Like the International Swaps and Derivatives Association (ISDA), the European Federation of Energy Traders (EFET; www.efet.org) has set up a standard master agreement for the delivery and acceptance of electricity (the General Agreement). As in the schedule to the ISDA Master Agreements, the parties may choose between alternative concepts and may also fine tune the General Agreement to their liking in the election sheet.
As the validity and enforceability of such master agreements in each jurisdiction are key for the market participants, the EFET has arranged for a legal opinion from each participating European country. Such opinions have most recently become available in draft form for France, Germany, Italy, Holland, Spain, the UK and Switzerland. The central issue in all these opinions is whether or not the concept of close-out netting (upon automatic or optional early termination) holds up before national insolvency law. In this regard, the Swiss opinion states the following:
The General Agreement, the election sheet and the multiple trades documented by confirmations are treated as one single agreement, in particular for the purpose of close-out netting. The opinion further holds that automatic termination with effect on the day of bankruptcy is not in violation of Swiss insolvency law. Optional termination, however, is deemed a valid concept only if the parties agree on a short period within which such termination rights need to be exercised. As the General Agreement does not provide for such a period, the parties must make the necessary amendments in the election sheet. Accordingly, automatic termination is the recommended election.
Although the Swiss opinion is in line with the prevailing view expressed in legal writing (and is also in line with the Swiss opinion on the ISDA Master Agreement of January 1992), no court precedents are yet available.
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