“Bilateral clearing of qualified financial contracts covers financial contracts entered into on a bilateral basis outside the clearing system. It will strengthen the financial supervisory authorities RBI, SEBI, IRDAI, etc. They will inform the contract as part of their competence as a qualified financial contractor. This law, if passed, will have a very large influence on India`s financial stability and we will have a very vibrant market that will allow companies to have more and affordable resources,” FM Sitharaman told Rajya Sabha about the bilateral compensation of qualified financial contracts, 2020. Consider a situation in which there are two financial parties involved in a particular transaction and they have several swap agreements between them. (i) Reducing credit risk against parties through compensation will strengthen the resilience of the financial sector. Accountability: The “close-out netting” is enforceable against an insolvent party and against the person providing guarantees (if any). The closing network is also enforceable against a party under administration, regardless of any omission, moratorium, insolvency, liquidation, liquidation or a court decision adopted under a law. Instead of sending two payments, Company B with bilateral compensation would send 2,083.33 USD (833.33 USD – 1,250 USD) or 25,000 USD (10,000 USD – 15,000 USD) per year. Bilateral Netting: Netting refers to the clearing of all receivables a result of transactions between two parties in order to determine a net amount to be paid or sent from one party to another. The term bilateral itself means “to have or refer to two pages; both sides. Net compensation refers to the determination of the difference between all swap payments, which generates a total (net). A total of 55 positions are held in reserve for a net transaction of only R5.
Bilateral compensation thus allows for a more efficient allocation of capital, which is essential to the deepening of our financial system. Yesterday (23 September), Parliament passed the Law on the Bilateral Interconnection of Qualified Financial Contracts. As a result, the government has changed the legal framework for bilateral networks. The current legal framework in India does not allow for the clearing of bilateral financial contracts (over-the-counter derivatives), which requires banks to provide capital on a gross basis for such derivatives, the depriving banks of large volumes of capital in a non-productive manner. On the other hand, there is a legal framework for multilateral transactions that allows for substantial savings.