Japan's Close-Out Netting Act

A financial institution trades OTC derivatives and similar transactions under a master agreement. If the counterparty enters insolvency proceedings, the close-out netting act is where it traces what happens, through the Japanese articles.

What the act provides

The purpose of the act is to establish how the close-out netting of specified financial transactions that financial institutions conduct is treated in bankruptcy and similar proceedings, and so to secure the stability of payment settlement¹. The overall mechanism is covered in Close-Out Netting.

The main text of the act has four articles. The details of the definitions are delegated to three texts². They are the enforcement order (a Cabinet order), the enforcement regulations (a Cabinet Office order), and a notice of the Commissioner of the Financial Services Agency.

Parties and transactions covered

The act covers specified financial transactions between a financial institution and its counterparty under a master agreement³.

A financial institution is one of the following three⁴.

• A bank under the Banking Act or a long-term credit bank under the Long-Term Credit Bank Act
• A financial instruments business operator under the Financial Instruments and Exchange Act that conducts Type I financial instruments business (excluding Type I small-amount electronic offering handling business operators and specially permitted business notifying persons for non-listed securities and similar)
• A corporation that a Cabinet order designates as conducting specified financial transactions on a considerable scale

The Cabinet order in the third item lists the following eight corporations⁵.

• Insurance companies and foreign insurance companies and similar
• Federations of shinkin banks
• The Norinchukin Bank
• Shoko Chukin Bank
• The Development Bank of Japan
• Securities finance companies
• Persons listed in Article 1-2, item (iii) of the Order for Enforcement of the Money Lending Business Act
• Commodity derivatives business operators

Article 2 has no provision defining the types of counterparty³. The lists in the act and the enforcement order do not use the term "foreign bank." These two texts therefore do not show whether a foreign financial institution or the Japanese branch of a foreign bank is a financial institution under the act.

Article 1 of the enforcement regulations lists the following specified financial transactions, each together with its collateral transaction (a loan or deposit of money or securities made for the purpose of collateral)⁶.

Effect and relation to insolvency proceedings

Close-out netting means the following. When a close-out netting event occurs for one party to specified financial transactions under a master agreement, the net total of the values of all the transactions at that time becomes a single claim or a single obligation between the parties. This happens regardless of the intentions of either party. The close-out netting events are petitions to start bankruptcy proceedings, rehabilitation proceedings, or reorganization proceedings⁷. The value is an amount calculated by a fair method based on prevailing market conditions for indicators such as interest rates, currency prices, and market prices⁸. Early termination events under a contract are separate from close-out netting events.

Article 3 sets out when the effect of close-out netting is recognized inside bankruptcy and similar proceedings. Suppose a decision to start bankruptcy, rehabilitation, or reorganization proceedings is made for one party that agreed to close-out netting in a master agreement. The effect is then recognized in the proceedings, and the property and claims relating to all the transactions are treated as a single claim held by the party subject to the decision or by the counterparty. As Article 2, paragraph 6 provides, the claim or obligation becomes single when the close-out netting event occurs. Its amount is set by the net total of the values at the time of the petition. The property and claims are named differently in each proceeding's own law, as follows⁹.

Article 53, paragraph 1 of the Bankruptcy Act provides that when neither the bankrupt nor the counterparty has finished performing a bilateral contract at the start of bankruptcy proceedings, the trustee may choose between cancelling the contract and demanding performance¹⁰. On the relation between the netting act and insolvency law, the Financial Law Board stated in November 2018 that the netting act is designed so that close-out netting occurs before insolvency proceedings start, and that conflict with insolvency law is not expected¹¹.

Article 4 applies only to reorganization proceedings. It provides how property securing a claim after close-out netting, such as margin, is settled within the proceedings¹². Consider a case where the counterparty of the party subject to a decision to start reorganization proceedings holds a single claim (a post-netting claim) under Article 3. Suppose the security interest agreement provides that, when a petition to start reorganization proceedings is filed, the secured party may receive the collateral property as payment. The sequence is then as follows.

1. Of the collateral property, property subject to close-out netting, such as securities, vests in the counterparty at the time of the petition to start reorganization proceedings.
2. If the value of the property subject to close-out netting exceeds the amount of the post-netting claim, the counterparty promptly pays the party subject to the decision an amount of money equal to the excess. Part of the property may be delivered in place of money.
3. The value is deducted from the amount of the post-netting claim. If the value exceeds the claim, the deduction is capped at the amount of the claim.

Where the agreement provides that the secured party may dispose of the collateral property, the same provisions apply with the time and price of transfer to a third party read in their place¹³. The property subject to close-out netting is the property that the enforcement regulations set out by Cabinet Office order, and a notice of the Commissioner of the Financial Services Agency defines its scope from May 1, 2020¹⁴. The time at which the value is calculated is the time when a set period has passed after the petition (the period normally needed for the procedure of estimating future costs and losses), if the security interest agreement so provides, and otherwise the time of the petition¹⁵.

Applying the articles to an example

Consider a hypothetical example in which Bank D (a bank under the Banking Act) and Company Y (a non-financial company) have three transactions under one master agreement that provides for close-out netting. A petition to start bankruptcy proceedings is filed against Company Y, and a decision to start bankruptcy proceedings follows. The values from Bank D's point of view at the time the close-out netting event occurs, which is the petition, split into the two cases below. A positive value is an amount Bank D receives, and a negative value is an amount it pays.

Using the values at the time of the petition, in case A the result is a single claim of 300 million yen that Bank D holds against Company Y. In case B it is a single obligation of 500 million yen that Bank D owes, that is, a single claim of 500 million yen that Company Y holds against Bank D. When the decision to start proceedings is made afterward, this result is recognized inside the bankruptcy proceedings. Which case applies depends on the total of the values at the time of the petition, and Bank D may be the net receiver or the net payer.

Applying the articles' requirements one by one gives the following.

Outside the scope of the act

The act sets out effects only within the parties, transactions, contracts, and proceedings that its articles name. Outside them, the act provides nothing. This does not mean close-out netting is not recognized outside the scope. It means the act does not set out an effect.

• Parties: A master agreement with no financial institution as a party does not fall within the definition of master agreement in Article 2, paragraph 5³.
• Transactions: A transaction not listed in Article 1 of the enforcement regulations is not a specified financial transaction under the act⁶.
• Contracts: A master agreement that does not provide for close-out netting is not covered by Article 3⁹.
• Proceedings: The only close-out netting events are petitions to start bankruptcy, rehabilitation, or reorganization proceedings. Article 2 names no other proceedings⁷.

Turning these four points into questions, in order from the top, gives the figure below.

Figure description

If the answer to any question is no, the articles do not set out an effect. Question 2 is checked transaction by transaction. In question 4, the proceedings are bankruptcy, rehabilitation, or reorganization proceedings, so the question asks whether the petition against one of the parties is a petition to start one of them.

The end point of the figure does not mean an effect is recognized. Two conditions are not in the figure. First, the master agreement must be made for conducting two or more specified financial transactions on a continuing basis³. Second, a decision to start proceedings must be made, because that decision is what makes the Article 3 effect recognized inside bankruptcy and similar proceedings. Separately, the net total resulting from close-out netting is the sum of the values of the transactions, and the values are calculated in accordance with Article 2 of the enforcement regulations. The decision to start proceedings and the calculation of the net total are covered in "Applying the articles to an example."

Consider a hypothetical example in which four cases apply the figure's questions. In the second case, there is an interest rate swap under item 1 and a transaction not listed in Article 1 of the enforcement regulations. The agreement provides for close-out netting, and a petition to start bankruptcy proceedings is filed.

A case in which the answer to all four questions is yes is the example of Bank D and Company Y in "Applying the articles to an example."

On these points, the articles of the act do not answer every question. How close-out netting is treated by contract outside the scope, and what happens under foreign law, need to be confirmed contract by contract and jurisdiction by jurisdiction.

Entry into force and amendments

The act was promulgated on June 15, 1998 and took effect on December 1 of the same year¹⁶. Among the later amendments, the 2019 (Reiwa 1) amendment concerns Article 4¹⁷.

In the November 2018 discussion, views supported the basic direction of a review. The review would allow immediate enforcement of security interests in relation to the Corporate Reorganization Act. Behind this was the fact that full application of the margin requirements for initial margin on non-centrally-cleared OTC derivatives was due in September 2020¹¹. The 2019 amendment made it possible to apply close-out netting to margin delivered under a security-interest structure (a pledge structure, in which margin is delivered by creating a security interest). That structure had been allowed provisionally in the supplementary provisions of the Cabinet Office Order on Financial Instruments Business, and it was now provided in the main text¹⁸.

The current version of the act, checked on e-Gov Law Search on October 5, 2026, reflects amendments up to Act No. 32 of 2024, which took effect on May 1, 2025¹⁹.

Reading the requirements as attributes

The requirements of the articles can be read as attributes of each master agreement and attributes of each transaction. For the master agreement, the questions are whether a financial institution is a party and whether close-out netting is provided for. For the transaction, the question is which item of Article 1 of the enforcement regulations it falls under. Whether a close-out netting event exists, whether a decision to start proceedings has been made, and how the values are calculated depend on the state of the proceedings at the time and on market values. The table in the example above looks at these six requirements (party, specified financial transaction, agreement, event, decision, and values) one by one.

Capital regulation and credit risk management

The close-out netting act is one of the bases that supports the effect of close-out netting under Japanese law. How close-out netting reduces exposure is covered in Risk Reduction through Netting and Collateral. Judging whether close-out netting is valid for an individual transaction is not covered on this page.

Notes

1. "金融機関等が行う特定金融取引の一括清算に関する法律" (Act on Close-Out Netting of Specified Financial Transactions Conducted by Financial Institutions), Article 1 (purpose) (in Japanese). ↩

2. The main text of the act is Articles 1 to 4. The enforcement order is the Enforcement Order of the Act on Close-Out Netting of Specified Financial Transactions Conducted by Financial Institutions (Cabinet Order No. 371 of 1998), and the enforcement regulations are the Regulation for Enforcement of the same act (Order of the Prime Minister's Office and the Ministry of Finance No. 48 of 1998), both under those titles in the Japanese Law Translation Database System (English translations that predate the 2020 amendment to the regulations). The notice is Financial Services Agency Notice No. 20 (April 3, 2020). ↩

3. Act on Close-Out Netting of Specified Financial Transactions Conducted by Financial Institutions, Article 2, paragraph 5 (master agreement: a document made "between a financial institution and its counterparty" "for conducting two or more specified financial transactions on a continuing basis"; unofficial translation). The article has no provision defining "counterparty" (in Japanese). ↩ ↩² ↩³ ↩⁴

4. Act on Close-Out Netting of Specified Financial Transactions Conducted by Financial Institutions, Article 2, paragraph 2, items 1 to 3 (in Japanese). ↩

5. "金融機関等が行う特定金融取引の一括清算に関する法律施行令" (Enforcement Order of the Act on Close-Out Netting of Specified Financial Transactions Conducted by Financial Institutions; the Cabinet order under Article 2, paragraph 2, item 3 of the act), items 1 to 8 (in Japanese). ↩

6. "金融機関等が行う特定金融取引の一括清算に関する法律施行規則" (Regulation for Enforcement of the Act on Close-Out Netting of Specified Financial Transactions Conducted by Financial Institutions), Article 1, items 1 to 7, under the delegation in Article 2, paragraph 1 of the act. Collateral transactions are defined in item 1 (in Japanese). ↩ ↩²

7. Act on Close-Out Netting of Specified Financial Transactions Conducted by Financial Institutions, Article 2, paragraph 3 (bankruptcy and similar proceedings: bankruptcy, rehabilitation, and reorganization proceedings), paragraph 4 (close-out netting event), and paragraph 6 (close-out netting, "regardless of the intentions of both parties"; unofficial translation) (in Japanese). ↩ ↩²

8. Regulation for Enforcement of the Act on Close-Out Netting of Specified Financial Transactions Conducted by Financial Institutions, Article 2 (calculation of the value under Article 2, paragraph 6 of the act) (in Japanese). ↩

9. Act on Close-Out Netting of Specified Financial Transactions Conducted by Financial Institutions, Article 3, items 1 to 3 (relation between close-out netting and bankruptcy and similar proceedings) (in Japanese). ↩ ↩²

10. "破産法" (Bankruptcy Act), Article 53, paragraph 1 (bilateral contracts). The current version retrieved October 5, 2026 (effective May 21, 2026) (in Japanese). ↩

11. Financial Law Board, "第 130 回金融法委員会（平成 30 年 11 月 5 日開催）における議論のポイント（一括清算法の見直しについて）" (Key points of the discussion at the 130th Financial Law Board meeting, held November 5, 2018: review of the close-out netting act; unofficial translation of the title), attached as Market Working Group Material 3, page 2 of the PDF, the first three items (in Japanese). These are the board's views and are not legally binding. The text's "non-centrally-cleared OTC derivatives" corresponds to the material's term "非清算店頭デリバティブ取引," which is defined in Article 123, paragraph 1, item 21-10 of the Cabinet Office Order on Financial Instruments Business, etc. ↩ ↩²

12. Act on Close-Out Netting of Specified Financial Transactions Conducted by Financial Institutions, Article 4, paragraphs 1 to 3 (in Japanese). ↩

13. Act on Close-Out Netting of Specified Financial Transactions Conducted by Financial Institutions, Article 4, paragraph 4 (paragraphs 1 to 3 apply mutatis mutandis, except the proviso of paragraph 2, with replacements such as "the time when the counterparty transferred it to a third party after the petition to start reorganization proceedings and before the start of reorganization proceedings"; unofficial translation) (in Japanese). ↩

14. Regulation for Enforcement of the Act on Close-Out Netting of Specified Financial Transactions Conducted by Financial Institutions, Article 3 (property subject to close-out netting, excluding property on which two or more security interests are created). Financial Services Agency Notice No. 20 (April 3, 2020) sets the scope that applies from May 1, 2020 (in Japanese). ↩

15. Regulation for Enforcement of the Act on Close-Out Netting of Specified Financial Transactions Conducted by Financial Institutions, Article 4, paragraph 1, items 1 and 2. The value on transfer to a third party is in paragraph 2 (in Japanese). ↩

16. Act on Close-Out Netting of Specified Financial Transactions Conducted by Financial Institutions, the promulgation date under the title (June 15, 1998) and the first supplementary provision (effective December 1, 1998). The act number is Act No. 108 of 1998 (in Japanese). ↩

17. Act on Close-Out Netting of Specified Financial Transactions Conducted by Financial Institutions, supplementary provisions, Article 15 of Act No. 28 of 2019. Article 4 as amended applies to property that is the object of a security interest created by a person for whom a petition to start reorganization proceedings is filed on or after the effective date (in Japanese). ↩

18. Financial Services Agency, "「金融機関等が行う特定金融取引の一括清算に関する法律」の改正に係る施行規則の一部を改正する命令（案）等に関するパブリックコメントの結果等の公表について" (Publication of the results of the public comment on the draft order partially amending the enforcement regulations relating to the amendment of the close-out netting act; unofficial translation of the title) (April 3, 2020), "1. Results of the public comment" (summary) and "2. Promulgation and effective dates." The orders were promulgated on April 3, 2020 as part of the Cabinet Office orders relating to the 2019 amendment of the Payment Services Act and other acts, and take effect and apply from May 1, 2020 (in Japanese). ↩

19. Legal data from e-Gov Law Search (retrieved October 5, 2026). The current versions are the act effective May 1, 2025 under Act No. 32 of 2024, the enforcement order effective January 1, 2011, and the enforcement regulations effective May 1, 2020. ↩ ↩²