EN ECB-PUBLIC  
 
 OPINION OF THE EUROPEAN CENTRAL BANK 
of 7 January 2021 
on the enforcement of close-out netting agreements 
(CON/2021/1) 
 
Introduction and legal basis 
On 17 November 2020 the European Central Bank (ECB) received a request from the Ministry of Finance 
of the Republic of Latvia for an opinion on a draft law on the enforcement of close-out netting in qualified 
financial transactions and on draft laws containing related ame ndments to the Law on credit institutions and 
to the Law on insolvency (the ‘draft laws’). 
The ECB’s competence to deliver an opinion is based on Articles  127(4) and 282(5) of the Treaty on the 
Functioning of the European Union and the third and sixth inden ts of Article 2(1) of Council Decision 
98/415/EC1, as the draft laws concern Latvijas Banka, rules applicable to  financial institutions insofar as 
they materially influence the st ability of financial institutio ns and markets and the specific tasks conferred 
on the ECB concerning the prudential supervision of credit inst itutions pursuant to Article 127(6) of the 
Treaty. In accordance with the fi rst sentence of Article 17.5 o f the Rules of Procedure of the European 
Central Bank, the Governing Council has adopted this opinion. 
 
1. Purpose of the draft laws 1.1 The purpose of the draft laws is threefold: first, to ensur e financial market stabilit y by limiting systemic 
risk that might be caused by legal protection, insolvency or wi nding-up proceedings against a 
financial market participant; second, to protect the parties to  a close-out netting agreement in the 
event that legal protection, ins olvency or winding-up proceedin gs are carried out in relation to any of 
the parties; and third, to contribute to the development of the  financial instruments market in Latvia, 
consolidating Latvia’s position as a regional hub for financial  services.  
1.2 As set out in the explanatory memorandum to the draft laws,  at present close-out netting in Latvia is 
applicable only to transactions where both counterparties are r egulated credit institutions or other 
financial market participants or public entities, pursuant to t he transposition of the relevant provisions 
of Directive 98/26/EC of the European Parliament and of the Cou ncil
2, Directive 2002/47/EC of the 
European Parliament and of the Council3 and of Directive 2001/24/EC of the European Parliament 
 
1  Council Decision 98/415/EC of 29 June 1998 on the consultatio n of the European Central Bank by national authorities 
regarding draft legislative prov isions (OJ L 189, 3.7.1998, p. 42). 
2  Directive 98/26/EC of the European Parliament and of the Coun cil of 19 May 1998 on settlem ent finality in payment 
and securities settlement system s (OJ L 166, 11.6.1998, p. 45).  
3  Directive 2002/47/EC of the Eu ropean Parliament and of the Co uncil of 6 June 2002 on financial collateral 
arrangements (OJ L 168, 27.6.2002, p. 43). 
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2 and of the Council4. The draft laws establish a legal framework governing close-ou t netting applicable 
to derivative and spot transacti ons with regard to currency, se curities and commodities where one of 
the contractual parties, although not a regulated financial mar ket participant, falls within a list of 
eligible entities, as described in paragraph 1.4. Latvia is one  of the last Union jurisdictions in which 
the enforcement of close-out ne tting transactions with unregula ted entities has not yet been 
implemented. The lack of relevant legislation subjects the fina ncial sector in Latvia to a greater 
domino effect when a financial crisis arises. This lack of legi slation also hinders Latvian financial 
market participants and large enterprises in attracting cheaper  financing in situations where the other 
counterparty is from a jurisdiction in which such legislation e xists, because the lack of close-out 
netting is a risk that is included in the price of any financia l instrument. Introducing such legislation 
will reduce the costs of complying with capital adequacy requir ements for Latvian credit institutions 
and financial market participants, as it will allow them to hol d less capital relative to their risk-weighted 
assets.  
1.3 The draft laws aim to ensur e the enforceability of close-ou t netting in qualified financial transactions5. 
Finanšu un kapitāla tirgus komisija (FKTK, the Latvian Financia l and Capital Market Commission) 
may issue regulations to designate any other type of transactio n, in addition to those specified by the 
draft laws, as qualified financial transactions. For the purpos e of the draft laws, an agreement is 
deemed to be a close-out netting agreement notwithstanding the fact that such agreement may 
contain provisions relating to t ransactions that are not qualif ied financial transactions, provided, 
however, that such agreement is deemed to be a close-out nettin g agreement only with respect to 
the qualified financial transactions.  
1.4 The draft laws regulate the enforcement of close-out nettin g where the parties to the close-out netting 
agreement fall into one of the following three categories: firs t, where both parties to the close-out 
netting agreement are Latvian or foreign State authorities, Lat vijas Banka, the ECB, central banks of 
other States, the Bank for Inter national Settlements (BIS), the  International Monetary Fund (IMF), 
specified multilateral development banks, or credit institution s, a wide range of financial market 
 
4  Directive 2001/24/EC of the European Parliament and of the Co uncil of 4 April 2001 on the reorganisation and winding 
up of credit institutions ( OJ L 125, 5.5.2001, p. 15). 
5  For this purpose qualified financial transactions are defined  to include transactions in respect of financial instruments 
specified under Section 3, Paragraph two, Clauses 4, 5, 6, 7, 8 , 9 and 10 of the Law on financial instruments markets: 
 (1) Options, futures, swaps, forward rate agreements and any o ther derivative contracts relating to securities, 
currencies, interest rates or y ields, emission allowances or ot her derivatives instruments, f inancial indices or financial 
measures which may be settl ed physically or in cash; 
 (2) Options, futures, swaps, forwards and any other derivative  contracts relating to commodities that must be settled 
in cash or may be settled in cash at the option of one of the p arties other than by reason of default or other termination 
event; 
 (3) Options, futures, swaps, and any other derivative contract  in accordance with Regulation (EU) 2017/565 relating to 
commodities that can be physically settled provided that they a re traded on a regulated market, a multilateral trading 
facility (MTF), or an organised trading facility (OTF), except for wholesale energy products traded on an OTF that must 
be physically settled; 
 (4) Options, futures, swaps, forwards and any other derivative  contracts in accordance with Regulation (EU) 2017/565 
relating to commodities, that  can be physically settled not oth erwise mentioned in point 3 and not being for commercial 
purposes, which have the characte ristics of other derivative fi nancial instruments; 
 (5) Derivative instruments for the transfer of credit risk;  (6) Financial contracts for differences;  (7) Options, futures, swaps, forward rate agreements and any o ther derivative contracts in  accordance with Regulation 
(EU) 2017/565 relating to climat ic variables, freight rates or inflation rates or other official economic statistics that must  
be settled in cash or may be se ttled in cash at the option of o ne of the parties other than by  reason of default or other 
termination event, as well as any other derivative contracts re lating to assets, rights, obligations, indices and measures 
not otherwise mentioned in this Se ction, which have the charact eristics of other derivative financial instruments, having 
regard to whether, inter alia , they are traded on a regulated m arket, OTF, or an MTF. 
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3 participants and central counterpa rties regulated by Latvia or other Union, European Economic Area 
(EEA) or Organisation for Econom ic Co-operation  and Development  (OECD) member states; 
second, where one of the parties i s one of the aforementioned e ntities and the other party is a legal 
entity or private individual who is not a consumer6; and third, where both parties are legal entities 
which, at the moment of entering into the close-out netting agr eement, meet two of the following size 
requirements: (1) a total balanc e sheet of EUR 40 million, (2) a net turnover of EUR 50 million and 
(3) 250 employees.  
1.5 The scope of the draft laws is limited in a number of respe cts. First, the draft laws clarify that legal 
relationships concerning financial collateral are regulated by the Law on financial collateral. Second, 
the draft laws do not apply to systems operated by Latvijas Ban ka or which the FKTK has notified to 
the European Securities and Markets Authority (ESMA) under the Law on settlement finality in 
payment and financial instruments settlement systems, or to par ticipants in such systems, or to 
collateral provided to participate in such systems. Third, the draft laws do not apply to collateral used 
by central banks in transactions  related to the performance of their central bank functions. 
1.6 The draft laws clarify that close-out netting can be enforc ed and is not affected by legal protection, 
insolvency or the winding-up of any of the parties, which inclu des any related statutory provisions, 
such as those on relationships with creditors, the management o r retention of funds or any other 
steps taken in insolvency. After enforcement of close-out netti ng, the only obligation or claim of either 
party will be equal to its net obligation to or claim on the ot her party as determined in accordance 
with the terms of the close-out netting agreement. To ensure th e enforceability of c lose-out netting, 
the draft laws eliminate the powers of the administrator in ins olvency proceedings to unilaterally 
terminate a close-out netting contract concluded in the six mon ths prior to the opening of proceedings 
under the Law on insolvency with regard to a company insolvency  and under the Law on credit 
institutions with regard to the insolvency of a credit institut ion. The legal effect of the provisions of a 
close-out netting agreement are not affected by the limitations  of set-off, discharge of claims and 
liabilities or equivalent limitations provided under the Law on  insolvency or the Law on credit 
institutions. Close-out netting may not be declared invalid or cancelled merely because it has taken 
place before the commencement of the relevant winding-up or ins olvency proceedings. Close-out 
netting is valid and binding vis-à-vis third parties.  
1.7 According to the explanatory memorandum, the issue of poten tially fraudulent transactions prior to 
an insolvency has been carefully analysed and the outcome is to  presume that certain specified 
eligible entities, such as Lat vian or foreign State authorities , Latvijas Banka, the ECB, central banks 
of other States, the BIS, the IMF, specified multilateral devel opment banks, or credit institutions, a 
wide range of financial market participants and central counter parties regulated by Latvia or other 
Union, EEA or OECD member state s, are reasonably reliable count erparties which are highly unlikely 
to enter into fraud ulent transactions.  
 
6  Within the meaning of the Latvi an Law on the protection of co nsumer rights. 
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4 1.8 Finally, the draft laws implement Article 7(6) of Directive  (EU) 2019/1023 of the European Parliament 
and of the Council7, which states that Member States may provide that a suspension  of individual 
enforcement measures in preventiv e restructuring does not apply  to netting mechanisms, including 
close-out netting mechanisms, in  financial markets, energy mark ets and commodity markets. 
 2. Observations  
2.1 The ECB notes that the purpose of the draft laws is to prov ide a legal framework governing close-
out netting applicable to derivative and spot transactions with  regard to currency, securities and 
commodities where one of the contractual parties is not a regul ated financial market participant. Such 
legal standardisation is an important element of facilitating o rganised platform trading and central 
clearing in line with the 2009 Pittsburgh G20 commitments to re form over-the-counter (OTC) 
derivatives markets
8. Further, legal certainty regarding close-out netting is an im portant element for 
reducing counterparty credit risk and to ensure the adequacy of  the amount of any collateral 
exchanged9. As such, the enforceability of  close-out netting is an import ant element for the risk 
management of firms and a prerequisite for the development of s afe and sound OTC derivatives 
markets as well as covered spot transaction markets. 
2.2 The adoption of the draft laws could have practical implica tions for Latvian credit institutions as well 
as for other credit institutions dealing with Latvian counterpa rties. In particular, close-out netting is 
an important risk mitigation tool for credit institutions which  allows for effective reduction of 
counterparty credit risk, and thus contributes to sound risk ma nagement practices of credit 
institutions. Due to the broader application of close-out netti ng provided for in the draft laws, meaning 
that it will also apply to transactions where one of the contra ctual parties is not a regulated financial 
market participant, provided that the party falls within the li st of eligible entities, the draft laws may 
contribute to credit instituti ons dealing with Latvian counterp arties meeting the conditions for 
contractual netting arrangements to be recognised as an eligibl e form of credit risk mitigation and 
risk reduction under Regulati on (EU) No 575/201 3 of the Europea n Parliament and the Council10. 
2.3 With regard to operations conducted by Latvijas Banka or th e ECB with Latvian credit institutions, 
the draft laws should enhance the enforcement of close-out nett ing arrangements that central banks 
have with such counterparties arising out of financial transact ions that are not based on collateral 
arrangements, e.g. foreign exchange swap transactions. In this respect, the precise interaction 
between the enforcement of close-out netting provisions contain ed in financial collateral 
arrangements under the Law on financial collateral, the enforce ment of collateral used by central 
 
7  Directive (EU) 2019/1023 of the European Parliament and of th e Council of 20 J une 2019 on preventive restructuring 
frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of restructuring, 
insolvency and discharge of debt, and amending Directive (EU) 2 017/1132 (Directive on restructuring and insolvency) 
(OJ L 172, 26.6.2019, p. 18). 
8  See the 2010 FSB working group report ‘Implementing OTC Deriv atives Market Reforms’, available on the FSB’s 
website at www.fsb.org . 
9  Bank for International Settlements (2013), Supervisory guidance for managing ri sks associated with the settlement of 
foreign exchange transactions , available on the BIS’s website at www.bis.org . 
10  Articles 295 to 298 of Regulation (EU) No 575/2013 of the Eur opean Parliament and of the Council of 26 June 2013 
on prudential requirements for cr edit institutions and investme nt firms and amending Regulation (EU) No 648/2012 
(OJ L 176, 27.6.2013, p. 1). The ECB has clarified the process regarding recognition of contractual netting agreements 
as risk-reducing in its letter to significant credit institutio ns of 10 October 2019 and which is available on the banking 
supervision website at www.bankingsupervision.europa.eu . 
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5 banks in transactions related to the performance of their centr al bank functions under the Law on 
settlement finality in payment and financial instruments settle ment systems, and the enforcement of 
close-out netting provisions contained in qualified financial t ransactions subject to the draft laws 
could be more clearly articulated. The draft laws provide that legal relationships related to financial 
collateral are regulated by the Law on financial collateral, th at the draft laws do not apply to collateral 
used by central banks in transactions related to the performanc e of their central bank functions, and 
that an agreement is deemed to be a close-out netting agreement  notwithstanding the fact that such 
agreement may contain provisions relating to transactions that are not qualified financial 
transactions, provided, however, that such agreement is deemed a close-out netting agreement only 
with respect to qualified financial transactions. The ECB under stands that it is intended that close-
out netting provisions contained in a single agreement covering  both collateral arrangements and 
qualified financial transactions not having a collateral elemen t are intended to be enforceable. An 
explicit clarification of this  understanding would be welcomed,  for the sake of legal certainty.  
2.4 Finally, as regards the clarification that the draft laws d o not apply to participants in systems operated 
by Latvijas Banka or which the FKTK has notified to ESMA under the Law on settlement finality in 
payment and financial instruments settlement systems, legal cer tainty could be further enhanced by 
explicitly clarifying, for the avoidance of doubt, that partici pants in such systems are exempt from the 
draft laws only regarding their actions, rights and obligations  arising in connection with such systems. 
 
This opinion will be published on EUR-Lex.   
 
Done at Frankfurt am Main, 7 January 2021.  
[signed] 
 The President of the ECB 
Christine LAGARDE