On 25 October 2023, the Republic of the Marshall Islands (RMI) enacted the Netting Act, 2022. The purpose of the legislation is to create a framework for close-out netting, which is vital for managing counterparty and financial risk in capital market and derivatives transactions. The Netting Act, 2022 brings the RMI law in line with other major financial sector jurisdictions and makes the RMI the first major flag State to adopt such legislation.
For any business entity engaged in complex transactions, the ability to enter into contracts which contain netting provisions is essential when raising funds and reducing the need to provide collateral as security. The Netting Act, 2022 meets the global regulatory requirement for financial institutions that requires those financial institutions only conduct derivatives transactions with companies formed in jurisdictions that have a clear framework to enable close-out netting. Based on international best practices, the Netting Act, 2022 will afford financial institutions regulatory capital relief when they do business with RMI business entities.
Netting saves companies time and costs by allowing counterparties to reduce their obligations to a single net payment due from one party to another. Further, netting eliminates the need to process a large number of transactions per month and reduces credit risk. This legislation adds additional benefits for business entities choosing the RMI as a corporate jurisdiction and for lenders engaged in financing RMI-registered vessels. The legislation now formally establishes the enforceability of netting under certain financial contracts in the RMI, previously allowed under general principles of the RMI Revised Code, but not specifically enacted by law – until now.