Legal enforceability

1. To ensure the legal enforceability of a netting agreement, an ADI must:
   1. obtain a written and reasoned legal opinion that concludes that in the event of default, liquidation, bankruptcy or other similar circumstances of a party to the netting agreement, the relevant courts and authorities would find the ADI’s exposure is limited to the single net sum determined in the netting agreement under:
      1. the law of the jurisdiction in which the counterparty is incorporated, formed or resides (in the case of a natural person), and if a foreign branch of the counterparty is involved, the law of the jurisdiction in which the branch is located;
      2. the law that governs the individual transactions involved; and
      3. the law that governs any contract or agreement necessary to give effect to the netting; and
   2. have policies and procedures in place to ensure that the legal enforceability of netting agreements is kept under review in response to possible changes in relevant laws.
2. An ADI must not recognise a netting agreement for Regulatory Capital purposes if there is any doubt as to its legal enforceability. Where an ADI becomes aware that a regulator or supervisor of a counterparty has given notice that it is not satisfied that netting is enforceable under the laws of the regulator’s or supervisor’s home country, it must not recognise the netting agreement for Regulatory Capital purposes regardless of any legal opinion obtained by the ADI.