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Payment Systems and Netting Bill 1998

Part 5 Market netting contracts

   

16   Effectiveness of market netting contracts

             (1)  If:

                     (a)  Australian law governs a market netting contract; and

                     (b)  the contract is entered into in circumstances that are within Commonwealth constitutional reach;

the following provisions apply:

                     (c)  obligations may be terminated, termination values may be calculated and a net amount become payable in accordance with the contract;

                     (d)  paragraph (c) applies despite:

                              (i)  any disposal of rights that may be netted under the contract; or

                             (ii)  the creation of any encumbrance, or any other interest, in relation to those rights; or

                            (iii)  the operation of any encumbrance, or any other interest, in relation to those rights that is created after the commencement of this section;

                            in contravention of a prohibition in the contract;

                     (e)  for the purposes of any law, the assets of a party to the contract are taken:

                              (i)  to include any net obligation owed to the party under the contract; and

                             (ii)  not to include obligations terminated under the contract.

             (2)  If:

                     (a)  a party to a market netting contract goes into external administration; and

                     (b)  Australian law governs either:

                              (i)  the external administration; or

                             (ii)  the contract;

the following provisions apply:

                     (c)  obligations may be netted or terminated, termination values may be calculated and a net amount become payable in accordance with the contract;

                     (d)  obligations that are, or have been, netted or terminated under the contract are to be disregarded in the external administration;

                     (e)  any net obligation owed by the party under the contract that has not been discharged is provable in the external administration;

                      (f)  any net obligation owed to the party under the contract that has not been discharged may be recovered by the external administrator for the benefit of creditors;

                     (g)  none of the following is to be void or voidable in the external administration:

                              (i)  the netting or termination of obligations under the contract;

                             (ii)  a payment by the party to discharge a net obligation under the contract;

                            (iii)  a payment, or a transfer of property (whether absolutely or by way of security), by the party to meet an obligation under the contract to pay a deposit or margin call.

Note:          By giving express recognition to market netting contracts, subsections (1) and (2) remove the basis for arguing that the contracts are void as contrary to public policy embodied in the laws dealing with insolvency.

             (3)  Subsections (1) and (2) have effect despite any other law (including the specified provisions).

Note:          Section 5 defines specified provisions .