Uganda Inches Closer To Enforceable Netting

• Published date: 28 September 2021
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Financial Services, Commodities/Derivatives/Stock Exchanges, Contracts and Commercial Law
• Law Firm: ENSafrica
• Author: Ms Kelle Gagné and Phillip Karugaba

Uganda is set to take a key step towards ensuring the enforceability of close-out netting under ISDA, GMRA and GMSLA contracts - at least in respect of financial institutions governed by the Financial Institutions Act. This follows a recent meeting hosted by Bank of Uganda ('BOU') to discuss draft regulations titled 'The Financial Institutions (Preference and Appraised Book Value) Regulations 2021'. The participants at the meeting included the leading financial institutions and market players as well representatives from the International Capital Markets Association ('ICMA').

Netting is the mechanism that allows participants in the derivatives, securities lending and repo markets to set-off their mutual obligations with a counterparty that has become the subject of an insolvency-type proceeding. Up to now, although automatic early termination would be enforceable as a matter of contract law, the Act voids transfers, made within 6 months of a management takeover (or closure) of a financial institution, if the transfer was made to effect a preference or the transfer was made at below appraised book value. In effect this gave BOU impeachment power to negate close-out netting performed against such a financial institution.

The new regulations give effect to section 88 of the Financial Institutions Act and clarify BOU's power of impeachment as it applies to derivatives, repos and securities lending entered into by a financial...