ground, and your voice will crack and will cry, “WHY ARE YOU EXPOSTULATING ON THE TOPIC OF FIRE AND GENERAL INSURANCE I SIMPLY DO NOT UNDERSTAND IT”. But box on you must, and you know that avocat à la cour, in his pork pie hat, will be enjoying a sweet pastry and schnapps with his Belgian dentist friend, and as they clink glasses they will be thinking of your toil and torment, and enjoying every minute of it.
Red Flag Act
Also, it is a fact, that no insolvency administrator, anywhere in the world, in the history of the world, has ever actually successfully challenged the netting down of offsetting transactions under a derivative trading agreement — or so far as this commentator knows, even tried to — because that would be a patently stupid thing to do, even by accident.
See also
References
- ↑ What this seems to be saying is these arrangements involve mutual obligations and consideration — in other words, they are “legal contracts”, and the parties address themselves to a chance (“aleatory”) element outside their mutual control: that is, they’re “derivative contracts”.