The Financial Netting Improvements Act Of 20061 ("Act") Became Law On December 12, 2006. The Act amends the Bankruptcy Code ("Code") and various federal banking laws to update and make technical corrections to the provisions of the Code and those other laws that were added or amended in 2005.2
The Act makes technical and conforming amendments to the Code’s definitions of "financial institution," "financial participant," "forward contract" and "swap agreement." The most significant of those amendments are the expansion of weather-related transactions that are included in "swap agreement" and the express inclusion therein of emissions- and inflation-related transactions.
The rights of commodity brokers, forward contract merchants, stockbrokers, financial institutions, financial participants, securities clearing agencies, repo participants and swap participants under various financial contracts that are carved out from the application of the automatic stay have been expanded beyond the right of setoff to include other netting contractual rights (as already expansively defined) under security and other credit-enhancing agreements and arrangements.
The safe harbors from avoidance by a bankruptcy trustee for various kinds of payments and other transfers provided in Section 546 of the Code have been expanded and clarified, most significantly to expressly encompass transfers made to or for the benefit of a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant or securities clearing agency in connection with any securities, commodities or forward contracts that are not margin or settlement payments (which were already protected).
Most unfortunately, the Act fails to correct the serious (but seemingly little-noticed) technical error that was made in 2005 in amending Section 553(a) of the Code, the provision that substantively validates certain setoff rights (as distinguished from the provisions that merely carve out certain offsets from the application of the automatic stay). Although we noticed the error in 2005, we have seen no commentary which discusses it, presumably because, like us, no one else who has noticed it wishes to describe it in writing lest it be exploited by bankruptcy trustees to contest certain offsets in financial-contract transactions that might otherwise be uncontested or arguably be protected.
The amendments made by the Act apply only in bankruptcy cases commenced after its enactment.
Footnotes
1. Pub. L. No. 109-390.
2. See Title IX of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8; D. Dykhouse, L.A. Lewis and M. Handler, "The Financial Contract Provisions of the Bankruptcy Abuse Prevention & Consumer Protection Act of 2005," XIV Derivatives Week 11 (March 21, 2005).
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