8 Close-Out Netting and Safe Harbours

Abstract

This chapter studies the early termination of collateral transactions. It is in this context that the transactions must prove their worth, i.e. must show they indeed reduce or limit the credit risk the collateral taker runs on the collateral provider. To achieve this result, contractual techniques have been developed that have subsequently been sanctioned and protected by the law. The chapter looks at the legal framework regulating those contractual techniques. However, the early termination of collateral transactions and the enforcement by the collateral taker of its rights in the assets provided as collateral involve specific legal issues. The majority of collateral transactions provide for 'close-out netting' as a way of enforcement; close-out netting thus replaces traditional enforcement of security interests, such as public auction. In addition, the termination of collateral transactions, and close-out netting in particular, in multiple jurisdictions is protected by 'safe harbours', i.e. shielded from insolvency law rules that would otherwise be applicable.