Financial System Legislation Amendment (Resilience and Collateral Protection) Regulation 2016

I, General the Honourable Sir Peter Cosgrove AK MC (Ret’d), Governor‑General of the Commonwealth of Australia, acting with the advice of the Federal Executive Council, make the following regulation.

Dated 05 May 2016

Peter Cosgrove

Governor‑General

By His Excellency’s Command

Kelly O’Dwyer

Assistant Treasurer

Contents

1 Name

2 Commencement

3 Authority

4 Schedules

Schedule 1—Facilitating access to derivatives for superannuation funds and life insurance companies

Life Insurance Regulations 1995

Superannuation Industry (Supervision) Regulations 1994

Schedule 2—Amendments relating to payment systems and netting

Payment Systems and Netting Regulations 2001

Schedule 3—Approved bodies

Life Insurance Regulations 1995

Superannuation Industry (Supervision) Regulations 1994

1  Name

  This is the Financial System Legislation Amendment (Resilience and Collateral Protection) Regulation 2016.

2  Commencement

 (1) Each provision of this instrument specified in column 1 of the table commences, or is taken to have commenced, in accordance with column 2 of the table. Any other statement in column 2 has effect according to its terms.

Note: This table relates only to the provisions of this instrument as originally made. It will not be amended to deal with any later amendments of this instrument.

 (2) Any information in column 3 of the table is not part of this instrument. Information may be inserted in this column, or information in it may be edited, in any published version of this instrument.

3  Authority

  This instrument is made under the following:

 (a) the Life Insurance Act 1995;

 (b) the Payment Systems and Netting Act 1998;

 (c) the Superannuation Industry (Supervision) Act 1993.

4  Schedules

  Each instrument that is specified in a Schedule to this instrument is amended or repealed as set out in the applicable items in the Schedule concerned, and any other item in a Schedule to this instrument has effect according to its terms.

Schedule 1—Facilitating access to derivatives for superannuation funds and life insurance companies

Life Insurance Regulations 1995

1  Paragraphs 4.00A(1)(a) and (b)

Repeal the paragraphs, substitute:

 (a) the charge is given in relation to a derivative to which either of the following is a party:

 (i) the life company;

 (ii) another person (the agent) acting on behalf of, on the instructions of, on account of or for the benefit of the life company; and

 (b) the charge complies with subregulation (1A), (1B) or (1C); and

2  After subregulation 4.00A(1)

Insert:

 (1A) A charge complies with this subregulation if it is given in order to comply with a requirement, in either of the following, that the performance of obligations in relation to the derivative be secured:

 (a) rules governing the operation of an approved body (as defined in subregulation (2));

 (b) a law of the Commonwealth, a State, a Territory or a foreign country (including a part of a foreign country) that applies to dealings in the derivative.

 (1B) A charge complies with this subregulation if:

 (a) it is given in favour of the agent; and

 (b) the agent enters into an arrangement that is a derivative on behalf of, on the instructions of, on account of or for the benefit of the life company; and

 (c) the agent is obliged under either of the following to keep the property of the life company separate from the property of the agent:

 (i) rules governing the operation of an approved body (as defined in subregulation (2));

 (ii) a law of the Commonwealth, a State, a Territory or a foreign country (including a part of a foreign country) that applies to dealings in the derivative; and

 (d) the agent is under an obligation, or but for a netting‑off would be under an obligation, to transfer property to another entity in relation to the derivative; and

 (e) the charge is given over an asset or assets of the statutory fund, to secure the performance of an obligation or obligations in relation to the derivative.

 (1C) A charge complies with this subregulation if:

 (a) the asset over which the charge is given is financial property; and

 (b) the obligations secured by the financial property are any of the following:

 (i) an obligation of the life company that relates to the derivative;

 (ii) an obligation of the life company to pay interest on an obligation covered by subparagraph (i);

 (iii) an obligation of the life company to pay costs and expenses incurred in connection with enforcing a charge given in respect of an obligation covered by subparagraph (i) or (ii); and

 (c) the financial property is transferred or otherwise dealt with so as to be in the possession or under the control of:

 (i) the secured person; or

 (ii) another person (who is not the life company), on behalf of the secured person, under the terms of an arrangement evidenced in writing.

 (1D) For the purposes of paragraph (1C)(c), financial property is taken not to be in the possession or control of a person mentioned in that paragraph if, under the charge, the life company is free to deal with the financial property in the ordinary course of business until the person’s interest in the financial property becomes fixed and enforceable.

 (1E) Without limiting paragraph (1C)(c), financial property is taken to be in the possession of a person for the purposes of that paragraph if:

 (a) in a case where there is an issuer of the financial property—the person is registered by, or on behalf of, the issuer as the registered owner of the financial property; or

 (b) in a case where the financial property is intermediated financial property—the person is the person in whose name the intermediary maintains the account.

 (1F) Without limiting paragraph (1C)(c), financial property is taken to be under the control of a person for the purposes of that paragraph if:

 (a) the financial property is intermediated financial property; and

 (b) the intermediary is not the life company (but may be the secured person or any other person); and

 (c) there is an agreement in force between the intermediary and one or more other persons, one of which is the secured person or the life company; and

 (d) the agreement has one or more of the following effects:

 (i) the person in whose name the intermediary maintains the account is not able to transfer or otherwise deal with the financial property;

 (ii) the intermediary must not comply with instructions given by the life company in relation to the financial property without seeking the consent of the secured person (or a person who has agreed to act on the instructions of the secured person);

 (iii) the intermediary must comply, or must comply in one or more specified circumstances, with instructions (including instructions to debit the account) given by the secured person in relation to the intermediated financial property without seeking the consent of the life company (or any person who has agreed to act on the instructions of the life company).

 (1G) Without limiting paragraph (1C)(c), the fact that the life company retains a right of one or more of the following kinds does not of itself stop that paragraph from being satisfied:

 (a) right to receive and withdraw income in relation to the financial property;

 (b) right to receive notices in relation to the financial property;

 (c) right to vote in relation to the financial property;

 (d) right to substitute other financial property that the parties agree is of equivalent value for the financial property;

 (e) right to withdraw excess financial property;

 (f) right to determine value of financial property.

3  Subregulation 4.00A(2) (definition of derivative)

Repeal the definition, substitute:

derivative means any of the following:

 (a) a derivative (within the meaning of Chapter 7 of the Corporations Act 2001);

 (b) a foreign exchange contract (within the meaning of that Chapter);

 (c) an arrangement that is a forward, swap or option, or any combination of those things, in relation to one or more commodities;

but does not include any arrangement that is of a kind mentioned in subregulation 6(2) of the Payment Systems and Netting Regulations 2001.

Note: Subregulation 6(2) of the Payment Systems and Netting Regulations 2001 identifies obligations that are not eligible obligations in relation to a close‑out netting contract. The arrangements mentioned include credit facilities, reciprocal purchase agreements (otherwise known as repurchase agreements), sell‑buyback arrangements, securities loan arrangements, contracts of insurance and managed investment schemes.

4  Subregulation 4.00A(2) (definition of derivatives contract)

Repeal the definition.

5  Subregulation 4.00A(2)

Insert:

financial property has the same meaning as in the Payment Systems and Netting Act 1998.

intermediary has the same meaning as in paragraph (h) of the definition of financial property in section 5 of the Payment Systems and Netting Act 1998.

intermediated financial property has the same meaning as in the Payment Systems and Netting Act 1998.

6  After Part 13

Insert:

Part 14—Transitional arrangements

Division 14.1—Transitional arrangements arising out of the Financial System Legislation Amendment (Resilience and Collateral Protection) Regulation 2016

14.01  Arrangements

  The amendments of these Regulations made by items 1 to 5 of Schedule 1 to the Financial System Legislation Amendment (Resilience and Collateral Protection) Regulation 2016 apply to charges given on and after the commencement of this regulation.

Superannuation Industry (Supervision) Regulations 1994

7  Paragraphs 13.15A(1)(a) and (b)

Repeal the paragraphs, substitute:

 (a) the charge is given in relation to a derivative to which either of the following is a party:

 (i) the trustee;

 (ii) another person (the agent) acting on behalf of, on the instructions of, on account of or for the benefit of the trustee; and

 (b) the charge complies with subregulation (1A), (1B) or (1C); and

8  After subregulation 13.15A(1)

Insert:

 (1A) A charge complies with this subregulation if it is given in order to comply with a requirement, in either of the following, that the performance of obligations in relation to the derivative be secured:

 (a) rules governing the operation of an approved body (as defined in subregulation (2));

 (b) a law of the Commonwealth, a State, a Territory or a foreign country (including a part of a foreign country) that applies to dealings in the derivative.

 (1B) A charge complies with this subregulation if:

 (a) it is given in favour of the agent; and

 (b) the agent enters into an arrangement that is a derivative on behalf of, on the instructions of, on account of or for the benefit of the trustee; and

 (c) the agent is obliged under either of the following to keep the property of the trustee separate from the property of the agent:

 (i) rules governing the operation of an approved body (as defined in subregulation (2));

 (ii) a law of the Commonwealth, a State, a Territory or a foreign country (including a part of a foreign country) that applies to dealings in the derivative; and

 (d) the agent is under an obligation, or but for a netting‑off would be under an obligation, to transfer property to another entity in relation to the derivative; and

 (e) the charge is given over an asset or assets of the fund, to secure the performance of an obligation or obligations in relation to the derivative.

 (1C) A charge complies with this subregulation if:

 (a) the asset over which the charge is given is financial property; and

 (b) the obligations secured by the financial property are any of the following:

 (i) an obligation of the trustee that relates to the derivative;

 (ii) an obligation of the trustee to pay interest on an obligation covered by subparagraph (i);

 (iii) an obligation of the trustee to pay costs and expenses incurred in connection with enforcing a charge given in respect of an obligation covered by subparagraph (i) or (ii); and

 (c) the financial property is transferred or otherwise dealt with so as to be in the possession or under the control of:

 (i) the secured person; or

 (ii) another person (who is not the trustee), on behalf of the secured person, under the terms of an arrangement evidenced in writing.

 (1D) For the purposes of paragraph (1C)(c), financial property is taken not to be in the possession or control of a person mentioned in that paragraph if, under the charge, the trustee is free to deal with the financial property in the ordinary course of business until the person’s interest in the financial property becomes fixed and enforceable.

 (1E) Without limiting paragraph (1C)(c), financial property is taken to be in the possession of a person for the purposes of that paragraph if:

 (a) in a case where there is an issuer of the financial property—the person is registered by, or on behalf of, the issuer as the registered owner of the financial property; or

 (b) in a case where the financial property is intermediated financial property—the person is the person in whose name the intermediary maintains the account.

 (1F) Without limiting paragraph (1C)(c), financial property is taken to be under the control of a person for the purposes of that paragraph if:

 (a) the financial property is intermediated financial property; and

 (b) the intermediary is not the trustee (but may be the secured person or any other person); and

 (c) there is an agreement in force between the intermediary and one or more other persons, one of which is the secured person or the trustee; and

 (d) the agreement has one or more of the following effects:

 (i) the person in whose name the intermediary maintains the account is not able to transfer or otherwise deal with the financial property;

 (ii) the intermediary must not comply with instructions given by the trustee in relation to the financial property without seeking the consent of the secured person (or a person who has agreed to act on the instructions of the secured person);

 (iii) the intermediary must comply, or must comply in one or more specified circumstances, with instructions (including instructions to debit the account) given by the secured person in relation to the intermediated financial property without seeking the consent of the trustee (or any person who has agreed to act on the instructions of the trustee).

 (1G) Without limiting paragraph (1C)(c), the fact that the trustee retains a right of one or more of the following kinds does not of itself stop that paragraph from being satisfied:

 (a) right to receive and withdraw income in relation to the financial property;

 (b) right to receive notices in relation to the financial property;

 (c) right to vote in relation to the financial property;

 (d) right to substitute other financial property that the parties agree is of equivalent value for the financial property;

 (e) right to withdraw excess financial property;

 (f) right to determine value of financial property.

9  Subregulation 13.15A(2) (definition of derivative)

Repeal the definition, substitute:

derivative means any of the following:

 (a) a derivative (within the meaning of Chapter 7 of the Corporations Act 2001);

 (b) a foreign exchange contract (within the meaning of that Chapter);

 (c) an arrangement that is a forward, swap or option, or any combination of those things, in relation to one or more commodities;

but does not include any arrangement that is of a kind mentioned in subregulation 6(2) of the Payment Systems and Netting Regulations 2001.

Note: Subregulation 6(2) of the Payment Systems and Netting Regulations 2001 identifies obligations that are not eligible obligations in relation to a close‑out netting contract. The arrangements mentioned include credit facilities, reciprocal purchase agreements (otherwise known as repurchase agreements), sell‑buyback arrangements, securities loan arrangements, contracts of insurance and managed investment schemes.

10  Subregulation 13.15A(2) (definition of derivatives contract)

Repeal the definition.

11  Subregulation 13.15A(2)

Insert:

financial property has the same meaning as in the Payment Systems and Netting Act 1998.

intermediary has the same meaning as in paragraph (h) of the definition of financial property in section 5 of the Payment Systems and Netting Act 1998.

intermediated financial property has the same meaning as in the Payment Systems and Netting Act 1998.

12  In the appropriate position in Part 14

Insert:

Division 14.11—Transitional arrangements arising out of the Financial System Legislation Amendment (Resilience and Collateral Protection) Regulation 2016

14.12  Arrangements

  The amendments of these Regulations made by items 7 to 11 of Schedule 1 to the Financial System Legislation Amendment (Resilience and Collateral Protection) Regulation 2016 apply to charges given on and after the commencement of this regulation.

Schedule 2—Amendments relating to payment systems and netting

Payment Systems and Netting Regulations 2001

1  At the end of the Regulations

Add:

5  Financial property

 (1) This regulation is made for paragraph (g) of the definition of financial property in section 5 of the Act.

 (2) The following property is declared to be financial property for the purposes of the Act:

 (a) a document evidencing ownership of gold, silver or platinum;

 (b) cash collateral (including cash, certificates of deposit and bank bills);

 (c) property described in paragraph 5(b), (c) or (e), or paragraph 25, of Attachment H to Prudential Standard APS 112—Capital Adequacy: Standardised Approach to Credit Risk, made by APRA under section 11AF of the Banking Act 1959 and as in force from time to time, as property that may be recognised as eligible collateral (ignoring any conditions set out in the Attachment);

 (d) property described in paragraph 5(d) of Attachment H to that prudential standard, ignoring:

 (i) the words “and the ADI holding the security has no information suggesting that the security justifies a rating below this level”; and

 (ii) any conditions set out in the Attachment;

 (e) a covered bond (within the meaning of the Banking Act 1959).

6  Eligible obligations

Obligations that may be eligible obligations

 (1) An obligation that relates to an arrangement that is a forward, swap or option, or any combination of those things, in relation to one or more commodities, is prescribed for the purposes of paragraph 14A(8)(a) of the Act.

Obligations that are not eligible obligations

 (2) None of the following are eligible obligations in relation to a close‑out netting contract:

 (a) an obligation under a credit facility (as defined in regulations made for the purposes of subparagraph 765A(1)(h)(i) of the Corporations Act 2001), including:

 (i) a margin lending facility (within the meaning of Chapter 7 of the Corporations Act 2001); and

 (ii) an obligation under a financial product that is declared by the Australian Securities and Investments Commission under subsection 761EA(9) of the Corporations Act 2001 not to be a margin lending facility;

 (b) an obligation under a deposit‑taking facility;

 (c) an obligation under a reciprocal purchase agreement (otherwise known as a repurchase agreement), a sell‑buyback arrangement or securities loan arrangement;

 (d) an obligation under a contract of insurance, including a life policy or a sinking fund policy within the meaning of the Life Insurance Act 1995;

 (e) an obligation under a managed investment scheme (within the meaning of the Corporations Act 2001);

 (f) an obligation under a lease or licence;

 (g) an obligation under a guarantee;

 (h) an obligation to pay money under:

 (i) a cheque; or

 (ii) an order for the payment of money; or

 (iii) a bill of exchange.

Authority for subregulation (2)

 (3) Subregulation (2) is made under subsection 14A(9) of the Act.

7  Obligations to which section 15A of the Act applies

  For the purposes of paragraphs 15A(1)(a) and (2)(a) of the Act, an obligation of a party to a close‑out netting contract to which a regulated body is a party is prescribed, if the obligation is created under one of the following:

 (a) a reciprocal purchase agreement (otherwise known as a repurchase agreement);

 (b) a sell‑buyback arrangement;

 (c) a securities loan arrangement.

Schedule 3—Approved bodies

Life Insurance Regulations 1995

1  Schedule 7

Repeal the Schedule, substitute:

Schedule 7—Approved bodies

Note: See the definition of approved body in subregulation 4.00A(2).

1  Approved bodies

  Each body in the following table is an approved body for the purposes of regulation 4.00A.

Superannuation Industry (Supervision) Regulations 1994

2  Schedule 4

Repeal the Schedule, substitute:

Schedule 4—Approved bodies

Note: See the definition of approved body in subregulation 13.15A(2).

1  Approved bodies

  Each body in the following table is an approved body for the purposes of regulation 13.15A.