Harbouring doubts on close-out netting

Derivatives safe harbours are viewed as crucial to close-out netting. However, they are under siege from the US Congress, where legislators have tried to undo the protections given to market participants when a counterparty defaults. Mark Pengelly reports

Close-out netting is a process market participants hope never to undertake. Nevertheless, it is a mainstay of the derivatives market – and one the industry is increasingly being forced to defend against academic and congressional attack. At the end of April, an amendment to the Senate financial reform bill proposed scrapping the safe harbours for derivatives completely – a move industry participants say would be disastrous for the market.

Close-out netting means that if a derivatives user goes