MEMBER FIRM OF BAKER & MCKENZIE INTERNATIONAL Finance / Corporate & Commercial Kuala Lumpur Malaysia: Coming into Force of the Netting of Financial Agreements Act 2015 The close-out netting mechanism is used by financial institutions and other financial market participants to reduce risk exposure, in the event of a counterparty default for bilateral financial transactions that have high counterparty and market risk, such as derivatives and repurchase transactions. The mechanism is triggered upon the occurrence of an event specified in the relevant financial agreement (for example, default or insolvency of a counterparty). Once triggered, the mechanism allows all transactions under the financial agreement to be terminated and the sum values to be aggregated, resulting in a single net amount being payable by one party to the other. The Netting of Financial Agreements Act 2015 ("Act") came into operation on 30 March 2015 and is intended to provide legal certainty to the enforceability of close-out netting provisions in financial agreements under Malaysian law. The Act aims to promote Malaysia's status as a 'netting-friendly' jurisdiction and serves as an important catalyst in the development of the domestic financial market. Legal Position prior to the Act Prior to the coming into force of the Act, there was legal uncertainty as to the enforceability of close-out netting arrangements in Malaysia. This was due to several provisions under Malaysian legislation which have been construed as potentially restricting the enforceability of close-out netting provisions. Under the Capital Markets and Services Act 2007, the Securities Commission Malaysia is empowered to issue directives requiring any person to take certain measures, in the interest of monitoring, mitigating or managing systemic risk in the capital market. The Pengurusan Danaharta Nasional Berhad Act 1998 ("Danaharta Act") also provides that the appointment of a Special Administrator under the Danaharta Act shall not be regarded as giving rise to a right for a person to terminate an agreement or accelerate the performance of an obligation, and imposes a moratorium period of twelve months upon the appointment of a Special Administrator, during which set-off (and consequently close-out netting) is restricted except with the consent of Pengurusan Danaharta Nasional Berhad. Overview of the Act Section 3 of the Act provides that, notwithstanding the provisions specified in Part I of the Schedule of the Act ("Schedule"), netting provisions contained in qualified financial agreements ("QFA") are enforceable in accordance with the terms of the QFA. The Schedule sets out a list of provisions which have been construed as having the ability to affect the enforceability of netting provisions. Client Alert June 2015 In This Issue: Coming into Force of the Netting of Financial Agreements Act 2015 Legal Position prior to the Act Overview of the Act Conclusion 2 Malaysia: Coming into Force of the Netting of Financial Agreements Act 2015 June 2015 Under the Act, the Minister of Finance is empowered to amend the Schedule on the recommendation of the relevant authorities (for example, Bank Negara Malaysia and the Securities Commission Malaysia). This is intended to preserve the sanctity of netting provisions moving forward. A QFA includes a master agreement, with a netting provision in respect of one or more qualifying financial transactions ("QFT"), or an agreement relating to financial collateral with respect to one or more QFTs under a master agreement. QFTs involve: (i) over-the-counter derivatives; (ii) repurchases, reverse repurchases, buy-sell backs in respect of securities; or (iii) lending or borrowing of unlisted debt securities under the Real Time Electronic Transfer of Funds and Securities System. The application of the Act in respect of financial collateral is limited to financial collateral in the form of: (i) cash or cash equivalents (including negotiable instruments and demand deposits); (ii) securities, securities accounts or a right to acquire securities; or (iii) futures agreements or futures accounts. Under the Act, the Minister of Finance is also empowered, on the recommendation of the relevant authorities, to prescribe other forms of netting provisions, mechanisms, QFAs or QFTs. This is intended to cater for market developments and to preserve the enforceability of close-out netting arrangements which may not take the current form of close-out netting arrangements in Malaysia. In order to mitigate potential systemic risk as a result of the immediate enforcement of netting provisions against troubled financial institutions, the Act further empowers the Minister of Finance to impose, by giving reasonable notice and on the recommendation of the relevant authorities, a period of temporary stay on the rights of enforcing netting provisions. Pursuant to the Netting of Financial Agreements (Period of Stay) Order 2015 and in line with international practices, the period of stay prescribed by the Act is two business days. Conclusion Without being able to enjoy the benefits of close-out netting arrangements, a party to a financial agreement would calculate its market and credit risk exposure by reference to each transaction entered into with its counterparty. By removing the uncertainty surrounding the enforcement of close-out netting arrangements in Malaysia (although not in its entirety since there are some residual powers reserved for the regulators), the Act is a welcome step towards mitigating such risks and increasing the stability and competitiveness of Malaysia's financial market. www.bakermckenzie.com For further information please contact Mark Lim +603 2298 7960 firstname.lastname@example.org Jasmine Liew +603 2299 6446 email@example.com Wong & Partners Level 21, The Gardens South Tower Mid Valley City Lingkaran Syed Putra Kuala Lumpur 59200 Malaysia ©2015 Baker & McKenzie. All rights reserved. Wong & Partners is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. 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