Foreign margin requirements for OTC derivatives
Status: A Bill is being considered by Parliament
Following a public consultation by the Reserve Bank and Ministry of Business, Innovation and Employment, Cabinet agreed in 2018 to a number of legislative amendments designed to remove impediments to compliance with foreign margin requirements for uncleared OTC derivatives. These amendments are included in Part 1 of the Financial Markets (Derivatives Margin and Benchmarking) Reform Amendments Bill, which is currently before Parliament.
Cabinet agreed to a number of legislative amendments that address aspects of New Zealand law which impede compliance with foreign margin requirements for OTC derivatives. These include amendments to the Reserve Bank of New Zealand Act 1989, the Corporations (Investigations and Management) Act 1989, the Companies Act 1993, and the Personal Property Securities Act 1999.
The amendments will mean that derivatives counterparties will be able to enforce their security interest over margin without delay, and ahead of other creditors, in the event of default by the other party to the derivative contract. More specifically, they will:
- carve out the claims of these derivatives counterparties from general moratoria on creditors’ claims that apply in statutory management and voluntary administration; and
- ensure that when these derivatives counterparties enforce their security interest over posted margin, the claim to enforce that security interest ranks ahead of other potential claims under the Companies Act 1993 and the Personal Property Securities Act 1999.
The amendments will apply only in relation to derivatives contracts that meet certain requirements, and only where those contracts were entered into by prescribed entities (specifically, registered banks, ACC, the New Zealand Superannuation Fund, and central counterparties that are designated settlement systems under Part 5C of the Reserve Bank of New Zealand Act 1989).
These constraints on the amendments are designed to:
- minimise adverse impacts on the rights of other creditors; and
- ensure that the amendments do not adversely affect the coherence of existing corporate insolvency and rehabilitation regimes, or personal property securities law.
- Cabinet paper: A New Zealand policy response to foreign margin requirements for 'Over-the-Counter' derivatives (PDF 795KB)
- Impact summary: A New Zealand response to foreign derivative margin requirements (PDF 922KB)
Submissions for publication
The Reserve Bank published the individual responses received as part of the consultation in October 2017, where consent to do so was provided by respondents.
- ACC and NZ Super Fund joint response (PDF 189KB)
- BNZ response (PDF 234KB)
- International Swaps and Derivatives Assn response (PDF 1MB)
- Joint response from three law firms (PDF 7.6MB)
- NZ Bankers Assn response (PDF 2.2MB)
- Restructuring, Insolvency, Turnaround Assn of NZ response (PDF 153KB)
The Reserve Bank and the Ministry of Business, Innovation and Employment (MBIE) sought feedback from the public and stakeholders on the implications for New Zealand of foreign margin requirements for uncleared over-the-counter (OTC) derivatives. A consultation paper outlined the Reserve Bank and MBIE’s view on issues and proposed options to ensure that financial institutions continue to have access to international capital markets.