RAND MERCHANT BANK
16 October 2003

Re: Proposed Amendment to Section 35B of the Insolvency Act

Kevin Daly of the Banking Council, South Africa has provided to the legal representatives of
FirstRand Bank Limited (acting through its Rand Merchant Bank Division), the Standard
Bank of South Africa Limited, Nedbank Limited, ABSA Bank Limited and Investec Bank
Limited a draft of the proposed amendment to Section 35B of the Insolvency Act.

We would like to start by thanking you, and your Committee, for your approachability and assistance with regard to the problems experienced by South African banks with Section 35B, and, particularly, for your Input on the drafting. As you know1 or will have become aware, the Section regulates a particularly difficult area in the market and It is important that it do so correctly.

The above mentioned banks met this morning and considered the proposal which had been submitted. There was some areas in the proposal that we felt could be improved, to better reflect the market practice and in this regard we attach an amended draft, This draft is a "clean" copy of what was submitted to us and the changes that we recommend have been tracked.

We would like to comment on the thinking behind the changes, as follows;

1.Section 35B(1) we have suggested the deletion of the words "to return" and the insertion, in their place, of the words "in respect of". The reason for this proposal is that the Master Agreement would not provide for a return of the collateral on insolvency, but rather that its value be taken into account in the netting calculation. It is felt that the above mentioned proposed substitution reflects this reality;

2. Section35B(1) - deletion of the word "security" it is proposed that the word "security" be deleted to avoid any confusion with a security interest being created over assets, as opposed to an outright transfer thereof;

3. Section3sB(1) - final proposed change - we felt that the insertion of these words better explain the process of ascertaining market values, the netting thereof, and the payment of the net amount;

4. With regard to the definition of "market value" we felt that it would not be correct to define market value solely as being a value determined without reference to the ability of the debtor to perform. By adding the proposed wording we are of the view that the definition better explains the concept;

5. In the definition "Master Agreement":

5.1 we proposed that the word "substantially" be Inserted as parties generally take some changes (which are almost invariably credit related and which do not affect the principle of netting or the provision of collateral) and such changes should not prevent the agreement concerned from qualifying as a "Master Agreement';

5.2 we propose that the word "terms" be changed to "form of agreement" this better reflects the nature of what the international associations referred to, publish;

5.3 we propose the insertion of the words "or any successor ..." as this recognises that the associations may not remain static',

5.4 we have proposed that the concept of "similar agreement" be retained but that the wording be changed "agreement with similar application". This is a very important Issue for all of the banks concerned. One very often finds that, for instance, when a client only deals forward exchange contracts in respect of foreign exchange with the bank, the bank encounters substantial resistance to get Its client to sign an ISIDA agreement. The client may be a relatively unsophisticated client and the often somewhat Intricate provisions of the market standard agreement cause some resistance in signing What happens in such cases Is that the bank would have a simplified type of agreement (which would have been drafted internally by it) regulating the netting and collateral issues on the same basis as they are regulated under the lSDA, It is very important to the Banks consulted that the legislation recognised this sort of agreement. It is felt that by providing that it must be an "agreement with similar application" one ensures that it is not all agreements which qualify, but only those which regulate the types of financial product entered into pursuant to the agreements published by the market associations referred to;

5.5 The way in which the proposed sub section (a)(ii) is drafted, does not accord with the sort of clauses that one would find in a Master Agreement. Typically, the Master Agreement would not regulate the issue of a return of assets which have been pledged or ceded, on insolvency. It may well be that the Insolvency Act provides for this, but the agreement would not. The Master Agreement would, however, provide that the value of any assets in respect which ownership had been transferred as collateral must be included in the calculation of the net amount. Our proposal recognises this.

6. The proposed Section 35(B)(3) limits the application of the section In relation to the definition of the Master Agreement - we thought that it might be better to merely provide that the provisions of the section do not apply to the sub categories listed rather than artificially excluding things from the definition of "Master Agreement"

7. Both is the definition of Master Agreement and In Section 35B(~) the word "or" should be "and".

We realise that there are a substantial number of changes that we recommend, but in our view they do not change In any material respect what we understand your Committee's thinking on the section to be.

As mentioned, the proposals have been debated extensively with the five major banks in the South African market and It has all of their support.

Yours faithfully

RAND MERCHANT BANK

Agreements providing for termination and netting

35B(1) Notwithstanding any rule of the common law to the contrary, upon the sequestration of the estate of a party to a Master Agreement, all unperformed obligations between the parties to the Master Agreement arising out of that and other Master Agreements, including an obligation to return in respect of assets in which ownership had been transferred as collateral security, shall terminate automatically at the date of sequestration, the values of the unperformed obligations shall be calculated at market value as at that date, the values so calculated shall be netted and the net amount shall be payable.
(2) For purposes of this section,

"market value" means a value determined on the basis of generally accepted market practice1 but without reference to the ability of the debtor to perform;

"Master Agreement" means-

(a) an agreement substantially in accordance with a standard form of termsagreement published by the International Swaps and Derivatives Association Inc., the International Securities Lenders Association, the Bond Market Association or the International Securities Market Association, or any successor or similar Internationally recognised trade association or body or any similar agreement with similar application, which provides that, upon the sequestration of one of the parties
(i) all unperformed obligations of the parties In terms of the agreement -
(aa) terminate or may be terminated; or
(bb) become or may become due immediately;
(ii) the value of 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 in respect of which ownership had been transferred as collateral shall be included in the calculation of the net amount referred to in subsection (iv)
(iii) the values of the unperformed obligations are determined or may be determined; and
(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; orand
(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.

(3) In this section "Master Agreement" does not include The provisions of this section 35B do not apply to-
(a) a transaction contemplated in section 35A;
(b) a netting arrangement contemplated in the National Payment System Act, 1998 (Act No.78 of 1998); orand
(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 of 1973), and sections 26, 29 and 30 of this Act shall not apply to dispositions in terms of a Master Agreement.