Legal modernization and financial instruments: Bulgaria takes steps to introduce a close-out netting regime


Several proposed amendments to Bulgaria's financial laws are poised to significantly enhance the country's financial infrastructure and legal framework. Foremost among these amendments is the Draft Law on Amendments and Additions to the Law on Financial Collateral Contracts (FCC Act), which would introduce crucial modifications to address practical challenges and improve legal certainty in the financial sector.

A key focus of the proposed amendments is to establish a comprehensive legal framework for close-out netting. Close-out netting serves as a fundamental credit risk management mechanism, allowing parties to terminate multiple transactions under a single master agreement in the event of default or specified triggering events. However, the absence of a regulated legal framework in Bulgaria has led to uncertainty and hindered the efficacy of close-out netting arrangements, particularly during insolvency proceedings. The proposed amendments would rectify this by providing clear provisions for close-out netting, aligning Bulgaria with international standards, and facilitating smoother cross-border transactions. By introducing robust legal mechanisms for close-out netting, the draft law aims to enhance financial market stability, mitigate credit risks, and promote investor confidence.

In addition, the draft law addresses practical challenges in the financial collateral regime. Financial collateral contracts play a crucial role in facilitating various financial transactions, including derivatives, repos, and securities lending. However, inconsistencies and inaccuracies in the application of the financial collateral regime have posed challenges for market participants. The proposed amendments would synchronize the financial collateral contract framework with the close-out netting mechanism, thereby enhancing legal certainty and promoting consistency in financial transactions. By updating existing provisions and expanding the scope of eligible entities and jurisdictions, Bulgaria aims to improve access to international financial markets for domestic participants while ensuring compliance with evolving European and national legislation.

Furthermore, the draft law would ensure stability in insolvency proceedings by limiting the power of insolvency practitioners to interfere with close-out netting contracts. These measures are considered necessary to maintain the integrity of financial contracts and promote investor confidence in Bulgaria's financial markets.

In terms of its implications, the adoption of the draft law is expected to yield several positive outcomes for Bulgaria's financial ecosystem. By creating a conducive environment for close-out netting and financial collateral agreements, the legislation will foster greater legal certainty, encourage the development of hedging and securities financing transactions, and promote market stability. Moreover, by aligning Bulgaria's legal framework with international best practices, the amendments will enhance the country's attractiveness to foreign investors and facilitate smoother cross-border transactions. This is particularly significant as Bulgaria prepares for its impending accession to the euro area, where robust financial regulations are imperative for sustained economic growth and stability.

The proposed amendments to Bulgaria's financial laws represent a significant step towards enhancing the country's financial stability and competitiveness on the global stage. By addressing practical challenges, improving legal certainty, and promoting stability in insolvency proceedings, Bulgaria aims to modernize its financial infrastructure and align it with international standards, paving the way for sustained economic growth and stability. Last but not least, the proposed changes might ultimately result in the adoption of an ISDA netting opinion for Bulgaria – something that will bring even more credibility to the market. For further information, please contact your usual CMS contact or our experts Ivan Gergov and Dimitar Zwiatkow.