A comprehensive Bulgarian close-out netting law was promulgated on August 15, 2025. It is structured as an amendment and supplement to the Financial Collateral Arrangements Act (Amendment), which transposed the EU Financial Collateral Directive 2002/47/EC (FCD) in Bulgaria. To reflect its broader scope, the title of the act was also changed to the Financial Collateral and Close-out Netting Arrangements Act (Act).
The initial draft of the Amendment was prepared by experts, including Schoenherr Bulgaria, within an EBRD project, but the final draft reflects the policy views and concerns of the Ministry of Finance, particularly regarding the personal and subject-matter scope of the protection that Bulgarian law should provide to close-out netting.
1. What Protections in Insolvency Will the Amendment Introduce?
Following the Amendment, parties acting within the scope of the Act will be able to terminate their transactions and benefit from the agreed close-out netting mechanism even after the adoption of “reorganization measures” or the commencement of “winding-up proceedings” (both terms defined under the Amendment in line with the FCD), thus effectively overriding any moratoriums or other insolvency law restrictions.
Moreover, certain insolvency avoidance rules will be partially mitigated or displaced with respect to close-out netting.
To benefit from these protections, parties must ensure their arrangements fall within the scope of the Act, meaning: (i) the arrangement meets the statutory definition of “close-out netting provision;” (ii) both parties are eligible under the Act; and (iii) the underlying obligations for which close-out netting applies correspond to the definition for “financial obligations.”
The most important scope-related rules for market participants are summarized below.
2. Definition of Close-Out Netting Provision
The same definition of “netting provision” under the Act – which has applied to financial collateral arrangements – will now also apply to the new close-out netting regime introduced by the Amendment. That definition, in turn, substantially follows the wording of Art. 2(1)(n) FCD. We believe it is sufficiently broad to cover both mechanisms where “values” of terminated transactions are compared to calculate close-out amounts under the ISDA Master Agreements, as well as classic set-off mechanisms with respect to obligations that have become due prior to termination (e.g., unpaid amounts under the ISDA Master Agreements or obligations under GMRA repurchase or GMSLA securities lending transactions).
3. Subject-Matter Scope of the Act
The Act employs the linguistically identical term “financial obligations” to denote both the obligations secured by financial collateral (Collateral Financial Obligations) and the obligations for which close-out netting applies (Netting Financial Obligations). Since these terms’ definitions differ significantly, the two key concepts under the Act have a notably different subject-matter scope.
The definition of Collateral Financial Obligations under the Act, following Art. 2(1)(f) FCD, employs a functional approach, referring to obligations that may be settled by cash payment or delivery of certain financial instruments. This functional description covers a broad range of transactions, provided they can be executed in the prescribed manner.
Conversely, the definition of Netting Financial Obligations covers obligations under a limited number of specific transactions. These include all derivatives transactions and certain other financial instruments under the EU MiFID Directive 2014/65/EU (MiFID), as transposed in Bulgaria.
4. Personal Scope of the Act
Following the Amendment, the Act now also has two separate sets of rules for the eligible counterparties (personal scope) – one for financial collateral arrangements and another for close-out netting arrangements.
The personal scope for financial collateral arrangements covers all specific sovereign and financial entities listed in Art. 1(2)(a–d) FCD, slightly expanding that list (Professional Counterparties). In the most hotly debated amendment, it was explicitly clarified that other entities having the characteristics of Professional Counterparties as per the Act’s statutory list under the law of a “foreign state,” i.e., including non-EEA states, are eligible. Furthermore, other “legal persons” are eligible if they deal with any of the Professional Counterparties.
The personal scope for close-out netting arrangements mirrors the personal scope for financial collateral arrangements, excluding certain entities from the list of Professional Counterparties but adding several others, most notably persons allowed by law to deal in eligible Netting Financial Obligations. As the latter term is defined by reference to MiFID financial instruments, the MiFID rules regarding who is eligible to deal in MiFID financial instruments – including exceptions allowing dealings without a license – should be primarily considered.
By Tsvetan Krumov, Partner, Schoenherr
This article was originally published in Issue 12.8 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
