On September 28, 2023, the Nitijela of the Republic of the Marshall Islands ("Nitijela") during the 44th Constitutional Regular Session, 2023, enacted the Netting Act, 2023 (the "Netting Act"), which was certified by the Speaker of the Nitijela to the Clerk on October 25, 2023 as having been passed in accordance with the relevant provisions of the Constitution of the Republic of the Marshall Islands and the Rules and Procedures of the Nitijela.

The Netting Act codifies the enforceability of netting agreements that enable parties in qualified financial transactions to aggregate contractual obligations into one single net payment obligation. Entities domiciled in the Marshall Islands and those that do business there will now have access to a broader range of financial products aimed at reducing credit risk in certain transactions.

What are "netting arrangements"?

Netting arrangements enable contractual parties to reduce credit risk by netting, or aggregating, obligations due between the parties, thus offsetting exposures and reducing multiple payment obligations into a single payment obligation. Netting is particularly useful in unwind or close-out scenarios, as it enables non-defaulting parties to aggregate contractual obligations when a default or termination event (such as an insolvency) occurs. In the absence of legally enforceable close-out netting, creditors must seek recovery for each individual transaction with the defaulting party, and may be obligated to pay a defaulting counterparty in full on those transactions where money is owed the defaulting party, while seeking a potentially discounted recovery for money owed by the defaulting party. Where close-out netting agreements are enforceable, creditors can offset their contractual obligations by netting all obligations between the parties together, resulting in one net payment due between the parties. Thus, close-out netting can greatly reduce credit exposure and better position non-defaulting parties to recover or otherwise limit losses when a default occurs.

What is the practical implication of the adoption of the Netting Act?

The Act confirms that close-out netting rights under qualifying financial contracts, including an International Swaps and Derivatives Association ("ISDA") master agreement, are enforceable in the Marshall Islands. Qualifying financial contracts covered by the Netting Act will include currency swaps, commodity swaps, equity and credit derivatives, collateral arrangements, and currency or interest rate futures.

This legislation brings the Marshall Islands in line with the United States, major EU countries, and many other jurisdictions that have adopted netting legislation.1 ISDA will welcome passage of the Netting Act and is currently drafting a netting opinion to reflect this latest development in the Marshall Islands. Availability of legally enforceable close-out netting, together with the ISDA netting opinion, will provide comfort to institutions acting as swap dealers and hedge or financing providers, allowing entities domiciled and/or doing business in the Marshall Islands the ability to enter into derivatives transactions and other important financial contracts for hedging, financing or trading purposes.


1 See, e.g., Status of Netting Legislation, Int'l Swaps & Derivatives Assoc., (last updated Sept. 28, 2023).

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