On 13 October 2025, the Estonian Parliament adopted the amendments to the Securities Market Act and other related acts, which introduce the uniform application of close-out netting regulation into Estonian laws and adjust the scope of the financial collateral regime.[1] The amendments will enter into force on the 10th day after publication in Riigi Teataja[2], i.e. on 21 November 2025 at the latest.
The amendments govern the scope and effect of close-out netting, with the goal of removing legal uncertainty regarding its enforceability. The amendments also extend the list of counterparties benefitting from the financial collateral regime.
The sections below summarise some of the key elements of the old and the newly introduced regimes.
The status of Estonian law prior to the reform
While Estonian legislation was generally favourable towards the concept of close-out netting prior to the reform, certain gaps existed, and the legal framework did not fully comply with international standards.
Generally, the concept of close-out netting was enforceable under Estonian laws, as it is essentially a mechanism under set-off, which is recognised under the provisions of the Law of Obligations Act in Estonia. Thus, although the concept of close-out netting under international standards goes beyond the meaning of set-off under Estonian contractual law, the current set-off regulation could, with certain gaps, be applied by analogy also to close-out netting.
Prior to the reform, there was no single legal act to define the specific terminology of close-out netting. Each specific legal act included its own definition or did not include one, and it was unclear which definition was the most appropriate to use. The use of relevant definitions by reference also led to a situation where the scope of eligible counterparties or transactions for the close-out netting regime varied to some extent. Similarly, the inclusion of spot and repurchase transactions within the scope of qualifying transactions was subject to conflicting interpretations under the previous definitions.
Further to the above, the regime itself was provided across a variety of insolvency-related legal acts, which led to gaps in the application of the rules in respect of different market participants due to differences in the legislative wording.
In respect of the financial collateral regime, Estonian law previously implemented an option from the Financial Collateral Directive 2002/47/EC (FCAD), whereby most of the unregulated companies[3] were excluded from the list of eligible counterparties to a financial collateral arrangement. The approach taken by Estonia was thereby more restrictive than that of most European Union member states, including the other Baltic countries and Finland. Further, the insolvency-related legal acts referred, when affording protection to the financial collateral, only to financial collateral arrangements meeting the requirements of Estonian law, thereby excluding foreign law financial collateral arrangements not meeting Estonian law requirements from such protection.
Overview of amendments
The amendments within the close-out netting regime were introduced in order to:
- clarify and harmonise the relevant terms, such as close-out netting, netting agreement, qualifying financial transaction and qualifying person;
- clarify the scope of qualifying persons and transactions within the scope of a netting agreement;
- amend the scope of protection of a financial collateral;
- amend the insolvency regime to ensure the enforceability of close-out netting in bankruptcy and other similar situations (reorganisation, moratorium and other special measures under financial services regulations).
Definition of close-out netting and netting agreement
With the amendments, the Securities Market Act will now provide for the definitions of close-out netting and netting agreement.
The definition of close-out netting is aligned with the 2018 ISDA Model Netting Act and the UNIDROIT Principles on the Operation of Close-Out Netting. Namely, under the newly introduced definition, close-out netting means the application of provisions previously agreed upon in a netting agreement between the parties upon the occurrence of a termination event either as a result of a declaration of intent by one party or, in the cases specified in the netting agreement, automatically, and which results in the following:
- the termination of any existing or future rights or obligations to transfer the object, or payment rights or obligations arising from one or more qualified financial transactions covered by a netting agreement or acceleration of such obligations;
- the calculation of a close-out value, market value, liquidation value or replacement value determined according to the provisions of the netting agreement in respect of each right or obligation or group of rights and obligations terminated under point 1 above, or of each obligation or group of obligations subject to accelerated performance and the conversion of each such value into a single currency;
- the determination of one party’s net claim against the other contracting party, based on the values calculated under point 2 above.
In addition to the above, the Securities Market Act now also implements the close-out netting provision of the FCAD into Estonian law.
Netting agreement has been defined as a bilateral agreement, to which one party is an eligible person and which provides for close-out netting upon the termination of qualified financial transactions. An agreement on netting upon termination of two or more netting agreements, and a collateral agreement related to or forming part of a netting agreement, are also considered netting agreements.
A netting agreement that includes transactions that are not qualified financial transactions shall be considered to be a netting agreement only in respect of the qualified financial transaction.
With the amendments, Estonian law now also explicitly recognises the single agreement concept common for industry-standard master documentation.
Subject matter scope – qualifying financial transactions
Under the amendments, the following financial transactions benefit from the close-out netting regime:
- derivative security which can be acquired, exchanged or transferred outside a trading venue or through a trading venue;
- derivative agreement;
- spot contracts within the meaning of Article 7(2) or 10(2) of Commission Delegated Regulation (EU) 2017/565;
- repurchase transactions and other securities financing transactions within the meaning of Articles 3(9) and 3(11) of Regulation (EU) 2015/2365 respectively;
- financial collateral and other collateral arrangements securing qualified financial transactions provided under above points.
The minister responsible for the area may, by regulation, determine types of transactions to be recognised as qualified financial transactions for close-out netting in addition to the transactions referred to above.
Personal scope – qualifying persons
In order to benefit from the close-out netting regime, at least one of the parties to the netting agreement must be a qualifying person, i.e. belong to a category of financial or institutional counterparties such as banks, investment firms, asset managers, insurance companies, other financial institutions subject to financial supervision, sovereigns, central banks, international financial institutions, etc. In addition to such financial and institutional counterparties, a large enterprise[4] is also considered a qualifying person.
There are no requirements or limitations on the other party as long as the netting agreement is entered into with a qualifying person as specified above. Thus, in principle, a natural person may also be a party to the netting agreement, and the law was not amended to be more restrictive in that respect.
Protection in insolvency or similar proceedings
Although the fragmented protection in insolvency proceedings was also envisaged in Estonian law previously, the amendments further clarify that close-out netting is enforceable notwithstanding the commencement or continuation of insolvency, liquidation or enforcement proceedings of a counterparty to the close-out netting provision. For the above purposes, the following proceedings are considered insolvency proceedings:
- bankruptcy proceedings;
- reorganisation proceedings of regular companies;
- moratorium established in respect of credit institutions;
- taking the early intervention measures or the resolution proceedings provided for in the Financial Crisis Prevention and Resolution Act[5];
- recovery and special regime of insurance undertakings;
- reorganisation proceedings of a management company managing a defined-benefit occupational pension fund.
Similarly as provided in the 2018 ISDA Model Netting Act and the FCAD, the principle above applies in case of applying crisis prevention or crisis resolution measures, insofar as it has not been laid down otherwise in the Financial Crisis Prevention and Resolution Act.
Financial collateral regime amendments
In addition to the above-mentioned changes, the new act expands the circle of parties eligible to enter into financial collateral arrangements. The financial collateral arrangements can now be concluded by all companies, provided that the other party to the financial collateral arrangement is one of the institutions or organisations listed in points (a) to (d) of Article 1(2) of the FCAD. The aim of this amendment is to achieve consistency of the personal scope of the Estonian financial collateral regime with international practice, including that of neighbouring countries.
Further, from the provisions of the insolvency-related legal acts affording protection to the financial collateral, references to financial collateral arrangements meeting the requirements of Estonian law were removed; thus, extending protection also to foreign-law financial collateral arrangements not meeting Estonian law requirements.
As a result of the above legislative reform, Estonian financial institutions and larger companies are expected to have greater access to the international derivatives and repo market and benefit from the close-out netting’s risk mitigation effects. This, in turn, should have a positive impact on the competitiveness of Estonian companies and, more broadly, the entire business environment.
Do you have questions?
The above overview has merely an informative objective and is not meant to cover all details of the legislative reform nor to provide legal advice.
If you require further assistance, please feel free to contact our specialists:
- Partner Kätlin Krisak, katlin.krisak@sorainen.com;
- Counsel Jane Eespõld, jane.eespold@sorainen.com;
- Senior associate Krista Ševerev, krista.severev@sorainen.com
[1] The legislation introducing the uniform application of close-out netting regulation into Estonian laws and adjusting the scope of the financial collateral regime was prepared by Sorainen Estonian office, in cooperation with the Ministry of Finance of the Republic of Estonia. Drafting of the legislation was commissioned by the European Bank for Reconstruction and Development as part of the technical cooperation project “Development of a Legal and Regulatory Framework for Derivatives in Estonia”, and was funded by TaiwanBusiness – EBRD Technical Cooperation Fund.
[2] Riigi Teataja is the official online publication of the Republic of Estonia, which publishes legislation.
[3] Provided that the other party to the financial collateral arrangement is one of the institutions or organisations listed in points (a) to (d) of Article 1(2) of the FCAD, only a company meeting at least two of the following criteria could, prior to the reform, be a party to a financial collateral arrangement: (1) an average number of employees of the company during the financial year is more than 250; (2) the annual balance sheet total of the company exceeds EUR 43 million; (3) the annual turnover of the company exceeds EUR 50 million.
[4] A large enterprise is a company which meets at least two of the following conditions: (1) the balance sheet total thereof is equal to or exceeds EUR 20 million; (2) the net turnover thereof is equal to or exceeds EUR 40 million; (3) the equity thereof is equal to or exceeds EUR 2 million.
[5] The Financial Crisis Prevention and Resolution Act implements into Estonian law the directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms.
