The UAE Netting Law 

Netting, in financial markets, operates as a legal mechanism through which reciprocal obligations between counterparties are consolidated into a single net exposure. Its significance lies not in the mechanics of set off, but in its role in determining counterparty credit exposure, particularly in default and insolvency scenarios. 
 

In the UAE, this position is now anchored in Federal Decree Law No. 31 of 2024 on Netting (the “Netting Law”), which has introduced a more comprehensive and technically developed framework governing the enforceability of close out netting, qualified financial contracts, and related collateral arrangements. The Netting Law applies at the federal level and does not extend to financial free zones, which continue to operate under their own netting regimes. 
 

The Netting law clarifies the treatment of netting in insolvency, expands the range of covered financial instruments, and reinforces the legal effectiveness of collateral arrangements within a unified framework. 
 

The Netting Law frames netting as a sequenced statutory process governing the treatment of obligations under qualified financial contracts. In particular, it provides that, upon the occurrence of a relevant event, obligations may be terminated, liquidated, or accelerated, following which they are to be valued in accordance with agreed or applicable methodologies. The resulting values may then be converted into a single currency and aggregated to determine a net balance payable by one party to the other. Through this process, multiple obligations are reduced to a single net exposure, representing the definitive financial position between the parties. It provides that netting agreements may take a variety of forms, including master agreements, arrangements relating to multiple transactions, collateral arrangements, and Sharia compliant structures producing equivalent economic effects.  
 

It further provides that a netting agreement, together with all qualified financial contracts to which it applies, is to be treated as a single agreement, preventing the separation of individual transactions and ensuring that the net balance constitutes the sole enforceable claim between the parties. The net amount determined pursuant to the netting process operates as the basis for discharge between the parties, replacing the underlying obligations on a gross basis. It is enforceable in accordance with its terms and is not subject to re-opening on a transaction-by-transaction basis, thereby conclusively determining the parties’ exposure at the point of close out and constituting the basis for settlement between them. 
 

The operation of the Netting Law is contingent on the classification of transactions as “qualified financial contracts”, which determines whether the statutory protections of netting apply. The legislation adopts a broad formulation of such contracts, capturing transactions commonly used in financial markets, including derivatives, foreign exchange transactions, securities and commodities dealings, and arrangements relating to financing and credit support. The scope extends beyond traditional instruments to encompass structures that achieve comparable economic outcomes, including Sharia compliant arrangements and transactions linked to emerging asset classes, ensuring that the regime remains responsive to developments in financial markets. 
 

This classification is determinative of the operation of the netting framework, which applies exclusively to obligations arising under qualified financial contracts. Transactions falling outside this category are not included within the netting set and remain enforceable on a standalone basis under general legal principles, with the potential to give rise to residual exposure alongside the netted position. 
 

The interaction between netting and insolvency law is where the effectiveness of a netting regime is most clearly established. The Netting Law further strengthens this position by limiting the application of general insolvency powers in the context of netting arrangements. In particular, rights of a liquidator to assume, reject, or otherwise interfere with contractual obligations do not extend to obligations arising under qualified financial contracts subject to a netting agreement. The Netting Law also operates notwithstanding any provisions that would otherwise restrict rights of set off or the netting of obligations, thereby ensuring that the netting process is not displaced by competing statutory regimes.  
 

In addition, transfers, payments, and other transactions effected pursuant to a netting agreement are protected from challenge, except in limited circumstances involving demonstrable intent to defraud creditors. This ensures that the implementation of the netting process, including collateral movements and settlement flows, cannot be unwound in insolvency, thereby preserving the finality and integrity of the net position. 
 

The Netting Law provides a clear framework for collateral arrangements, which operate alongside netting to mitigate counterparty risk. It recognises both security-based collateral and title transfer structures, including repurchase and securities lending arrangements, and confirms that such arrangements are to be given full legal effect.  
 

In title transfer arrangements, ownership of the collateral passes to the collateral taker, enabling its use in accordance with the agreed terms. The Netting Law’s recognition of such arrangements mitigates the risk of recharacterisation in insolvency, whereby an outright transfer could otherwise be treated as a security interest, affecting priority and enforcement. By preserving the intended allocation of rights, the Netting Law supports certainty in enforcement outcomes. Enforcement is correspondingly streamlined, allowing collateral to be realised in accordance with contractual terms without the need for prior court intervention, thereby enhancing speed and predictability in stressed market conditions. 
 

The Netting Law addresses cross border financial activity by recognising netting arrangements involving foreign counterparties and multi-branch structures. It provides a basis for determining net exposure across branches of a single entity and clarifies the allocation of claims between head offices and branches. This reduces the risk of fragmented or inconsistent treatment across jurisdictions and supports the consolidation of exposures at the counterparty level. In practice, this is particularly relevant for international financial institutions, as it facilitates enforceability analysis and strengthens confidence in the recognition of netting arrangements across jurisdictions. 
 

The Netting Law enhances the legal certainty underpinning the operation of netting arrangements in the UAE, particularly in the context of insolvency and the treatment of collateral. By clarifying the scope of qualified financial contracts, confirming the enforceability of close out netting, and addressing the interaction with competing statutory regimes, it provides a more coherent and reliable framework for the determination of financial exposure. 
 

Its significance is most evident in application, including transaction structuring, enforceability analysis, and risk management. In this respect, the Netting Law reinforces the UAE’s position as a jurisdiction capable of supporting complex and cross border financial activity within a legal framework that supports the effective allocation and enforcement of financial risk. 

Note: This Legal Update / Newsletter is intended for general informational purposes only and should not be construed as legal advice. It is based on laws and legal interpretations in effect as of the date of publication. Laws and regulations may change over time, and their application can vary depending on individual circumstances. Readers are strongly encouraged to seek specific legal counsel before acting on any of the information provided herein.rian and religious purpose in accordance with the law.