1.2 In particular, when assessing counterparty credit and liquidity exposures, participants in netting arrangements should not rely upon such exposures being the balance of unsettled payment orders made and received or of unrealised gains and losses unless they have reasoned legal opinions that, in the event of a legal challenge, the relevant courts and administrative authorities would find their exposures to be the net amount under: (a) the law of the country in which the counterparty is chartered and, if the counterparty is a branch of a foreign bank, then also under the law of the jurisdiction in which the branch is located; (b) the law that governs the individual transactions subject to the netting scheme; and (c) the law that governs any contract or agreement necessary to effect the netting. Such opinions should be periodically reviewed to determine the effect of any relevant changes in law . These opinions should also be available to the authorities responsible for supervising the participants' financial soundness.

1.3 These conditions are cumulative. Unless a netting scheme is found to be legally effective under each of above-mentioned laws the participants should not rely upon their exposures being the balance of unsettled payment orders made and received or of unrealised gains and losses. In some cases, all of the relevant laws may be of a single legal jurisdiction. In other cases, it may be difficult to evaluate the rights and obligations of the parties because of the need to determine which countries' laws govern. As a result, this cumulative test effectively requires a "worst-case" analysis. For example, in the case of a bank branch operating in a foreign jurisdiction, if the netting is effective under the host-country laws but not the bank's home-country laws, then the effectiveness of the netting should not be relied upon.

1.4 If participants in multilateral systems intend to rely on the multilateral net positions as reflecting either their credit or liquidity exposures, special attention will need to be given to the legal status of the netting provider or central counterparty so as to ensure that the multilateral net positions would withstand a legal challenge. At the same time, the netting provider or central counterparty will need to consider the legal position of each participant.