The International Swaps and Derivatives Association (ISDA) has published an Informal Country Update on the enforceability of close-out netting under the Acting Law of the Astana International Financial Centre (AIFC) issued by international law firm, Dentons. The publication of the Informal Country Update marks a significant milestone in the Astana Financial Services Authority’s work with ISDA that commenced in 2021 and marks the completion of the first step towards the full recognition of the AIFC as a ‘netting-friendly jurisdiction’.
The publication of the Informal Country Update is also an important contribution to Kazakhstan’s financial market infrastructure as the update will provide insights for globally active firms that want to carry out their financial transactions in the local market.
ISDA is one of the world’s largest global financial trade associations and the Informal Country Update covers a number of legal issues relevant to the trading of derivatives, including the enforceability of close-out netting.
Netting entails offsetting the value of multiple payments due to be exchanged between two or more parties. It can be used to determine which party is owed remuneration in a multiparty agreement. Netting may be used in trade when parties offset one position with an opposing one, to balance out losses from one with gains in another.
Having certainty on the enforceability of ‘close-out netting’, one of the types of netting, is one of the key factors that determines the location of the market participants’ trading activities. This proposed update will create greater market interest in exploring the AIFC jurisdiction for local derivatives market and create conditions for its prosperity.
Close-out netting provides a means of mitigating credit risks associated with over-the-counter derivatives and is widely used in the financial market by private sector entities, in particular banks and private non-financial institutions. To date, ISDA recognises more than 80 jurisdictions as ‘netting-friendly’ and the AIFC aims to seek ISDA recognition for its close-out netting regime as the next step in future.
Close-out netting is crucial in promoting financial stability and the development of a robust, liquid, and efficient derivatives market as it enables derivatives participants to protect against adverse market changes following default of a counterparty. In the absence of certainty regarding close-out netting, financial institutions may face higher transaction costs and increased liquidity and regulatory capital requirements.
The Astana Financial Services Authority (AFSA) is the independent regulator of the Astana International Financial Centre (AIFC), which is established in accordance with the Constitutional Law of the Republic of Kazakhstan “On the Astana International Financial Centre” for the purposes of regulating financial services and related activities in the AIFC. AFSA administers the AIFC Regulations and Rules and is responsible for the authorisation, registration, recognition and supervision of financial firms and market institutions in the AIFC.
Over 1,500 firms from 64 countries are registered in the AIFC. These firms provide banking, insurance, investment, professional and other services. The range of financial services offered at the AIFC is comparable to the list of services available in long-established financial centers of the world, such as London, Hong Kong, Singapore, Dubai and others.
The Astana International Financial Centre (AIFC) is an independent jurisdiction that began operations in 2018. In accordance with the 2025 Development Strategy, the key task of the AIFC is to consolidate as a universal platform connecting the countries of the EAEU, Central Asia and South Caucasus. www.aifc.kz
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