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International Financial Law: The Case Against Close-Out Netting, Vincent R. Johnson

Faculty Articles

In financial transactions today, a practice called “close-out netting” plays a key role in controlling and allocating risks. If anchored in the parties’ chosen contractual language and recognized by law, close-out netting can circumvent normal bankruptcy processes by providing for the acceleration of mutual obligations and the efficient calculations and settlement of the net balance. When correctly implemented, close-out netting can eliminate the risk that arises under ordinary bankruptcy principles.

Despite the support for close-out netting by lenders, scholars, regulators, and policy makers, a few attentive observers of financial law argue that close-out netting is unsound, and the argument against …