In an article in February this year, we reported on the introduction into Parliament of the Financial Markets (Derivatives Margin and Benchmarking) Reform Amendment Bill (the Bill).
We noted that the two parts of the Bill, which accommodate foreign margin requirements for derivatives (Part 1) and provide for the licensing of financial benchmark administrators (Part 2), have been prompted by foreign influences.
Since February, submitters have had their say on the Bill's proposal to bow to those foreign influences. Not surprisingly, given what is at stake by not passing this legislation, the submissions have been largely supportive. For the most part, therefore, the submissions have tended to focus on technical points rather than matters of substantive policy.
On 2 July, the Select Committee, having considered all submissions, reported back on the Bill. Part 2 of the revised Bill is relatively unchanged from the version introduced in February. Not so Part 1, which has undergone three main changes.
In order for collateral to qualify for the special protection the new legislation will afford when a New Zealand qualifying counterparty is insolvent, that collateral must now be “in the possession or under the control" of the secured party. This new requirement mirrors the position under equivalent legislation in Australia, the EU, and the UK. While the concept of “possession" of collateral is already familiar to us (from the Personal Property Securities Act 1999 (PPSA)), the concept of “control" is not. For that reason, the Bill includes detailed provisions defining what does, and what does not, amount to control.
The Bill's transitional provisions have been changed so that its amendments apply to qualifying derivatives entered into before the Bill's enactment, and not just those entered into afterwards (as was initially proposed). This change will be universally welcomed by market participants, some of whom may have otherwise faced the prospect of having to split their collateral portfolio – an operationally complex and highly inefficient approach.
The Bill now omits the clause that was aimed at clarifying whether outright transfers of collateral are “security interests" for the purposes of the PPSA. This was in response to submissions that had played the 'unforeseen consequences' card. That is a pity. This issue, while a technical one, has a lot riding on it. As such, lawyers will continue to debate this issue, reflecting on an opportunity lost, and noting the officials' view that “there may be a significant delay before another legislative vehicle to make this change becomes available".
The Bill now awaits its second reading. It may not be passed before the Phase 4 entities become in-scope for foreign margin rules – on 1 September 2019. But, if not, this should hopefully happen during the fourth quarter of this year.