THE BANKING COUNCIL
Amendment of s35B of the Insolvency Act
I have consulted with two of the banks on Tienie's revised draft, and the other banks are meeting on the matter later today.
The banks consulted thus far are both pleased with the revision and consider the redrafted version an improvement on the earlier draft.
As anticipated they are concerned about the possible exclusion of the phrase "or similar agreement" and also the reference to collateral security in the definition a': Master Agreernent.
I have requested that these banks write to Advocate de Lange directly, since they are better able to explain their difficulties.
Briefly5 banks do occasionally negotiate proprietary agreements and would like to avoid any unnecessary impediment to their contractual freedom. The word "similar in my view creates a sufficient safeguard against the wider application of this section as do the substantive requirements included under the Roman numerals of that definition.
The newly inserted text under Roman numerical (ii) is awkward. The definition of Master Agreement now reads, "Master Agreement means an agreement... which provides that, upon the sequestration of one of the parties... any assets pledged- or ceded in securitatem debit or transferred by one party to the other as collateral security for obligations under the agreement, be returned to the first-mentioned party".
Firstly1 what happens to the pledged assets is clearly dependent on the circumstances, e.g. if the party which gave the pledge goes insolvent, the assets will obviously not be returned to that party.
Secondly we cannot specify that the "pledge, security cession or transfer of assets will form part of the net, since pledges and security cessions are typically dealt with outside of the netting arrangement.
Third, and most importantly, security is typically dealt with In a so-called "Collateral Security Annex" or "CSA" to the Master Agreement, which is often added later or not utilised - In cases where margin and security requirements between the two counter -parties are negotiated on a "global basis or dealt with under a separate agreement
We would thus request that you motivate to the Portfolio Committee that the term "or similar Agreernent" be retained and that the newly inserted text under Roman numeral (ii) rather be omitted from the definition of Master Agreement.
The other changes have been welcomed and supported. With much gratitude for your assistance in this matter.
Yours sincerely
Kevin Daly Consultant
Agreements providing for termination and netting
35B.(1) Notwithstanding any rule of the common law to the contrary, all unperformed obligations between the parties to the master agreement arising out of that and any other master agreement, including an obligation to return assets in which ownership had been transferred as collateral security, shall, [notwithstanding any rule of the common law to the contrary] {upon the sequestration of the estate of a party to a such master agreement, terminate automatically at the date of sequestration, the values of the unperformed obligations shall be calculated at market value as at that date, and the net amount shall be payable.
(2) For purposes of this section,
"market value" means a value determined without reference to the ability of the debtor to perform;
"master agreement" means-
(a) an agreement in accordance with standard terms published by the International Swaps and Derivatives Association, the International Securities Lenders Association, the Bond Market Association or the International Securities Market Association, [or any similar agreement], which provides that, upon the sequestration of one of the parties -
(i) all unperformed obligations of the parties in terms of the agreement [or agreements -
(aa) terminate or may be terminated; or
(bb) become or may become due immediately;
(ii) any assets pledged or ceded in securitatem debiti, or transferred by one party to the other as collateral security for obligations under the agreement, be returned to the first-mentioned party: [(ii)]
(iii) the values of the unperformed obligations are determined or may be determined; and
{(iii)] (iv) the values are netted or may be netted, so that only a net amount (whether in the currency of the Republic or any other currency) is payable to or by a party; or
(b) any agreement declared by the Minister, after consultation with the Minister of Finance, by notice in the Gazette to be an agreement for the purposes of this section [
"unperformed obligation" include an obligation to return assets in which ownership has been transferred as security for party's prospective liability arising from transactions under a Master Agreement
(3) In this section 'master agreement' does not include-
(a) a transaction contemplated in section 35A;
(b) a netting arrangement contemplated in the National Payment System Act 1998 (Act No.
78 of 1998): or
(c) any agreement declared by the Minister after consultation with the Minister of
Finance, by notice in the Gazette. not to be a master agreement for the purposes of this
section.
(4) Section 341(2) of the Companies Act, 1973 (Act No.61 0' 1973), and sections 26, 29 and 30 of this Act shall not apply to dispositions in terms of a master agreement."