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Close-Out Netting, Insolvency Law and Conflict of Laws

Forthcoming in Journal of Corporate Law Studies (JCLS) 2014-II

LSE Legal Studies Working Paper No. 14/2014

36 Pages Posted: 26 Mar 2014 Last revised: 5 Aug 2014

Philipp Paech

London School of Economics - Law Department

Date Written: July 15, 2014

Abstract

Close-out netting is a risk mitigation tool used by financial institutions. It is comparable to set-off and in insolvency situations any solvent counter-party that is able to use it obtains a very strong position as compared to other creditors. Therefore, it might conflict with the pari passu principle. Many jurisdictions have solved that conflict and adapted their laws so that close-out netting is enforceable even in the event of insolvency. However, as the financial market is global, the parties, their branches and assets might be located in different jurisdictions. Still, countries failed to agree on a harmonised conflict-of laws rule, despite the obvious need, when they decided not to include a conflict-of-laws principle in the 2013 Unidroit Principles on the Operation of Close-out Netting Provisions. The relevant EU law, though patchy, already addresses this concern. This Article identifies the underlying conceptual difficulties and proposes a solution for an improved framework for both the EU and other financial marketplaces.

Suggested Citation

Paech, Philipp, Close-Out Netting, Insolvency Law and Conflict of Laws (July 15, 2014). Forthcoming in Journal of Corporate Law Studies (JCLS) 2014-II; LSE Legal Studies Working Paper No. 14/2014. Available at SSRN: https://ssrn.com/abstract=2414400 or http://dx.doi.org/10.2139/ssrn.2414400

Philipp Paech (Contact Author)

London School of Economics - Law Department ( email )

Houghton Street
London WC2A 2AE, WC2A 2AE
United Kingdom

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