The fragmented approach toward close-out netting provisions in Australia, Indonesia, Malaysia and Singapore compared


Close-out netting provisions are a relatively new addition to the financial legal framework. Their primary objective is to strengthen the regulation and manage the risk associated with over-the-counter derivatives. They have been adopted by the financial industry and used in financial transactions to assist in controlling and allocating financial risks. They are becoming an effective tool that provides an efficient process in calculating and settling on a net balance. However, they have been criticized for being unable to save some of the larger financial institution throughout the 2008 Global Financial Crisis. This paper examines how close-out netting provisions are applied under the UNIDROIT Principles which serves as the benchmark on how jurisdictions have incorporated them into national law. It examines the current approach taken by Australia, Indonesia, Malaysia and Singapore, stressing their importance in the increasing interconnected financial markets across Southeast Asia and Oceania. While this paper is limited in its scope only referring to the international framework and four national countries, the analysis undertaken can arguably be applied to other national and supranational legal systems. The paper challenges the fragmented approach to regulation of close-out netting provisions in a global setting. It highlights the divergent approaches currently adopted in defining, negotiating, drafting, interpreting and enforcing close-out netting provisions. It argues that nation states should adapt the UNIDROIT Principles in light of their national law and policy. It also presents a way forward in enforcing close-out netting provisions within contracts.

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  1. 1.

    United Nations Commission on International Trade Law—UNCITRAL Legislative Guide on Insolvency Law 208-215, At 208, it states that financial contracts have become an important component of inter- national capital markets.

  2. 2.

    UNIDROIT Principles on the Operation of Close-Out Netting Provisions which were adopted by the UNIDROIT Governing Council at its 92nd session, Rome, 8–10 May (2013).

  3. 3.

    Pak [9].

  4. 4.

    Giovanoli [4].

  5. 5.

    Johnson [7].

  6. 6.


  7. 7.

    United Nations Commission on International Trade Law—UNCITRAL Legislative Guide on Insolvency Law at 213,

  8. 8.


  9. 9.

    Ibid. Close-out netting is often understood as resembling the classical concept of set-off applied upon default or insolvency of one of the parties. Traditionally, the concept of set-off applies only to parties with mutual debts of the same kind that are already due and payable, and that are legally distinct. Whether set-off occurs by contract, by unilateral declaration by one party or by operation of law, the parties’ existing debts are set off against each other, such that the party with the smaller debt owes nothing, and the party with the larger debt owes only the difference between the two obligations. Even though overlap can occur between the concepts of set-off and close-out netting, they are neither functionally nor conceptually identical.

  10. 10.


  11. 11.

    Mallesons Stephen Jaques, Australian Finance Law, Lawbook Co (2008) pp. 795–797. Close-out netting provisions can operate at various levels such as to payments generally (particular transaction), to all payments (type of transaction), to all payments (in a defined class of transactions) and can apply to all payments in all transactions. Additionally, there are bilateral and multilateral netting.

  12. 12.

    Ibid. The sum value of all such transactions is then aggregated, resulting in a single net payment obligation.

  13. 13.

    Simkovic [10].

  14. 14.

    Bliss and Kaufman [2].

  15. 15.

    Johnson [7]. Close-out netting puts creditors into a position of super-priority far preferable to the position of most creditors of a bankrupt estate. Thus, close-out netting between A and B transfers credit risk from A to B’s general creditors, and from B to A’s general creditors. This shift is unfair because A and B will retain, to a great extent, the potential benefits of the underlying transactions, while their general creditors, who do not directly benefit from the creation of those positions, will bear much of the cost if the transactions fail.

  16. 16.


  17. 17.


  18. 18.


  19. 19.

    Šimunović [11].

  20. 20.

    Hupke [6].

  21. 21.

    Loon and Lan [8].

  22. 22.

    Benjamine [1].

  23. 23.

    United Nations Commission on International Trade Law—UNCITRAL Legislative Guide on Insolvency Law 208-215, At 208, it states that financial contracts have become an important component of inter- national capital markets.

  24. 24.


  25. 25.

    Ibid, at 209, Debtors often enter into multiple financial contracts with a given counterparty in a single course of dealing and the availability of credit is enhanced if rights under those contracts are fully enforceable in accordance with their terms, thereby permitting counterparties to extend credit based on their net exposure from time to time after taking into account the value of all “open” contracts.

  26. 26.

    Ibid, at 2010, “Close-out netting” embraces two steps: firstly, termination of all open contracts as a result of the commencement of insolvency proceedings (close-out); and secondly, the set-off of all obligations arising out of the closed out transactions on an aggregate basis (netting).

  27. 27.

    UNIDROIT Principles on Close-Out Netting Provisions,

  28. 28.

    Ibid, Explanatory Comments 16.

  29. 29.

    Ibid, Explanatory Comments 17, Consideration should also be given to the general principle that the law should not treat similar situations differently without justification, and the specific principles against discrimination between domestic and foreign creditors in insolvency (UNCITRAL Model Law on Cross-Border Insolvency, Article 13).

  30. 30.

    Ibid, Principle 2.

  31. 31.

    Ibid, Principle 8.

  32. 32.

    Ibid, Principle 6.

  33. 33.


  34. 34.


  35. 35.

    Ibid, Explanatory Comment 118.

  36. 36.

    Ibid, Explanatory Comment 120–122.

  37. 37.

    Ibid. 122. Even if in principle eligible, an obligation may be unenforceable for various reasons. A prominent case relates to wagering or gaming prohibitions which might apply in relation to certain derivatives transactions in some jurisdictions.

  38. 38.

    UNIDROIT Convention on Substantive Rules for Intermediated Securities, (2009) Article 31.

  39. 39.

    Ibid, Article 33, Further, when appropriating the collateral securities as the collateral taker’s own property and setting off their value against, or applying their value in or toward the discharge of, the relevant obligations, provided that the collateral agreement provides for realization in this manner and specifies the basis on which collateral securities are to be valued for this purpose.

  40. 40.


  41. 41.

    International Swaps and Derivatives Association, Model Netting Act and Guide, 2018,

  42. 42.

    International Swaps and Derivatives Association,, ISDA has more than 900 member institutions from 69 countries.

  43. 43.

    International Swaps and Derivatives Association, Model Netting Act and Guide, 2018, The 2018 MNA is a model law intended to set out the basic principles necessary to ensure the enforceability of bilateral close-out netting, including bilateral close-out netting on a multibranch basis, as well as the enforceability of related financial collateral or margin arrangements.

  44. 44.

    Ibid, Principle 2 of the MNA provides that a close-out netting provision means a contractual provision on the basis of which, upon the occurrence of an event predefined in the provision in relation to a party to the contract, the obligations owed by the parties to each other that are covered by the provision, whether or not they are at that time due and payable, are automatically or at the election of one of the parties reduced to or replaced by a single net obligation, whether by way of novation, termination or otherwise, representing the aggregate value of the combined obligations, which is thereupon due and payable by one party to the other.

  45. 45.

    Ibid, Principle 6 - Operation of close-out netting provisions in general relates to the law of the implementing State should ensure that a close-out netting provision is enforceable in accordance with its terms.

  46. 46.

    Ibid, Point 4 (a) Enforceability of Netting Agreement.

  47. 47.

    Ibid, Point 4 (b) Limitation on obligation to make payment or delivery.

  48. 48.

    Ibid. Limitation on right to receive payment or delivery.

  49. 49.

    Above, n 39.

  50. 50.

    FieldFisherWasterhouse,, accessed 24 January 2019. ISDA User Guide to 1992 ISDA Master Agreement,

  51. 51.


  52. 52.

    Goode [5].

  53. 53.


  54. 54.

    Payment Systems and Netting Act 1998. section 15.

  55. 55.


  56. 56.

    Payment Systems and Netting Act 1998, section 5.

  57. 57.

    (2008) 171 FCR 473.

  58. 58.


  59. 59.

    Ibid, at 37. The obligations referred to in the definition are intended to apply broadly to encompass monetary obligations arising under a financial contract such as an interest rate or currency swap, and to non-monetary obligations such as an obligation to deliver commodities under a commodities derivative contract or securities under a securities derivative contract. The obligations covered by the definition are also intended to cover contingent obligations.

  60. 60.

    Ibid, section 14 1 (ca).

  61. 61.

    Ibid, section 14 2 (fa)..

  62. 62.

    (2008) 171 FCR 473.

  63. 63.

    Above, n 59, section 14(1).

  64. 64.

    Ibid, section 14(2).

  65. 65.

    Ibid, section 14(4).

  66. 66.

    Ibid, at 37.

  67. 67.

    Foreign Judgements Act 1991, Part 2. However, a judgment given by a court of New Zealand is only registrable under the Foreign Judgments Act if it is given before 11 October 2013.

  68. 68.

    (2013) 16 DCLR (NSW) 366.

  69. 69.

    Ibid, at 6.

  70. 70.

    Ibid, at 67.

  71. 71.

    Above, n 30, 14A (1)(b).

  72. 72.

    Australian Financial Markets Association, Resilience and Collateral Protection Law Amendments, 2016,

  73. 73.


  74. 74.


  75. 75.


  76. 76.


  77. 77.

    Foreign Judgements Act 1991 – Foreign Judgement Regulations 1992, the basis of such enforcement is “substantial reciprocity” in the enforcement of judgments between Australia and each country. The statutory regime applies to the following jurisdictions: Bahamas, British Virgin Islands, Canada, Cayman Islands, Dominica, Falkland Islands, Fiji, France, Germany, Gibraltar, Grenada, Hong Kong, Israel, Italy, Japan, Korea, Malawi, Montserrat, PNG, Poland, St Kitts and Nevis, St Helena, St Vincent and the Grenadines, Seychelles, Singapore, Solomon Islands, Sri Lanka, Switzerland, Taiwan, Tonga, Tuvalu, UK and Western Samoa.

  78. 78.

    Payment and Settlements Systems (Finality and Netting) Act 2003, Act 39 of 2002, Most recently amended by Act 4 of 2018 wef 06/06/2018.

  79. 79.

    Ibid, section 2.

  80. 80.

    [2016] SGHC 17, at 7, The plaintiff, Stanley Tan Poh Leng (“ST”), was a private wealth client of the defendant, UBS AG (“the Bank”). Between October 2007 and August 2008, ST invested in 16 equity accumulators (“the Accumulators”) on a margin trading basis. At one time, ST owned equity stocks with a combined market value in excess of S$100 million in his account with the Bank (“the Account”).

  81. 81.

    Ibid, at 184.

  82. 82.

    Ibid, at 189 and 200.

  83. 83.

    Above, n 56, section 13.

  84. 84.


  85. 85.

    Singapore Arbitration Act 2002, section 33.

  86. 86.

    Peh Teck Quee v Bayerische Landesbank Girozentrate [199] 3 SLR(2) 842 at 12.

  87. 87.


  88. 88.

    [2016] SGHC 17, at 7.

  89. 89.

    GAR Know How Construction Arbitration – Malaysia Contract Law,

  90. 90.

    James Capel (Far East) Ltd v YK Fung Securities Sdn Bhd [1996] 2 MLJ 97.

  91. 91.

    Netting of Financial Agreements Act 2015. The Act was passed in order to bring Malaysia’s regulatory regime in line with international Netting law and practice. The further purpose was to redress the preexisting uncertainty in Malaysian Law over the enforceability of netting arrangements.

  92. 92.

    Ibid, paragraph 6[1][a].

  93. 93.

    World Bank, Financial Sector Assessment, Republic of Indonesia, (2017),

  94. 94.

    No. 14/15/PBI/2012.

  95. 95.

    Number 7. 2011.

  96. 96.

    Bank Indonesia issued two Bank Indonesia Regulations regarding foreign exchange transactions against Rupiah: (i) Bank Indonesia Regulation No. 18/18/PBI/2016 on Foreign Exchange Transactions against Rupiah between Banks and Domestic Parties (“PBI 18/18”) and (ii) Bank Indonesia Regulation No. 18/19/PBI/2016 on Foreign Exchange Transactions against Rupiah between Banks and Foreign Parties (“PBI 18/19”). As a general rule, to conduct a foreign exchange transaction against Rupiah, banks must satisfy the following requirements: those imposed by the banking authority(ies) under which only a certain category of bank is allowed to conduct foreign exchange transactions; implement risk management as required under the banking authority(ies) regulations on the implementation of risk management in banks; provide training on foreign exchange transactions against Rupiah to customers; and  comply with the Bank Indonesia regulation on the mandatory use of Rupiah.

  97. 97.

    Decisions of the Central Jakarta District Court No. 001/Pdt/Arb.Int/1999/PN.JKT.PST, No. 002/Pdt/Arb.Int/1999/PN.JKT.PST, and No. 002/Pdt.P/2000/PN.JKT.PST issued on 3 February 2000, in Soemartono [12].

  98. 98.


  99. 99.


  100. 100.


  101. 101.


  102. 102.


  103. 103.


  104. 104.


  105. 105.

    Above, n 56.

  106. 106.

    Watson [13].

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  108. 108.


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Walters, R., Trakman, L. The fragmented approach toward close-out netting provisions in Australia, Indonesia, Malaysia and Singapore compared. J Bank Regul 21, 224–240 (2020).

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  • close-out netting provisions
  • Australia
  • Inodnesia
  • Malaysia
  • Singapore