One year after its enactment, Decree-Law 70/97 of April 3 (Netting Law) has fulfilled many of its expectations. A formidable increase in derivative documentation efforts clearly shows the renewed interest of derivatives transaction agents dealing with Portuguese residents to make use of the advantages arising from Portugal's entry in the netting jurisdictions' league.
The Netting Law expressly frames itself within the Basle Committee Report on Banking Supervision of July 1994 and the Directive 96/10/CE of the EU Parliament and Council of March 21 1996 (which amended the Capital Adequacy Directive). The Netting Law refers also to local bankruptcy/insolvency statutes to be exceptionally derogated by its provisions.
The Netting Law is construed to encompass financial instrument transactions governed by standard documentation (in the words of the Portuguese legislator "from which similar rights flow"). Reference is made to such financial instruments to include derivative transactions in general. Finally, it is clearly stated that contractual close-out netting mechanisms set out in early termination provisions — triggered by bankruptcy related events of default — will be admitted and upheld against the Portuguese counterparty's bankrupted estate and respective creditors.
With the Netting Law, which had been preceded by a netting adhoc authorization for deals entered within the Oporto Derivatives Exchange and by a set-off clarification for derivative agreements entered into with the Portuguese Republic — the Portuguese legal system has shown its capability to adapt to sophisticated new legal developments and needs. However, at the implementing regulatory level, doubts have arisen from the Bank of Portugal as to the requirements to be requested from Portuguese banks to allow them to net-book their derivative positions.
These and other issues can be seen as fine adjustments of the system to a completely new statutory reality, and they should be overcome by the joint efforts of market agents, collaboration with other regulatory entities and additional information to be provided by dealers' associations (such as ISDA and ISMA). The local market expectations are that, following the statutory path opened by the Netting Law, Portugal is committed to fully equiping its legislative environment with all necessary conditions to enable its residents to be active players in an ever more global financial arena.
Pedro Cardigos dos Reis