/ Derivate instruments – new amendment to insolvency statute affects close-out netting under master agreements

29 January, 2019

On January 12, 2019 an amendment (Law 21.130- the New Law) to the Chilean insolvency statute was published as part of a major overhaul of Chilean banking regulations, which affects derivative trading master agreements such as ISDAs (“Master Agreements)”. The New Law introduces certain improvements relating to close out netting in the event of bankruptcy, particularly concerning debtors which are not institutional investors. The New Law is less helpful for creditors of banks, pension fund managers, insurance companies and other institutional investors.

Indeed, the good news is that as of the New Law when a common debtor requests and obtains financial protection claimable under the reorganization statute, creditors operating under a Master Agreement recognized by the Central Bank of Chile (CBCH) may now early-terminate or seek immediate repayment of their dues without having to wait for a financial protection period to expire. Prior to the New Law, if a common debtor had obtained such financial protection, creditors were subject to such 30 (in some cases 90) day stay.

However, the New Law makes an exception in the case of banks and other institutional investors under financial distress. When such entities are parties to Master Agreements, the early termination events and acceleration clauses relating to financial instability prior to liquidation may only be enforced once a term to be set by the CBCH has elapsed. Under current CBCH regulations, creditors must observe a 2-day stay counted from the day on which the financial stress event took place before exercising their right to apply the close-out netting provision. It is not entirely clear yet what position the CBCH the will take with respect to the stay period under the New Law and whether or not it will stick to the current two days.


Felipe Cousiño