In the financial markets concerns have arisen regarding the enforceability of netting and close-out rights and security rights in the context of the Intervention Act. On 16 December 2013 the Dutch Minister of Finance sent a letter to the Dutch Bankers Association and the Dutch Insurers Association stating that he has prepared a bill aimed at addressing these concerns, with the intention that the relevant new rules enter into force on 1 January 2015. It is also mentioned in this letter that the Dutch Central Bank intends to publish a policy rule aimed at addressing the same concerns.
As described in our newsletter of 28 June 2012, on 13 June 2012 the Financial Institutions Special Measures Act (Wet bijzondere maatregelen financiële ondernemingen, the "Intervention Act") entered into force with retroactive effect as of 20 January 2012.
The Intervention Act introduced new powers for the Dutch Central Bank to procure the complete or partial transfer, pursuant to a transfer plan, of a bank or insurance company that is experiencing serious financial problems to a third party.
In addition, the Act enables the Minister of Finance to intervene in the affairs of financial institutions (financiële ondernemingen) – including banks and insurance companies – with a view to safeguarding the stability of the financial system. The Minister's powers in this regard include the power to expropriate some or all of the assets of the financial institution and/or to expropriate securities issued by, or with the cooperation of, the institution.
Like the EU, English, German and French (draft) intervention legislation, the Intervention Act further contains provisions restricting the exercise of certain contractual rights of counterparties of a bank or insurance company that is or has been subject to one of the new special measures, or of counterparties of an entity belonging to the same group as that bank or insurance company if the exercise of such contractual rights is triggered by an intervention measure.
Possible adverse effects on netting and close-out rights
Unlike the corresponding EU, English, German and French (draft) legislation, the Intervention Act does not contain explicit provisions to safeguard the enforceability of netting and close-out provisions contained in master agreements such as the ISDA Master Agreement (for OTC derivatives), the Global Master Repurchase Agreement (GMRA) (for repos) and the Global Master Securities Lending Agreement (GMSLA) (for securities lending), in the event of a (partial) transfer of assets and liabilities in the context of a transfer plan or in the event of a partial expropriation. This means that, in theory, transactions entered into under one and the same master agreement may be split up, in the sense that some of these transactions remain with the problem institution (the "bad bank") while others are transferred to a third party (the "good bank"). It is even possible that a single transaction is split up, in the sense that the link between the rights and obligations thereunder is broken. As a result, the counterparty of the problem institution could lose its netting and close-out rights, simply because there is no longer anything to net.
The rights of counterparties under netting and close-out provisions may be adversely affected in a similar manner if a financial institution's assets are expropriated. The enforceability of the netting or close-out provisions is not safeguarded because a partial expropriation may result in transactions under the same master agreement being split up or even in the split-up of a single transaction.
Although the risk that a transfer plan or an expropriation is structured in such a manner may be remote, doubts have arisen on the part of financial counterparties (particularly foreign banks) and international industry-specific organisations such as ISDA, ICMA and ISLA as to whether, in the event of a partial transfer of a Dutch bank's or insurer's assets and liabilities pursuant to a transfer plan or in the event of a partial expropriation, contractual netting and close-out provisions agreed upon with such institutions are enforceable and whether security rights granted by such institutions can be enforced.
Letter from Minster of Finance
In a letter dated 16 December 2013, the Minister of Finance informed the Dutch Bankers Association and the Dutch Insurers Association that he has prepared a bill intended to address the concerns of the financial markets. The proposed amendments are not a break with the existing legislation but are intended to be a codification of what already applies. The bill confirms that netting rights under a close-out netting provision will not be adversely affected by a transfer plan in respect of the financial institution's assets and liabilities or by an expropriation. NautaDutilh, the large Dutch banks – ING, ABN AMRO and Rabobank – and the Dutch Central Bank have been working closely with the Ministry of Finance in preparing the bill.
Furthermore, with a view to addressing concerns relating to the enforceability of security rights, the bill confirms that a transfer plan will also not adversely affect ancillary rights, security rights in assets of the problem institution or a third party, or other security rights and privileges in respect of such assets, provided that such rights and/or privileges could, on the basis of a master agreement or a related agreement, be enforced against the problem institution prior to the approval of the transfer plan.
The Minister notes that it is his intention that – assuming that the bill is passed by Parliament – the proposed changes will enter into force on 1 January 2015. If, before that date, he exercises the power to expropriate a financial institution's assets, he will make the arrangements necessary to ensure that netting rights are not adversely affected.
The Minister further notes that the Dutch Central Bank is in the process of drawing up and will soon publish a policy rule providing that in the event of an assets/liabilities transfer, the assets and liabilities will all be incorporated in the transfer plan so as to ensure that netting rights are not adversely affected.