The Chief Economic Advisor in the Economic Survey FY 20 had pitched for a bilateral netting law which would encourage participation in derivative markets to hedge against risks. The Government decided that it was time to bring in legislation to this effect on 23rd September 2020. This law came into force on the 1st October 2020. This bill was termed as critical for the financial stability of the country. It also provided a firm legal basis for bilateral netting outside the clearing system. 40% of total financial contracts are bilateral and this law will definitely help in faster resolution of such contracts. This law will help create a proper market for Credit Default Swaps (CDS) in India. This law is bound to bring down NPAs, promote financial stability and it will also free up funds which the banks can then lend hence boosting credit. It will also empower entities like the RBI, SEBI, IRDAI etcetera to regulate these markets.
This Banking brief gives a run down of this new law, its effects and how it will benefit the financial markets in the country.
Special thanks to @Anisha for the guidance!!