The Australian Government has introduced a long-awaited bill to parliament which is to enable an easier connection between Australian financial institutions and the international risk-management marketplace. These open the way for Australians to comply with global derivative margining requirements and access international clearing houses.
The bill introduced to parliament is the Financial System Legislation Amendment (Resilience and Collateral Protection) Bill 2016. The bill, and the supporting explanatory memorandum, can be found here. For those who have hoped for some of this reform for many years, this is indeed a welcome step.
The bill broadly reflects its exposure draft, which was released for consultation on 21 December 2015. Our alert on the exposure draft, which describes some of the reforms, can be found here.
Here are just a few things to think about when taking a look at the bill and comparing it to its exposure draft.
Stay tuned for regulations (especially life companies and super trustees)
The bill does not change the restrictions imposed on trustees of regulated superannuation entities and life companies on granting the security. These need to change in order for these entities to access certain international capital markets and liquidity. This should happen in a new regulation (an exposure draft of which was released in December and can be found here). A number of Australian superannuation trustees and life companies and their managers and counterparties will be keen to have this regulation made as soon as possible.
Other regulations could be made under the bill in the future. Some of these may be very important to the way security-based credit support arrangements will be protected and to the way that market participants can exercise close-out rights under certain financial market transactions. These will be important to focus on.
Stay fixed and don’t float
The protection given under the bill to security over financial property has been varied in some respects. One of the key changes is that if the grantor of security is free to deal with the financial property in the ordinary course of business then the enforcement of the security will not be protected by the new regime. Care will be required by market participants taking security who are intending to rely on the new protections. Fortunately, the bill provides some further guidance in this regard.
Having technical difficulties? The bill addresses this
The bill also looks to resolve, for the purpose of the Netting Act, a range of technical legal issues related to traditional security law, insolvency law and new laws about the vesting of security interests. These seem to be important in ensuring the new regime applies as intended.
Does the bill do anything else?
Yes, it does quite a bit. This bill represents one of the most significant steps forward in Australian financial markets legislation since the introduction of the Payment Systems and Netting Act in 1998. The bill touches on a range of legislative protections which underpin systemically important payment systems, settlement systems, exchanges and clearing houses. See our Alert on the earlier exposure draft for more context.
What are the next steps?
The bill has been introduced to parliament but it has not been passed. The regulation which was released for consultation in December has not been made. It is hoped that both the bill will be passed and the regulation will be made mid-year. This timing will be critical to market participants who are expecting to be caught by margin requirements in Australia and internationally from 1 September 2016.
Market participants may wish to consider the impact on their business of APRA’s discussion paper and draft prudential standards on margining and risk mitigation (available here).