Key Points:
- Parties can agree to net unless the Minister prescribes otherwise. Existing provisions in contract regarding netting and set-off are enforceable, unless the Minister decides otherwise.
- The Act enables one-party agreement that requires a single net amount for all transactions that have been made under the agreement by providing for the enforceability of netting provisions in financial agreements on the occurrence of an event of default.
- The Minister may impose a period of stay for a period of not more than two business days. The Minister may also prescribe: (i) other financial agreements to be qualified financial agreements; (ii) netting provisions; and (iii) qualified financial transactions.
Effective 30 March 2015, the Netting of Financial Agreements Act 2015 (‘the Act’) came into force, which provides legal certainty as to the enforceability of a close-out netting mechanism under Malaysian law. Prior to this, there was some uncertainty on the enforceability of netting arrangements in Malaysia.
According to Deputy Finance Minister Datuk Ahmad Maslan, the Act gives assurance to international and domestic financial market participants such as fund management, insurance, and banking institutions, and also public and private companies to enforce the close-out netting mechanisms when an ‘event of default’ occurs under certain agreements.
With the Act coming into force, credit risk reduction benefits will be provided by allowing counter parties to net off credit risk exposures instead of having gross exposures thereby improving the operational efficiency of the financial system by reducing systemic risks.
1. What is a “Netting Provision”?
It is a provision in a qualified financial agreement which allows one party to pay to another a single net amount upon the occurrence of an event in default.
2. How Is The Netting Provision Enforced And How Does It Affect My Agreement?
The Act provides statutory assurance on the enforceability of a “netting provision” under certain “qualified financial agreements” (‘QFAs’).
A QFA may consist of a master agreement, with a netting provision, in respect of one or more qualified financial transactions. Examples of qualified financial transactions include:
- An over-the-counter derivative;
- A repurchase transaction; or
- A securities borrowing and lending of unlisted debt securities under the Real Time Electronic Transfer of Funds and Securities System;
- Islamic financial instruments such as an Islamic derivative and a buy-sell back agreement.
Where a master agreement is also in respect of one or more transactions that are not qualified financial transactions, the master agreement shall be a qualified financial agreement only with respect to the transactions that are qualified financial transactions.
A QFA may also be an agreement relating to financial collateral that secures payment or performance of an obligation. If your agreement is not a QFA under the definition above, the issue of enforceability of a netting provision does not arise, unless the Minister:
(a) makes an Order prescribing your agreement as a QFA; and
(b) makes an Order prescribing netting provisions applicable to your agreement.
If your agreement is a QFA and it contains a netting provision, then it will be enforced according to the terms of that netting provision unless the Minister directs otherwise.
If there are existing statutory provisions which have the effect of being construed as preventing close-out netting, the netting provisions in a QFA will override those existing statutory provisions.
3. How And What Happens When The Netting Provision Is Triggered?
The netting provision is triggered when the events specified in the QFA materialises (such as the default or insolvency of a counterparty). It can be triggered automatically or by way of declaration.
Once triggered, all the transactions in the said QFA may be terminated and the value for each of the transactions will be determined. The sum value of all the transactions will then be aggregated whereby a single net amount becomes payable by one party to another.
If there are collaterals provided, the netting provisions may be enforced against the collateral for example by way of transfer or otherwise. For the purposes of the Act, financial collaterals must be provided in the form of:
- Cash or cash equivalents, including negotiable instruments and demand deposits;
- Securities, a securities account or a right to acquire securities; or
- Futures agreement or futures account
4. What Happens If My Agreement Is Made Before 30 March 2015, And Does Not Contain Netting Provisions?
The contractual provisions in the agreement remain valid, until applicable netting provisions are prescribed by Ministerial Order. Once such Order is made, the statutory netting provision will override the netting provision that has been previously agreed between the parties.
5. Can I ‘Opt-Out’ Of Having A Netting Provision?
Yes, you may.
6. Can I Agree On a Netting Provision That Departs From The Statutory Standard?
Yes, unless it is overridden by a subsequent Ministerial Order determining any other mechanism which has the effect of determining a single net amount to be a netting provision.
7. What Powers Does The Minister Have?
To cater to an evolving market, and to be in line with future market developments and international best practices, the Minister of Finance is provided with the flexibility to:
- determine any other agreement or arrangement to be a “qualified financial agreement”;
- determine any other mechanism which has the effect of determining a single net amount to be a netting provision; or
- determine any other transaction to be a qualified financial transaction.
The Minister is empowered with this flexibility upon the recommendation of the relevant authorities which include:
- Bank Negara Malaysia;
- Securities Commission of Malaysia;
- Pengurusan Danaharta Nasional Berhad; and
- Any other authority whose reach of statutory supervision or oversight may extend to a person who deals in a qualified financial transaction.
8. Can The Minister Impose A Period Of Stay Of The Netting Provision?
Yes. The Minister may do so upon recommendation of the relevant authorities to guard against systemic risk that may be caused as a result of an immediate enforcement of a netting provision against a troubled financial institution in times of crisis.
9. How Long Is The Period Of Stay?
The period of stay shall be two business days. This is stipulated in the Netting of Financial Agreements (Period of Stay) Order 2015 which simultaneously came into force with the Act.
The period of stay will prevail over any other period of stay as may be prescribed under the legislations below:
- The Financial Services Act 2013;
- The Islamic Financial Services Act 2013;
- The Malaysia Deposit Insurance Corporation Act 2011; and
- The Pengurusan Danaharta Nasional Berhad Act 1998.
For further information, please contact:
Ang Siak Keng, Partner, ZICOlaw
siak.keng.ang@zicolaw.com
