The Serbian Financial Collateral Act: Love At Second Sight?

• Published date: 16 February 2022
• Subject Matter: Finance and Banking, Insolvency/Bankruptcy/Re-structuring, Financial Services, Commodities/Derivatives/Stock Exchanges, Insolvency/Bankruptcy
• Law Firm: Kinstellar
• Author: Mr Petar Kojdi&#263

February 2022 - The adoption of the Financial Collateral Act (FCA) in 2018 was widely regarded as a great addition to Serbia's financial law infrastructure. Nevertheless, more than three years later, the FCA's full potential has largely remained untapped. The key reason lies in its narrow scope in terms of covered counterparties and eligible transactions. Although the FCA delivered adequate protections for close-out netting in financial transactions among eligible counterparties (i.e., mostly sovereign and financial sector entities), it still does not protect close-out netting in transactions that involve corporate counterparties. Perhaps the time has come for the Serbian legislature to consider suggested updates to the FCA so that market participants may give it another chance.

Netting in Serbia: Status Quo

From 1 January 2019, netting provisions were removed from the Insolvency Act (Zakon o stecaju) and replaced by the new netting rules of the Financial Collateral Act (Zakon o finansijskom obezbedenju) ("FCA").

The FCA and the Decision on Financial Derivatives (Odluka o obavljanju poslova s finansijskim derivatima) ("Derivatives Decision") issued by the National Bank of Serbia ("NBS") both recognise termination and close-out netting provisions in financial transactions ("Transactions") with eligible Serbian counterparties. The mutual liabilities and receivables of the parties may be netted in the event of contract termination as a consequence of agreed events of default and termination events, in accordance with the standardised master agreement on financial derivatives customary in business practice and/or in the manner customary in business practice.

Although the FCA and the Derivatives Decision facilitated greater legal certainty for close-out netting in Transactions between eligible counterparties, the FCA as the primary source of netting legislation in Serbia, does not recognise close-out netting in Transactions that involve a regular corporate entity, and this can constrain the ability of corporate counterparties to hedge interest, currency, FX and other risks. The close-out netting in such cases is left to the general contract and insolvency rules and is potentially exposed to the discretion of an insolvency administrator.

The FCA establishes that close-out netting is recognised and protected only in Transactions with certain eligible Serbian counterparties listed in Article 4 of the FCA: the Republic of Serbia (sovereign counterparty); the...