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Spain recently approved rules to reduce the risks derived from the insolvency of any of the parties involved in financial operations in relation to derivative instruments. In the event of the accelerated maturity of the balances resulting from these operations, the netting of the balances is now allowed.

The new regulation, introduced by Law 66/1997 of December 30, gives a broad definition of a derivative instrument to include financial swaps, interest forward agreements, options and futures, purchases and sales of foreign currency, or any combination of the above, or similar operations.

For netting to take place, Spanish law provides that the following requirements must be met:

  • an agreement must exist for the creation of a sole legal obligation comprising all financial operations in relation to derivative instruments included in it;
  • in the agreement, the parties must agree that in the event of the accelerated maturity of the operations, they can only claim the resulting net balance. The net balance will be calculated under the terms of the agreement;
  • one of the parties to the agreement must be a credit entity, an investment services firm, or a non-resident entity authorized to carry out the activities reserved to the former entities under Spanish law.

Once these requirement are met, the effects of the agreed netting will not be affected by the insolvency of one of the parties to the agreement.

By way of exception to this general rule, the new regulation allows the financial operations or the netting agreement to be challenged, when they are executed after the date established for relating-back the effects of the bankruptcy, and it is proven that the netting took place to defraud creditors.

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