Netting opinion

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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 the effectiveness of close-out netting under a master trading agreement would be respected by an insolvency administrator in the jurisdiction of an insolvent counterparty to that agreement.

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).”

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 legal education. 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. That all the commercial affairs between a Belgian and an Italian should be adjudicated before the courts of England and Wales. And he is just the sort to make his living — and extract his revenge on the common law tradition —writing netting opinions.

But God — manifesting Herself in the shape of the Basel Committee on Banking Regulations and Supervisory Practices, plays 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, so that their firm's financial controllers can recognise balance sheet reductions as a result.

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

• Close-out netting
• Legal opinion
• Red Flag Act