Foreign margin requirements for OTC derivatives

On 7 March 2019 the Financial Markets (Derivatives Margin and Benchmarking) Reform Amendment Bill was first read in the House. The Bill amends aspects of New Zealand law which impede compliance with foreign margin requirements for over-the-counter derivatives.

About the amendments

The Bill amends several pieces of legislation to address aspects of New Zealand law which impede compliance with foreign margin requirements for over-the-counter (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
  • the Personal Property Securities Act 1999.

The Bill is currently in the Select Committee stage and will be considered by the Finance and Expenditure Committee.

What the amendments will do

The amendments will mean that derivatives counter parties will be able to enforce their security interest over margin without delay, and ahead of other creditors, in the event of the other party to the derivative defaulting. More specifically, they will:

  • carve out the claims of these derivatives counter parties from general moratoria on creditors’ claims that apply in statutory management and voluntary administration
  • ensure that when these derivatives counter parties 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.

When the amendments will apply

The amendments will apply only for derivatives contracts that meet certain requirements, and where those contracts were entered into by prescribed entities. The prescribed entities are registered banks, ACC, the New Zealand Superannuation Fund, and central counter parties 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
  • ensure that the amendments do not adversely affect the coherence of existing corporate insolvency and rehabilitation regimes, or personal property securities law.

Read the documents behind the policy decision and the introduction of the Bill:

Cabinet paper: A New Zealand policy response to foreign margin requirements for ‘Over-The-Counter’ derivatives [PDF, 509 KB]

Regulatory Impact Summary: A New Zealand response to foreign derivative margin requirements [PDF, 612 KB]

Approval for Introduction: Financial Market (Derivatives Margins and Benchmarking) Reform Amendment Bill [PDF, 453 KB]

Cabinet Economic Development Committee Minute of Decision: Financial Market (Derivatives Margins and Benchmarking) Reform Amendment Bill: Policy Approval and Approval for Introduction [PDF, 161 KB]

Consultation on the changes

In 2017, the Reserve Bank of New Zealand and our Ministry conducted public consultation on the implications for New Zealand of foreign margin requirements for over-the-counter derivatives. This consultation process has now closed.

Here are the relevant documents:

Next steps

The Bill has been introduced to the House and been referred to the Finance and Expenditure Committee for the Select Committee stage.

Follow the progress of the Bill(external link)