By James Hamilton, J.D., LL.M.
A bill amending the derivatives netting and financial contract provisions incorporated by Title IX of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 to reflect current market and regulatory practices has passed both houses of Congress and been cleared for the President. The Financial Netting Improvements Act of 2006 (HR 5585) would amend banking, bankruptcy, and securities laws related to the disposition of financial contracts in the event of insolvency. In such cases, financial contracts are processed on a net basis to reduce the systemic risk associated with activities in derivatives markets, which is that the failure of one entity will disrupt and endanger financial markets. That process, known as financial netting, involves settling mutual obligations at their net value as opposed to each obligation's gross dollar value. H.R. 5585 would update existing laws regarding netting to ensure that some of the newer forms of contractual arrangements are resolved in the same manner as other similar contracts.