The general administrative act became necessary following a decision by the Federal Court of Justice (Bundesgerichtshof – BGH) of 9 June 2016 about the validity of certain arrangements in the master agreement on financial futures transactions (ref. no. IX ZR 314/14). The Federal Court of Justice ruled that settlement arrangements which are concluded by parties to equity option transactions in case insolvency occurs, where such parties are subject to German law and which are incompatible with section 104 of the German Insolvency Code (Insolvenzordnung – InsO), are in this respect invalid and therefore directly subject to the provisions of section 104 of the Insolvency Code. The Federal Ministry of Justice and Consumer Protection (Bundesministerium der Justiz und für Verbraucherschutz – BMJV) and the Federal Ministry of Finance (Bundesministerium der Finanzen – BMF) subsequently declared their intention to immediately initiate legislative measures to promptly clarify or render more precisely the affected provisions of insolvency law, in order to ensure that the commonly used master agreements continue to be recognised in the market and by supervisory authorities. However, first the question of whether the decision has implications beyond the scope of the individual case will be examined. If the legislature does take action, it is expected that several months will pass before such changes can come into effect.

For this period, BaFin establishes that contractual netting agreements must continue to be settled as contractually agreed.

Background:

Netting master agreements provide that the transactions covered (in this case particularly derivative transactions) are terminated or can be terminated in the event of default as contractually defined. The market values of the individual transactions determined upon termination are then netted to establish a net claim.

Contractual netting agreements underlying the matter ruled on by the Federal Court of Justice are used in numerous master agreements. They are model clauses which are not only used in the German master agreement ruled on by the Federal Court of Justice but in the same or a slightly altered form in numerous other model agreements as well. These model clauses are intended for model master agreements such as those issued by the International Swaps and Derivatives Association (ISDA). BaFin assumes that such contractual clauses are used in a very high number of contracts which may be subject to the Insolvency Code in the case of insolvency. It is not currently possible to estimate whether the oft-used contractual clauses are affected by the Federal Court of Justice's decision and if so, which ones.