Special Treatment of Derivatives in Korean Insolvency Proceedings: Comparison with the United States and Japan

Abstract

In April 2005, Korea enacted the Debtor Rehabilitation and Bankruptcy Law (DRBL)

which took effect in April 2006. Article 120, Paragraph 3 and Article 336 of the DRBL contain

special provisions (referred to herein as the Korean Netting Provision) for certain Qualified

Financial Transactions such as derivatives as well as repo and securities lending transactions.

The Korean Netting Provision eliminates most of the legal uncertainty arising from the lack of

express provisions under Korean insolvency and other statutes relating to close-out netting and

credit support arrangements and thus, should further stimulate the expansion of domestic and

cross-border derivatives transactions in Korea. This paper briefly reviews the legal issues that

may arise when a party to a derivatives transaction becomes the subject of proceedings under the

insolvency laws of Korea, the United States and Japan and examines the major provisions of the

Korean Netting Provision and compares then with similar provisions in the United States and

Japan.