The sections, word for word
Every section on this subject, exactly as printed in the Official Gazette (Act No. 3 of 2020). The explanation follows beneath.
Section 718. Definition of applicable concepts
In this Chapter— “financial regulatory authority” means—
(a) the Central Bank of Nigeria ;
(b) the Securities and Exchange Commission ;
(c) the National Insurance Commission ;
(d) the National Pension Commission ; and
(e) any other financial regulatory authority established by an Act of the National Assembly ; “cash” means money credited to an account in any currency or a similar claim for repayment of money, such as a money market deposit ; “collateral” means any—
(a) cash in any currency ;
(b) securities of any kind, including debt and equity securities ;
(c) guarantees, letters of credit and obligations to reimburse ; and
(d) any asset commonly used as collateral in Nigeria ; “collateral arrangement” means any margin, collateral, security arrangement or other credit enhancement related to or forming part of a netting agreement or one or more qualified financial contracts entered into thereunder, including—
(a) a pledge, charge or any other form of security interest in collateral, whether possessory or non-possessory ;
(b) a title transfer collateral arrangement ;
(c) a security interest collateral arrangement ; and
(d) any guarantee, letter of credit or reimbursement obligation by or to a party to one or more qualified financial contracts, in respect of those qualified financial contracts ; “insolvent party” means the party in relation to which an insolvency proceeding under the laws of Nigeria has been instituted ; “liquidator” means the liquidator, administrator, nominee, supervisor, receiver, trustee, conservator or other individual, person or entity which administers the affairs of an insolvent party during an insolvency proceeding under the laws of Nigeria ; “netting” means the occurrence of the following—
(a) termination, liquidation or acceleration of any payment or delivery obligation or entitlement under one or more qualified financial contracts entered into under a netting agreement;
(b) calculation or estimation of a close-out value, market value, liquidation value or replacement value in respect of each obligation or entitlement or group of obligations or entitlements terminated, liquidated or accelerated under paragraph (a) ;
(c) conversion of any values calculated or estimated under paragraph (b) into a single currency ; and
(d) determination of the net balance of the values calculated under paragraph (b), as converted under paragraph (c), whether by operation of set-off or otherwise ; “netting agreement” means any—
(a) agreement between two parties that provides for netting of present or future payment or delivery obligations or entitlements arising under or in connection with one or more qualified financial contracts entered into under the agreement by the parties to the agreement (a “master netting agreement”) ;
(b) master agreement between two parties that provides for netting of the amounts due under two or more master netting agreements (a “master-master netting agreement”) ; and
(c) collateral arrangement related to or forming part of one or more of the foregoing ; “non-insolvent party” means the party other than the insolvent party; “party” means a person constituting one of the parties to a netting agreement ; “person” includes partnerships, companies, regulated entities such as banks, insurance companies and pension fund administrators, or any other body corporate (including statutory corporations or statutory bodies) whether organised under the laws of Nigeria or under the laws of any other jurisdiction, and any international or regional development bank or other international or regional organisation ; “qualified financial contract” means any financial agreement, contract or transaction, including any terms and conditions incorporated by reference in any financial agreement, contract or transaction, pursuant to which payment or delivery obligations are due to be performed at a certain time or within a certain period of time and whether or not subject to any condition or contingency and includes—
(a) a currency, cross-currency or interest rate swap ;
(b) a basis swap ;
(c) a spot, future, forward or other foreign exchange transaction ;
(d) a cap, collar or floor transaction ;
(e) a commodity swap ; (f ) a forward rate agreement ;
(g) a currency or interest rate future ;
(h) a currency or interest rate option ;
(i) an equity derivative, such as an equity or equity index swap, equity forward, equity option or equity index option ;
(j) a derivative relating to bonds or other debt securities or to a bond or debt security index, such as a total return swap, index swap, forward, option or index option ;
(k) a credit derivative, such as a credit default swap, credit default basket swap, total return swap or credit default option ;
(l) an energy derivative, such as an electricity derivative, oil derivative, coal derivative or gas derivative ;
(m) a weather derivative, such as a weather swap or weather option ;
(n) a bandwidth derivative ;
(o) a freight derivative ;
(p) an emissions derivative, such as an emissions allowance or emissions reduction transaction ;
(q) an economic statistics derivative, such as an inflation derivative ;
(r) a property index derivative ;
(s) a spot, future, forward or other securities or commodities transaction ;
(t) a securities contract, including a margin loan and an agreement to buy, sell, borrow or lend securities, such as a securities repurchase or reverse repurchase agreement, a securities lending agreement or a securities buy or sell back agreement, including any such contract or agreement relating to mortgage loans, interests in mortgage loans or mortgage-related securities ;
(u) a commodities contract, including an agreement to buy, sell, borrow or lend commodities, such as a commodities repurchase or reverse repurchase agreement, a commodities lending agreement or a commodities buy or sell back agreement ;
(v) a collateral arrangement ;
(w) an agreement to clear or settle securities transactions or to act as a depository for securities ;
(x) any other agreement, contract or transaction similar to any agreement, contract or transaction referred to in paragraphs (a) - (w) with respect to one or more reference items or indices relating to interest rates, currencies, commodities, energy products, electricity, equities, weather, bonds and other debt instruments, precious metals, quantitative measures associated with an occurrence, extent of an occurrence, or contingency associated with a financial, commercial or economic consequence, or economic or financial indices or measures of economic or financial risk or value ;
(y) any swap, forward, option, contract for differences or other derivative in respect of, or combination of, one or more agreements or contracts referred to in paragraphs (a-x) ; and
(z) any agreement, contract or transaction designated as such by the financial regulatory authority under this Act ; “security interest collateral arrangement” means “security financial collateral arrangement” as defined in Chapter 9 (Debentures) of this Act and includes charges ; and “title transfer collateral arrangement” means a margin, collateral or security arrangement related to a netting agreement based on the transfer of title to collateral, whether by outright sale or by way of security, including a sale and repurchase agreement, securities lending agreement, or securities buy or sell-back agreement.
Section 719. Powers of a financial regulatory authority
A financial regulatory authority may, in relation to the relevant sector it regulates, by notice issued under this section, designate as “qualified financial contracts” any agreement, contract or transaction, or type of agreement, contract or transaction, in addition to those listed in this section.
Section 720. Enforceability of a qualified financial contract
A qualified financial contract shall not be and shall be deemed never to have been void or unenforceable by reason of the Gaming Machines (Prohibition) Act or any other laws relating to games, gaming, gambling, wagering or lotteries.
Section 721. Enforceability of netting agreements
(1) The provisions of a netting agreement is enforceable in accordance with their terms, including against an insolvent party, and, where applicable, against a guarantor or other person providing security for a party and shall not be stayed, avoided or otherwise limited by—
(a) any action of the liquidator ;
(b) any other provision of law relating to bankruptcy, reorganisation, composition with creditors, receivership or any other insolvency proceeding an insolvent party may be subject to ; or
(c) any other provision of law that may be applicable to an insolvent party, subject to the conditions contained in the applicable netting agreement.
(2) After commencement of insolvency proceedings in relation to a party, the only obligation, if any, of either party to make payment or delivery under a netting agreement shall be equal to its net obligation to the other party as determined in accordance with the terms of the applicable netting agreement.
(3) After commencement of insolvency proceedings in relation to a party, the only right, if any, of either party to receive payment or delivery under a netting agreement shall be equal to its net entitlement with respect to the other party as determined in accordance with the terms of the applicable netting agreement.
(4) Any power of the liquidator to assume or repudiate individual contracts or transactions will not prevent the termination, liquidation or acceleration of all payment or delivery obligations or entitlements under one or more qualified financial contracts entered into under or in connection with a netting agreement, and applies, if at all, only to the net amount due in respect of all of such qualified financial contracts in accordance with the terms of such netting agreement.
(5) The provisions of a netting agreement which provide for the determination of a net balance of the close-out values, market values, liquidation values or replacement values calculated in respect of accelerated or terminated payment or delivery obligations or entitlements under one or more qualified financial contracts entered into is not affected by any applicable insolvency law limiting the rights to set off, offset or net out obligations, payment amounts or termination values owed between an insolvent party and another party.
(6) The liquidator of an insolvent party may not avoid—
(a) any transfer, substitution or exchange of cash, collateral or any other interests under or in connection with a netting agreement from the insolvent party to the non-insolvent party ; or
(b) any payment or delivery obligation incurred by the insolvent party and owing to the non-insolvent party under or in connection with a netting agreement on the grounds of it constituting a preference by the insolvent party to the non-insolvent party, unless there is clear and convincing evidence that the non-insolvent party—
(i) made such transfer,
(ii) incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the insolvent party was indebted or became indebted, on or after the date that such transfer was made or such obligation was incurred.
(7) Reasonable notice to interested parties, individuals, persons or entities shall be required for the realisation, appropriation or liquidation of collateral under a collateral arrangement unless otherwise agreed by the parties : Provided that this subsection is without prejudice to any applicable provision of law requiring that realisation, appropriation or liquidation of collateral is conducted in a commercially reasonable manner.
(8) For the purposes of this section—
(a) a netting agreement is deemed to be a netting agreement notwithstanding the fact that the netting agreement may contain provisions relating to agreements, contracts or transactions that are not qualified financial contracts defined in section 718, provided, however, that, for the purposes of this section, such netting agreement shall be deemed to be a netting agreement only with respect to those agreements , contracts or transactions that fall within the definition of “qualified financial contract” in this Chapter ;
(b) a collateral arrangement is deemed to be a collateral arrangement notwithstanding the fact that such collateral arrangement may contain provisions relating to agreements, contracts or transactions that are not a netting agreement or qualified financial contracts as defined in section 718 of this Act, provided, however, that, for the purposes of this section, such collateral arrangement shall be deemed to be a collateral arrangement only with respect to those agreements, contracts or transactions that fall within the definition of “netting agreement” or “qualified financial contract” as defined in section 718 of this Act ; and
(c) a netting agreement and all qualified financial contracts entered into shall constitute a single agreement.
What this means
Short answer
Netting agreements and qualified financial contracts, such as swaps, forwards and repurchase agreements, are enforceable according to their terms even against a party in insolvency (section 721). After insolvency starts, each party owes or is owed only its net amount, and the liquidator cannot avoid transfers or payments under the agreement unless there is clear and convincing evidence of intent to hinder, delay or defraud.
The key terms
Section 718 defines the vocabulary used in this Chapter. In outline:
- Netting is termination, liquidation or acceleration of payment or delivery obligations under qualified financial contracts, calculation of a close-out or replacement value for each, conversion into one currency and determination of the net balance.
- A netting agreement is an agreement between two parties providing for netting of obligations under one or more qualified financial contracts (a master netting agreement), a master agreement netting two or more master netting agreements, or a related collateral arrangement.
- A qualified financial contract is a financial agreement under which payment or delivery obligations fall due at a time or within a period. It includes currency, interest-rate and commodity swaps, spot, forward and futures transactions, options and caps, equity, bond, credit, energy, weather and other derivatives, securities and commodities contracts including repurchase and securities lending agreements, collateral arrangements, and agreements to clear or settle securities transactions.
- A collateral arrangement is any margin, collateral or security arrangement forming part of a netting agreement, including pledges, charges, title transfer collateral and security interest collateral arrangements, guarantees and letters of credit.
- The financial regulatory authorities are the Central Bank of Nigeria, the Securities and Exchange Commission, the National Insurance Commission, the National Pension Commission and any other authority established by an Act of the National Assembly.
Designating more contracts
A financial regulatory authority can, for its own sector, designate additional agreements or types of agreement as qualified financial contracts by notice (section 719).
Not void as gaming
A qualified financial contract is not, and is deemed never to have been, void or unenforceable under the Gaming Machines (Prohibition) Act or other laws on gaming, gambling, wagering or lotteries (section 720).
Enforceability against an insolvent party
- The terms of a netting agreement are enforceable, including against an insolvent party, a guarantor or a person giving security, and are not stayed, avoided or limited by the liquidator’s actions or by other insolvency law (section 721(1)).
- After insolvency proceedings begin, each party’s only obligation to pay or deliver, and its only right to receive, is its net obligation or net entitlement under the agreement (section 721(2) and (3)).
- The liquidator’s power to assume or repudiate individual contracts does not prevent termination, liquidation or acceleration of all obligations under the agreement, and applies only to the net amount due (section 721(4)). Insolvency rules limiting set-off do not affect the determination of the net balance (section 721(5)).
- The liquidator cannot avoid a transfer of cash or collateral, or a payment or delivery obligation, to the non-insolvent party as a preference, unless there is clear and convincing evidence of actual intent to hinder, delay or defraud creditors (section 721(6)).
- Reasonable notice is required before realising, appropriating or liquidating collateral unless the parties agree otherwise, and realisation must still be commercially reasonable (section 721(7)).
- A netting agreement and all the qualified financial contracts under it are treated as a single agreement (section 721(8)).
Questions and answers
Are netting agreements enforceable if a party is insolvent?
Yes. Section 721 makes them enforceable in accordance with their terms, including against an insolvent party, and not stayed or avoided by the liquidator or insolvency law.
What is a qualified financial contract?
A financial agreement under which payment or delivery obligations fall due at a certain time or within a period, including swaps, forwards, futures, options, repurchase and securities lending agreements, and other derivatives listed in section 718.
Can a liquidator avoid payments under a netting agreement as a preference?
Not unless there is clear and convincing evidence of actual intent to hinder, delay or defraud creditors (section 721(6)).
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