The Finance and Expenditure Committee has released its report on the Financial Markets (Derivatives Margin and Benchmarking) Reform Amendment Bill. It recommends that it be passed with amendments.
The committee received and considered 13 submissions from interested groups and individuals and heard oral evidence from 4 submitters. It received advice from the Ministry of Business, Innovation and Employment and the Financial Markets Authority
The bill is an omnibus bill that seeks to amend several Acts to enable that New Zealand financial market participants to comply with international rules.
Part 1 enables compliance with foreign margin rules for over-the-counter derivatives. Part 2 established a new licensing regime for administrators of financial benchmarks.
Outright transfers of collateral
Clause 18 would amend the PPSA 1991 to clarify in the context of qualifying derivatives, that certain types of outright transfers of collateral do not create a security interest for the purposes of that Act. As introduced, clause 18 would only apply to collateral posted for “qualifying derivatives”, rather than applying generally.
The committee recommends removing clause 18 and suggests having the matter readdressed following further consultation.
Collateral held by enforcing counterparties
New sections 122(9A)(ab) and 122AB should be inserted into clauses 4 and 5 to provide further clarity as to when the provisions relating to collateral in Part 1 would apply.
Section 122(9A)(ab) would require collateral to be in the possession or under the control of the enforcing counterparty or agent, before the rights in Part 1 could be exercised.
Section 122AB would define when an enforcing counterparty should be treated as having possession or control of the collateral.
Transitional provisions—current and future derivatives
In the bill as introduced, the provisions in Part 1 would only apply to qualifying derivatives entered into on or after the date the bill came into force.
This could force parties to divide their portfolios according to whether the derivatives were entered into before or after the bill came into force, creating uncertainty, costs, and inefficiency.
The committee recommends amending the transitional provisions so that the provisions in Part 1 would also apply to derivatives entered into before the bill came into force, provided there were still wholly or partly unfulfilled obligations under those derivatives.