Derivatives Week, Vol. XV, NO. 45
“Partnership Member Changes & Bermuda Close-Out Netting,”
In recent years, growth in the number of partnerships registered in Bermuda has been fuelled by hedge funds organized as limited partnerships. Given the increasing number of hedge funds organized as partnerships in Bermuda, it was recognized that the traditional position, that partnerships lack legal identity separate from their individual partners, was obsolete.
Although this still holds in certain other jurisdictions, such as the Cayman Islands and the British Virgin Islands, in Bermuda this realization led to the enactment of The Partnership Amendment Act 2006, which for the first time extends an option for Bermuda partnerships to obtain legal personality.
Although Bermuda law and regulatory provisions permit a Bermuda registered partnership to enter into a contract that contains close-out netting and set-off provisions, enforcement of such provisions can be rendered difficult or even impossible where there have been changes to the members of a partnership that lacks a legal identity separate from its members.
The close-out netting provisions in ISDA Master Agreements, for example, assume mutuality between the parties, with both parties liable as a principal for, and beneficially entitled to, all debits and credits arising from the transactions to be netted.
In the case of a Bermuda-registered partnership, this assumption may be false. When a party enters into a trade with a Bermuda-registered partnership that lacks legal personality, its counterparty actually is each partner of the general partnership. In the case of a limited partnership, its counterparty would be each general partner. For partnerships with no legal personality, mutuality is affected by changes in the partnership’s members. Consequently, obligations resulting from transactions arranged before any membership change will not be netted against obligations from transactions agreed after the change, unless and until mutuality is restored.