JAPAN Trends and Developments Contributed by: Daisuke Tanimoto and Mitsuo Shimada, Anderson Mōri & Tomotsune
With respect to paragraph (1) above, it is necessary to determine whether the digital assets referenced by an OTC digital asset derivative transaction have “quo - tations on organized exchanges or other markets”. Furthermore, in order to ensure that “the contract is deemed to be terminated upon the commencement of the bankruptcy proceeding”, as is the case with other derivative transactions, it may be advisable to insert an automatic early termination provision in the contract. Article 58 of the Bankruptcy Act will apply mutatis mutandis to a party with respect to which a civil reha - bilitation or corporate reorganisation proceeding is commenced (Article 51 of the Civil Rehabilitation Act (Act No. 225 of 1999, as amended), Article 63 of the Corporate Reorganization Act (Act No 154 of 2002, as amended) and Article 41, Paragraph 3 and Article 206, Paragraph 3 of the Act on Special Measures for the Reorganization Proceedings of Financial Institutions (Act No 95 of 1996, as amended), respectively). Close-out netting by way of set-off Even if an OTC digital asset derivative transaction does not fall within the ambit of the Netting Act or Article 58 of the Bankruptcy Act, the non-defaulting party in such a transaction may still be able to exercise its statutory or contractual set-off rights. In this regard, the contractual set-off rights would be enforceable if the requirements of Article 505, Paragraph 1 of the Civil Code (Act No 89 of 1896, as amended), which are set forth as follows, are met:
• all the receivables and payables to be set off are held by parties bound to each other; • the parties are bound by obligations the nature of which are of the same kind; and • the obligations of both parties under the agreement are due and payable. Whether an OTC digital asset derivative transaction meets all of the requirements of Article 505, Paragraph 1 needs to be analysed on a case-by-case basis, and the type and nature of the specific OTC digital asset derivative transactions may be relevant to such analy - sis. Conclusion Although there is currently no standard practice in Japan regarding close-out netting arrangements for OTC digital asset derivative transactions, it is hoped that with the increasing prevalence of such transac - tions, and the corresponding need to analyse them, standardised practice for such close-out netting will soon emerge.
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