House of Representatives

Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2017

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Scott Morrison MP)

Chapter 6 - Stays

Outline of chapter

6.1 Schedules 1 to 5 to this Bill enhance the stay provisions in the Industry Acts and Transfer Act, and make consequential amendments to the PSN Act.

Context of amendments

6.2 An important aspect of Australia's resolution regime for ADIs and insurers is the operation of the stay provisions located in the various Industry Acts and the Transfer Act. In general, the existing provisions prevent counterparties from:

·
denying an obligation;
·
accelerating a debt;
·
closing-out any transaction; or
·
enforcing a security,

under a contract with a regulated entity, where the basis for taking such action is that APRA has exercised a specified regulatory power in relation to that entity (e.g. a general directions power, a direction to recapitalise an ADI or insurer, appointment of statutory or judicial manager or a compulsory transfer of business power). The stay provisions are important in ensuring that pre-emptive actions by counterparties do not impede the ability for APRA to implement an orderly resolution of a regulated entity.

6.3 The existing stay provisions only apply where the entity against which the regulatory action is taken is also the party to the contract. This omission gives rise to the possibility that the exercise of a regulatory power against one entity may trigger the exercise of rights under a contract with another entity in the same group.

6.4 The triggering of termination rights under contracts of other group entities could have material, adverse effect on a financial group and on APRA's ability to implement an orderly resolution of the regulated entity. This may particularly be the case where the related company in question provides essential services to an ADI, insurer or group, and relies on contractual arrangements with third parties to perform those services. More broadly, the exercise of termination rights in any contract entered into by a member of a financial group could significantly undermine confidence in APRA's efforts to stabilise a distressed regulated entity.

6.5 Extending the relevant stay provisions to address the issues above is consistent with the expanded scope of APRA's powers pursuant to the other amendments in the Bill.

6.6 A further important element of the resolution regime is the interaction of the stay provisions with the PSN Act. The PSN Act overrides a range of laws in order to ensure the validity of certain provisions relating to netting and the payments systems covered by the PSN Act. Consequential amendments are made to the PSN Act to take into account the enhancements to the stay provisions, the moratorium provisions for statutory and judicial management, and the extension of certain powers to group entities. This is intended to ensure that current protections under the PSN Act are retained and the rights of counterparties to close-out netting contracts are clear.

Summary of new law

1.61 Schedules 1 to 5 to this Bill amend the Industry Acts and Transfer Act to enhance the stay provisions, and make consequential amendments to the PSN Act, including amendments to:

·
ensure that an exercise of a power in relation to an entity does not give rise to termination rights or other rights (that is, denying an obligation, accelerating a debt, closing-out on a transaction, or enforcing a security) in contracts of entities within the same relevant group of bodies corporate (that is, any group comprising the ADI or insurer and its subsidiaries or an authorised NOHC and its subsidiaries);
·
ensure that the current protections afforded to counterparties to certain close-out netting contracts under the PSN Act are retained (with appropriate amendments to take into account stays applying to cross-default rights);
·
set out the relationship between the enhanced moratorium provisions for statutory and judicial management and the PSN Act, as appropriate.

Comparison of key features of new law and current law

New law Current law
The existing stay provisions in the Industry Acts and the Transfer Act have been enhanced so that an exercise of power made in respect of:

·
a body corporate (which might be an ADI/insurer, or an authorised NOHC of an ADI/insurer, or a subsidiary of an authorised NOHC or ADI/insurer),

cannot be grounds for:

·
a counterparty to that body corporate; or
·
a counterparty to a body corporate that is in the same relevant group of bodies corporate as the entity against which the power was exercised,

to deny an obligation, accelerate a debt, close-out on a transaction, or enforce a security.

The existing stay provisions in the Industry Acts and the Transfer Act operate so that an exercise of power made in respect of an entity cannot be used as a basis for a counterparty to a contract with that entity to deny an obligation, accelerate a debt, close-out on a transaction, or enforce a security.
The PSN Act includes express provisions dealing with the application of resolution actions to authorised NOHCs or subsidiaries of an authorised NOHC or ADI/insurer. It also caters for stays on actions under cross-default clauses and incorporates into its terms and definitions the amended and new stay and moratorium provisions provided for in the Bill. The PSN Act deals with the interaction of certain provisions relating to netting and the payments system with the existing stay provisions in the Industry Acts and the Transfer Acts. However, it does not expressly deal with the application of relevant resolution actions to authorised NOHCs or subsidiaries of the authorised NOHC or ADI/insurers, or cater for stays on actions under cross-default clauses, or for the application of the amended and new stay and moratorium provisions provided for in the Bill.

Detailed explanation of new law

Extend stay provisions to contracts entered into by a related body corporate within the same 'relevant group of bodies corporate'

Enhance existing stay provisions in the Industry Acts and the Transfer Act

6.7 The Bill amends the existing stay provisions in the Industry Acts and the Transfer Act to ensure that the exercise of a power in relation to an entity does not give rise to termination rights or other rights in the contracts of entities within the same relevant group of bodies corporate as the entity against which the regulatory action was taken. An ADI/insurer and its subsidiaries, or an authorised NOHC and its subsidiaries, will constitute a relevant group of bodies corporate.

6.8 The relevant stay provisions are:

·
direction under the Banking Act is not grounds for denial of obligations etc; [Schedule 1, item 43, subsections 11CD(1) to 11CD(2) of the Banking Act]
·
recapitalisation direction under the Banking Act is not grounds for denial of obligations etc; [Schedule 1, item 102, sections 13N of the Banking Act]
·
a recapitalisation facilitated by a statutory manager under the Industry Acts is not grounds for denial of obligations etc; [Schedule 1, item 143, section 14AC of the Banking Act; Schedule 2, item 58, section 62ZOH of the Insurance Act; Schedule 3, item 52, section 179AFof the Life Insurance Act]
·
a statutory manager being in control under the Industry Acts is not grounds for denial of obligations etc; [Schedule 1, item 191, section 15C of the Banking Act; Schedule 2, item 58, section 62ZOX of the Insurance Act; Schedule 3, item 52, section 179AX of the Life Insurance Act]
·
a compulsory transfer under the Transfer Act is not grounds for denial of obligations etc - note that this will apply not only to compulsory business transfers but also to compulsory share transfers; [Schedule 4, item 78, sections 36AA of the Transfer Act]
·
a judicial manager being in control under the Insurance Act is not grounds for denial of obligations etc; [Schedule 2, item 43, section 62V of the Insurance Act]
·
a recapitalisation facilitated by a judicial manager under the Insurance Act is not grounds for denial of obligations etc; [Schedule 2, item 49, section 62ZB of the Insurance Act]
·
a recapitalisation direction under the Insurance Act is not grounds for denial of obligations etc; [Schedule 2, item 110, section 103K of the Insurance Act]
·
a direction under the Insurance Act is not grounds for denial of obligations etc; [Schedule 2, item 120, subsections 105(1) to 105(2) of Insurance Act]
·
a judicial manager being in control under the Life Insurance Act is not grounds for denial of obligations etc; [Schedule 3, item 36, section 165B of the Life Insurance Act]
·
a recapitalisation facilitated by a judicial manager under the Life Insurance Act is not grounds for denial of obligations etc; [Schedule 3, item 44, section 168C of the Life Insurance Act]
·
a recapitalisation direction under the Life Insurance Act is not grounds for denial of obligations etc; [Schedule 3, item 80, sections 230AJ of the Life Insurance Act] and
·
a direction under the Life Insurance Act is not grounds for denial of obligations etc. [Schedule 3, item 89,sections 230C(1) to 230C(2) of the Life Insurance Act]

6.9 In summary, the enhanced stay provisions now provide that where a body corporate is a party to a contract (whether the proper law of the contract is Australia law or law of a foreign country), a counterparty to that contract cannot:

·
deny an obligation;
·
accelerate a debt;
·
close-out any transaction; or
·
enforce a security,

on the ground that an exercise of power (as specified under the relevant stay provision in that case e.g. directions power, power to recapitalise an ADI or insurer, appointment of a statutory or judicial manager and compulsory business transfer power) occurred against either the contracting body corporate or, if the body corporate is a member of a relevant group of bodies corporate, another member of that group. (A group comprising an ADI/insurer and subsidiaries will be a relevant group of bodies corporate. A group comprising an authorised NOHC and subsidiaries will also be a relevant group of bodies corporate.)

6.10 Under these provisions, the body corporate against which the relevant regulatory action is taken could be an ADI or insurer, an authorised NOHC of the ADI/insurer, or a subsidiary of the ADI/insurer or authorised NOHC. In order for the stay to apply, either that body corporate, or a related body corporate that is a member of the same relevant group of bodies corporate, must be party to the relevant contract.

6.11 For example, if an ADI is party to a contract with a third party entity, and the contract includes a provision that purports to give the third party a right to terminate the contract with the ADI, if APRA gives a direction to a related body corporate of the ADI (that is in the same relevant group of bodies corporate), the relevant stay provision will operate to prevent action being taken under the contract on the basis of the direction.

6.12 The Bill makes consequential amendments to the existing protections afforded to counterparties affected by an exercise of a directions power. Under the current law, if a counterparty is prevented from fulfilling its obligations under a contract with a body corporate (for example, an ADI), because of the giving of a direction to that body corporate, the counterparty is relieved from all obligations owed to the body corporate under the contract, subject to any Court order (see subsections 11CD(2) of the Banking Act, 105(2) of the Insurance Act, and 230C(2) of the Life Insurance Act). The Bill extends this protection so that the counterparty is relieved of their obligations to the contracting body corporate (subject to any Court order) if they are prevented from fulfilling their obligations under the contract because of a direction regardless of whether the direction is given to the contracting body corporate itself or to a related body corporate of the contracting body corporate. [Schedule 1, item 43, subsection 11CD(2) of the Banking Act; Schedule 2, item 120, subsection 105(2) of the Insurance Act; Schedule 3, item 89, subsection 230C(2) of the Life Insurance Act]

New stay provisions - Conversion or write-off etc. not grounds for denial of obligations

6.13 Chapter 5 sets out the new provisions in the Industry Acts that provide certainty that capital instruments can be converted or written down as required by APRA's prudential standards. As a consequence of these new provisions corresponding stay provisions are added to the Industry Acts. [Schedule 1, items 31, sections 11CAA, to 11CAC of the Banking Act; Schedule 2, item 17, sections 36A to 36C of the Insurance Act; Schedule 3, item 64, sections 230AAB to 230AAD of the Life Insurance Act]

6.14 In summary, the Bill ensures that counterparties of a contracting entity (the 'first entity') cannot:

·
deny an obligation;
·
accelerate a debt;
·
close-out any transaction; or
·
enforce a security,

under a contract with the first entity on certain grounds. Specifically, the first entity cannot do so on the ground that a 'relevant instrument' is being or has been converted or written-off in accordance with the terms of that instrument or on the ground of the making of a determination (however described) by APRA that results in the relevant instrument being required to be converted or written off in accordance with the terms of the instrument. For the avoidance of doubt, these provisions are not intended to impede close-out of a contract on other grounds (for example, relating to an event that may have led to APRA making such a determination) or to impede the conversion or write off of instruments issued for the purposes of the conversion and write-off provisions themselves. [Schedule 1, item 31, section 11CAC of the Banking Act; Schedule 2, item 17, section 36C of the Insurance Act; Schedule 3, item 64, section 230AAD of the Life Insurance Act]

6.15 A 'relevant instrument' is defined as an instrument:

·
that contains terms that are for the purpose of conversion and write-off provisions and is issued by a regulated entity, a holding company of a regulated entity, a subsidiary or related subsidiary of a regulated entity or an entity of a kind prescribed by the regulations); and
·
either:

-
the instrument was issued by the first entity (as noted above, the 'first entity' for these purposes is the party to the contract to which the stay provision applies); or
-
the first entity is a party to the instrument; or
-
the first entity is a conversion entity in relation to the instrument (that is, the instrument converts into ordinary shares of the first entity); or

·
or, if the first entity is a body corporate that is a member of a 'relevant group of bodies corporate'(that is, a group comprising a regulated entity and its subsidiaries or an authorised NOHC of a regulated entity and the NOHC's subsidiaries):

-
the instrument was issued by another member of that group; or
-
another member of that group is a party to the instrument; or

·
another member of that group is a conversion entity in relation to the instrument. [Schedule 1, item 31, subsection 11CAC(4) of the Banking Act; Schedule 2, item 179, subsection 36C(4) of the Insurance Act; Schedule 3, item 64, subsection 230AAD(4) of the Life Insurance Act]

6.16 In summary, consistent with the other amendments to enhance the existing stay provisions in the Industry Acts and Transfer Act, the new stay provisions in the Industry Acts also extend to where the issuing entity, or a party to the instrument, or the conversion entity is a member of the same relevant group of bodies corporate as the first entity (the entity that is party to the stayed contract). [Schedule 1, items 31, section 11CAC of the Banking Act; Schedule 2, item 17, section 36C of the Insurance Act; Schedule 3, item 64, section 230AAD of the Life Insurance Act]

Consequential amendments to the PSN Act to encompass 'related bodies corporate'

Background

6.17 Amendments are made to the PSN Act to take into account, first, the enhancements to the stay provisions and, secondly, the extension of certain regulatory powers to related bodies of ADIs and insurers. This is because these amendments mean that the stay provisions will apply where regulatory action, including the appointment of a statutory manager, is taken against an entity that is not an ADI or insurer (that is, it may be an authorised NOHC or a subsidiary of an ADI, insurer or authorised NOHC). Secondly, the extension of the stay provisions so that they apply where the contracting party is not the party against which regulatory action was taken (where they are a member of same "relevant group of bodies corporate") means that amendments are required.

6.18 In broad terms, the PSN Act overrides a range of laws in order to ensure the validity of certain provisions relating to netting and the payments system covered by the PSN Act. For present purposes the protection afforded by existing section 14 ('Effectiveness of close-out netting contracts') to close-out netting contracts, which include over the counter (OTC) derivatives and securities lending contracts, is particularly relevant.

6.19 The PSN Act differentiates between 'specified provisions', 'specified stay provisions' and 'direction stay provisions'. Section 14 ('Effectiveness of close-out netting contracts'), and provisions in the PSN Act relating to other netting and payment systems arrangements, support the effectiveness of close out, netting of obligations, and payments despite any other law, including a 'specified provision'.

6.20 However, subsection 14(3) of the PSN Act provides an exception by stating that the protections in relation to close-out netting contracts have effect 'subject to a specified stay provision that applies to the contract'. Accordingly, if a stay provision falls within this definition, then the rights to close out and rights in relation to relevant securities in section 14 cannot be exercised if the specified stay provision applies.

6.21 The PSN Act further distinguishes between specified stay provisions that are 'direction stay provisions' and those that are not direction stay provisions. If a specified stay provision is a 'direction stay provision' then it operates on a permanent and continuing basis; in other words, the action (giving of a direction) that gave rise to the ostensible close-out right cannot itself be relied on as a basis for close-out at any time. If the specified stay provision is not a direction stay provision, and the contract in question is a derivative or securities lending contract of a kind covered by section 15A of the PSN Act, the stay will operate temporarily, under Division 2 of Part 4 of the PSN Act ('Ceasing non-direction stays for derivatives contracts'), although it may be made permanent if the relevant body corporate (e.g. an ADI or insurer) is resolved during the 'resolution period' as defined in the PSN Act.

6.22 Having regard to the above, the Bill amends the PSN Act to:

·
apply in an appropriate way where resolution actions and directions, to which stay provisions apply, are taken against not only ADIs and insurers, but also authorised NOHCs and subsidiaries of ADIs/insurers and authorised NOHCs. This has implications for Division 2 of Part 4 of the PSN Act ('Ceasing non-direction stays for derivatives contracts') where a 'specified stay provision' that is not a 'direction stay provision' applies in relation to a group entity;
·
address the implications of the stay provisions applying on a cross-default basis. This also has implications for Division 2 of Part 4;
·
provide for appropriate treatment of the new stay provisions relating to actions under conversion and write-off provisions. As discussed below, these will be defined as both 'specified stay provisions' and 'direction stay provisions', with the result that they will not be subject to Division 2 of Part 4; and
·
ensure that the new moratorium provisions for statutory and judicial management are treated appropriately under the PSN Act. In general terms they will be treated as 'specified provisions', with the result that the provisions of the PSN Act in relation to netting arrangements and payment systems will apply despite the moratorium provisions.

Amendments

6.23 A new definition of 'related body corporate' is inserted into the PSN Act. For the purposes of the PSN Act, the question of whether a body corporate is related to another body corporate is to be determined in the same way as that question is determined for the purposes of the Corporations Act. The inclusion of this definition is necessary for the purposes of amendments to Part 4 of the PSN Act ('Close-out netting contracts') relating to the interaction between stay provisions and the protections given to close-out netting contracts. [Schedule 5, items 10 and 17, sections 5 and 5AA of the PSN Act]

6.24 The expansion of the statutory management regime and directions powers to group entities (that is, related bodies corporate of ADIs and insurers - see Chapter 2 and Chapter 3 ) means that the definition of 'regulated body' in the PSN Act had to be expanded beyond ADIs, general insurers, life companies and private health insurers, to include:

·
an authorised NOHC of an ADI/insurer; and
·
a subsidiary of an authorised NOHC or an ADI/insurer.
·
For this purpose it is also necessary to include a definition of 'subsidiary' in the PSN Act: [Schedule 5, items 8 and 17, sections 5 and 5AB of the PSN Act]

6.25 The existing stay provisions in the Industry Act and the Transfer Act are all listed as 'specified stay provisions' under the PSN Act. Since the Bill applies the statutory management regime to the Insurance Act and Life Insurance Act, the following new stay provisions are added to the definition of 'specified stay provision' in the PSN Act:

·
a recapitalisation facilitated by a statutory manager is not grounds for denial of obligations etc; [Schedule 2, item 58, subsection 62ZOH(2) of the Insurance Act; Schedule 5, item 14, section 5 of the PSN Act]
·
a statutory manager being in control is not grounds for denial of obligations etc; [Schedule 2, item 58, subsection 62ZOX(2) of the Insurance Act; Schedule 5, item 14, section 5 of the PSN Act]
·
a recapitalisation facilitated by a statutory manager is not grounds for denial of obligations etc; [Schedule 3, item 52, subsection 179AH(2) of the Life Insurance Act; Schedule 5, item 15, section 5 of the PSN Act] and
·
a statutory manager being in control is not grounds for denial of obligations etc. [Schedule 3, item 52, subsection 179AX(2) of the Life Insurance Act; Schedule 5, item 15, section 5 of the PSN Act]

6.26 The insertion of the following new conversion and write-off stay provisions into the Industry Acts required relevant changes to the definition of 'specified stay provision' and 'direction stay provision' in the PSN Act :

·
the Banking Act conversion and write-off stay provision (conversion or write-off etc. not grounds for denial of obligations); [Schedule 1, item 31, subsection 11CAC(2) of the Banking Act;Schedule 5, items 3 and 12, section 5 of the PSN Act]
·
the Insurance Act conversion and write-off stay provision (conversion or write-off etc. not grounds for denial of obligations); [Schedule 2, item 19, subsection 36C(2) of the Insurance Act; Schedule 5, items 4 and 13, section 5 of the PSN Act]
·
the Life Insurance Act conversion and write-off stay provision (conversion or write-off etc. not grounds for denial of obligations). [Schedule 3, item 64, section 230AAD(2) of the Life Insurance Act; Schedule 5, items 5and 15, section 5 of the PSN Act]

6.27 As explained above this will mean that section 14 of the PSN Act ('Effectiveness of close-out netting contracts') applies subject to the stay provisions listed at 6.25 and 6.26. However, those two sets of stay provisions will be treated differently under Division 2 of Part 4 of the PSN Act. The resolution stays regime in Division 2 of Part 4 ('Ceasing non-direction stays for derivatives contracts') will apply to the 'specified stay provisions' listed at 6.25 as they are not 'direction stay provisions' (broadly speaking, they relate to resolution in the context of statutory management, and therefore fall within Division 2 of Part 4, like the corresponding stay provisions in the Banking Act). However, Division 2 of Part 4 will not apply to the 'specified stay provisions' relating to conversion and write off listed at 6.26 because they will be defined to be 'direction stay provisions' (so they will apply permanently in relation to a given trigger for action under a contract).

6.28 The existing sections 15A ('Ceasing non-direction stays for derivatives contracts') and 15B ('When APRA may declare that non-direction stays cease') in Division 2 of Part 4 of the PSN Act are amended by expanding their application to not only close-out netting contracts to which an ADI or insurer is a party, but to close-out netting contracts to which other group entities are party, and to cater for cross default situations. [Schedule 5, items 18 to 24, sections 15A and 15B of the PSN Act]

6.29 The current position is that section 15A of the PSN Act provides for a specified (non-direction) stay provision to apply on a temporary basis to a derivatives or securities lending contract of a kind covered by section 15A of the PSN Act while action is taken to resolve the regulated entity in question. Section 15A and the other provisions in Division 2 of Part 4 are only relevant where the stay provision relates to the appointment of a statutory or judicial manager, or recapitalisation under a statutory or judicial manager, or a compulsory transfer of business (sometimes referred to as 'resolution stay provisions'). This will continue to be the case.

6.30 The amendments under the Bill will mean that section 15A of the PSN Act applies to keep a stay on foot for at least the resolution period [5] even where the relevant resolution action (for example, the appointment of a statutory manager) was taken against an authorised NOHC or subsidiary for example, rather than (or as well as) an ADI or insurer. [Schedule 5, items 18 to 21, section 15A of the PSN Act]

6.31 Secondly the amendments will ensure that section 15A applies where the contracting party and the trigger body are both members of the same relevant group of bodies corporate (a group comprising an ADI/insurer and its subsidiaries or authorised NOHC and its subsidiaries). As noted above, if the contracting party and the entity against which regulatory action has been taken are related but not both members of the same relevant group of bodies corporate, the stay provisions will not apply. [Schedule 5, items 18 to 21, section 15A of the PSN Act]

6.32 Section 15B of the PSN Act currently gives APRA power to declare, before the end of the resolution period, that the stay is to come to an end, and consequential amendments are made to ensure the section reflects the new application of the stay provisions to related bodies corporate. [Schedule 5, items 22 to 24, section 15B of the PSN Act]

6.33 Section 15C of the PSN Act currently sets out what must be done to resolve an ADI or insurer in order for APRA to make the stay provision permanent. The broad policy objectives of this section are unchanged by the Bill but amendments have been made, including by the addition of new provisions, to cater for group resolution, the operation of cross default clauses and the interaction of such clauses with the amended stay provisions. [Schedule 5, items 25 to 29, sections 15C, 15D and 15E of the PSN Act]

6.34 In relation to the existing section 15C of the PSN Act ('When APRA may declare that non-direction stays continue'), the expansion of the statutory management regime to group entities (see Chapters 1 and 2 ) means the entity to which a trigger event occurs (the 'trigger body') may not always be the party to the close-out netting contract (the 'trigger contract'). For example, APRA could appoint a statutory manager (trigger event) to an ADI (trigger body) where the party to the relevant close-out netting contract is a subsidiary of the ADI.

6.35 To address this issue, section 15C of the PSN Act will continue to cover the simple case where the entity subject to the regulatory action giving rise to the stayed trigger event is party to the contract in question. There will be two new provisions dealing with where the entity subject to the regulatory action is not the same as the contracting entity. [Schedule 5, items 25 to 29, sections 15C, 15D and 15E of the PSN Act]

6.36 Accordingly, section 15C of the PSN Act is amended to make it clear that it specifically covers where the regulated body is also the contracting body, which is the simplest scenario and similar to the way section 15C currently works. A number of amendments are required to section 15C to reflect the fact that the regulated body will not necessarily be an ADI or insurer, such as where the trigger is appointment of a statutory manager to a group entity under the new powers discussed in Chapter 2. This is relevant because the test for whether the stay can be made permanent, which broadly requires APRA to make a determination as to whether the body has been resolved, will differ depending on whether it is an ADI or insurer, on the one hand, or a related body corporate that does not have depositors or policyholders. If the regulated body is an ADI or insurer, and it is resolved without a transfer of business, then the resolution test will require APRA to consider (among other things) whether the body has the each material authorisation for its regulated business. If the body is not an ADI or insurer, this requirement will not apply. Further amendments clarify that it will only be necessary to consider whether minimum capital requirements are met if they actually apply to the party. The amendments also address where the resolution action giving rise to the contractual trigger and stay may be the appointment of a statutory manager to an insurer. [Schedule 5, items 25 to 28, section 15C of the PSN Act]

6.37 To address the position where the trigger body and the contracting body are not the same (that is, where they are related bodies corporate), a new provision ('When APRA may declare that non-direction stays continue - related body corporate of regulated body is party to trigger contract') is inserted. Before APRA can make a determination that the stay be made permanent, it will be necessary to apply certain tests set out in subsection 15D(5) to:

·
the trigger body (the entity in relation to which the triggering regulatory action has been taken), where resolution occurs without a transfer of business; or
·
the receiving body, where resolution occurs through a total transfer of business; or
·
either or both of those bodies, where resolution involves a partial transfer of business.

6.38 In each case, APRA will be required to assess whether the matters in subsection 15D(5), which broadly set out a 'resolution test' in similar terms to the one in subsection 15C(3), are satisfied in relation to the trigger body or any receiving body to which relevant business has been transferred. [Schedule 5, item 29, section 15D of the PSN Act]

6.39 Other amendments deal with the position where there has been a transfer of business from the trigger entity to a receiving body. If there has been a partial transfer, APRA will have a discretion to apply the 'resolution test' to either or both of the trigger body or the receiving body. In addition, , whether the transfer is total or partial, APRA will only be able to make the stay permanent if APRA is satisfied there will be no detrimental effect on any counterparty to a close out netting contract to which the declaration would apply. [Schedule 5, item 29, sections 15D and 15E of the PSN Act]

6.40 Further detail on these amendments, is set out below.

Amended section 15C of the PSN Act: extending the section to authorised NOHCs and subsidiaries, when the trigger body and the contracting body are the same

6.41 To protect the legitimate interests of counterparties to relevant close-out netting contracts, the amendments provide that a specified stay provision may only be declared to continue if the circumstances set out below exist. It should be noted that in these amendments the amended term 'regulated body' has the broad meaning discussed at 6.24, namely it includes not only ADIs, insurers and PHIs (as is currently the case), but also authorised NOHCs of ADIs and insurers, and subsidiaries of an ADI/insurer or authorised NOHC. The specified circumstances are:

·
a trigger event to which a specified stay provision (other than a direction stay provision) applies is an event that involves a regulated body and the trigger event happens in relation to a close-out netting contract (the 'trigger contract') to which that same regulated body is a party;
·
APRA is satisfied that all matters set out at 6.44 will be satisfied in relation to the party in respect of which the declaration may be made (which will be either or both of the regulated body or a receiving body if there has been a transfer of business) at the following time:

-
if a certificate of transfer will come into force under the Transfer Act, just after that coming into force; or
-
in all other cases, at the time the declaration will be made;

·
the party in respect of which the declaration may be made is not in external administration (as defined in the PSN Act) (other than statutory management or judicial management); and
·
APRA has not already made a declaration under section 15B that the specified stay provision ceases to apply in relation to the trigger event. This is to provide certainty, so that APRA cannot make a declaration extending the application of the relevant stay if it has previously made a declaration that the stay ceases to apply. [Schedule 5, items 25 to 28, heading and subsections 15C(1), 15C(3)and 15C(5) of the PSN Act]

6.42 If these conditions are satisfied, APRA may declare that the specified stay provision is to continue to apply to:

·
if a certificate of transfer for a total transfer will come into force under the Transfer Act, all close out netting contracts to which the regulated body is a party (and to which the receiving body, within the meaning of the Transfer Act, will become a party immediately after the transfer), and all securities given over financial property in respect of obligations under those close-out netting contracts;
·
if a certificate of transfer for a partial transfer will come into force under the Transfer Act, either or both of the following:

-
all close out netting contracts to which the regulated body is a party (and to which the regulated body will remain a party immediately after the transfer), and all securities given over financial property in respect of obligations under those close-out netting contracts;
-
all close out netting contracts to which the regulated body is a party (and to which the receiving body, within the meaning of the Transfer Act, will become a party immediately after the transfer), and all securities given over financial property in respect of obligations under those close-out netting contracts; or

·
in all other cases, all close out netting contracts to which the regulated body is a party and all securities given over financial property in respect of obligations under those close-out netting contracts. [Schedule 5, item 26, subsection 15C(2) of the PSN Act]

6.43 In order for a specified stay provision to continue to apply, APRA must be satisfied that the matters set out at 6.44 will be satisfied in relation to the party (the regulated body and/or receiving body) in respect of which the declaration may be made at the time the declaration will be made or just after the coming into force of a certificate of transfer, if applicable.

6.44 The conditions of which APRA must be satisfied are as follows

·
that the party is able to meet all its liabilities under:

-
close out netting contracts to which it is a party as and when they become due and payable (including all payment and delivery obligations); and
-
all securities given over financial property in respect of obligations under those close-out netting contracts;

·
that the party is solvent (within the meaning of the Corporations Act) (this is a current requirement); and
·
if the party is an ADI, general insurer or life company, that they have the material authorisation (however described) necessary for their regulated business. The term 'regulated business' in section 5 of the PSN Act is repealed and replaced with:

-
in relation to an ADI-means the ADI's banking business (within the meaning of the Banking Act); and
-
in relation to a general insurer-means the general insurer's insurance business (within the meaning of the Insurance Act); and
-
in relation to a life company-means the life company's life insurance business (within the meaning of the Life Insurance Act).

·
(If the party is not an ADI, general insurer or life company, then the material authorisation requirement will not need to be satisfied.) [Schedule 5, item 27, paragraph 15C(3)(c) of the PSN Act]
·
if minimum capital requirements under the Banking Act, the Insurance Act or the Life Insurance Act apply to the party, that either of the following is satisfied:

-
the party's level of capital complies with the minimum capital requirements that apply to it under the Banking Act, the Insurance Act or the Life Insurance Act (as the case requires) and the applicable prudential standards made under the relevant Act; or [Schedule 5, item 27, paragraph 15C(3)(d) of the PSN Act]
-
arrangements are in place to ensure that the party performs all its obligations under (i) close out netting contracts to which it is a party and (ii) all securities given over financial property in respect of obligations under those close-out netting contracts as and when they are due to be performed. Those arrangements must remain in place until at least the earliest day on which:

·
the party's level of capital complies with the applicable minimum capital requirements;
·
if a Banking Act statutory manager is in control of the party's business-APRA makes an ultimate termination of control under existing subsection 13C(3) of the Banking Act;
·
if an Insurance Act statutory manager is in control of the party's business-APRA makes an ultimate termination of control under subsection 62ZOC(3) of the Insurance Act;
·
if a Life Insurance Act statutory manager is in control of the party's business-APRA makes an ultimate termination of control under subsection 179AC(3) of the Life Insurance Act;
·
if the party is under judicial management under the Insurance Act-an order under existing section 62ZF of that Act cancelling the judicial management comes into force; or
·
if the party is under judicial management under the Life Insurance Act-an order under existing section 172 of that Act cancelling the judicial management comes into force. [Schedule 5, item 28, paragraph 15C(5)(b) of the PSN Act]

6.45 The existing subsections 15C(6), 15C(7) and 15C(8) remain unchanged, so that:

·
a declaration made under section 15C cannot be varied or revoked;
·
a declaration made under section 15C is not a legislative instrument; and
·
regulations may do any of the following:

-
prescribe requirements relating to how declarations made by APRA are to be made (including requirements relating to the content or form of declarations);
-
prescribe requirements relating to the notification or publication of declarations;
-
include provisions that apply to determining, either generally or for a particular purpose, the time when declarations are taken to be made.

New section 15D of the PSN Act: Applies where the trigger body and the contracting body are different

6.46 The new section 15D applies when the trigger body and the contracting body are different. This will be relevant where: (a) regulatory action is taken against one entity in a 'relevant group of bodies corporate', where (b) this ostensibly triggers close-out or other relevant rights under a contract between a counterparty and another member of that relevant group of bodies corporate, and (c) those rights are stayed by a 'specified stay provision' that is not a 'direction stay provision'. As with section 15C, for a 'specified stay provision' that is not a 'direction stay provision' to apply, the regulatory action in question would be appointment of a statutory or judicial manager, recapitalisation under a statutory or judicial manager or a compulsory transfer of business or shares. Section 15D provides that a specified stay provision may only be declared to continue if the following specified circumstances exist:

·
a trigger event to which a specified stay provision (other than a direction stay provision) applies is an event that involves a regulated body (the 'trigger body') and the trigger event happens in relation to one or more close-out netting contracts (each of which is a 'trigger contract') to which a related body corporate of the trigger body (the 'contracting body') is a party. The specified stay provisions will apply if the trigger body and contracting body are within the same relevant group of bodies corporate;
·
APRA is satisfied that all the matters set out in subsection 15D(5) will be satisfied in relation to each entity covered by subsection 15D(2) (that entity will be the trigger body or a receiving body or both, as explained below) in respect of which the declaration may be made at the following time:

-
if a certificate of transfer will come into force under the Transfer Act, just after that coming into force; or
-
in all other cases, at the time the declaration will be made;

·
each entity covered under subsection 15D(2) is not in external administration (as defined in the PSN Act) (other than statutory or judicial management); and
·
APRA has not already made a declaration under section 15B that the specified stay provision ceases to apply in relation to the trigger event. This is to provide certainty, so that APRA cannot make a declaration extending the application of the relevant stay if it has previously made a declaration that the stay ceases to apply. [Schedule 5, item 29, subsection 15D(1) of the PSN Act]

6.47 An entity is covered under subsection 15D(2):

·
if section 15E does not apply (in other words, there has been no relevant transfer of business) -the trigger body; or
·
if section 15E applies because a transfer of business has occurred under the Transfer Act from the trigger body to a receiving body:

-
in the case of a total transfer of business-the receiving body; or
-
in the case of a partial transfer of business-an entity specified in a determination under subsection 15E(3), which will either be the trigger body or the receiving body or both. [Schedule 5, item 29, subsection 15D(2) of the PSN Act]

6.48 If these conditions are satisfied, APRA may declare that the specified stay provision is to continue to apply to each trigger contract specified in the declaration, and to all securities given over financial property in respect of obligations under each trigger contract specified in the declaration. APRA may specify either or both of the following in such a declaration:

·
one or more trigger contracts;
·
one or more classes of trigger contracts. [Schedule 5, item 29, subsections 15D(3) and 15D(4) of the PSN Act]

6.49 The Bill inserts a note under subsection 15D(4) to refer to subsection 15E(2) for a restriction on when APRA may make a declaration under subsection 15D(2) in the case of a transfer of business from the trigger body to a receiving body. (That restriction is discussed at 6.55). [Schedule 5, item 29, section 15D of the PSN Act]

6.50 One of the specified circumstances which must be satisfied in order for a specified stay provision to continue to apply is that APRA must be satisfied that all the matters set out in subsection 15D(5) will be satisfied in relation to the entity covered under subsection 15D(2) in respect of which the declaration may be made. These matters must be satisfied at the time the declaration will be made (or just after the coming into force of a certificate of transfer, if applicable). [Schedule 5, item 31, paragraph 15D(1)(b) of the PSN Act]

6.51 The conditions of which APRA must be satisfied are as follows:

·
that the entity covered under subsection 15D(2) is able to meet all its liabilities under:

-
close out netting contracts to which it is a party as and when they become due and payable; and
-
securities given over financial property in respect of obligations of the entity under those contracts (as they become due and payable); and

·
that the entity covered under subsection15D(2) is solvent (within the meaning of the Corporations Act); and
·
if the entity covered under subsection15D(2) is an ADI, general insurer or life company, that it has the material authorisation (however described) necessary for its regulated business. The term 'regulated business' in section 5 of the PSN Act is repealed and replaced so that:

-
in relation to an ADI-it means the ADI's banking business (within the meaning of the Banking Act); and
-
in relation to a general insurer-it means the general insurer's insurance business (within the meaning of the Insurance Act); and
-
in relation to a life company-it means the life company's life insurance business (within the meaning of the Life Insurance Act).

·
If the entity covered under subsection 15D(2) is not an ADI, general insurer or life company, then this condition does not apply [Schedule 5, item 29, paragraph 15D(5)(c) of the PSN Act]
·
if minimum capital requirements under the Banking Act, the Insurance Act or the Life Insurance Act apply to the entity covered by subsection 15D(2), that either of the following is satisfied:

-
the entity's level of capital complies with those minimum capital requirements; or
-
arrangements are in place to ensure that the entity performs all its obligations under: (i) close out netting contracts to which it is a party as and when they are due to be performed; and (ii) securities given over financial property in respect of obligations given to the entity under those contracts as and when they are due to be performed. Those arrangements must remain in place until at least the earliest day on which:

·
the entity's level of capital complies with the applicable minimum capital requirements;
·
if a Banking Act statutory manager is in control of the entity's business-APRA makes an ultimate termination of control under existing subsection 13C(3) of the Banking Act;
·
if an Insurance Act statutory manager is in control of the entity's business-APRA makes an ultimate termination of control under subsection 62ZOC(3) of the Insurance Act;
·
if a Life Insurance Act statutory manager is in control of the entity's business -APRA makes an ultimate termination of control under subsection 179AC(3) of the Life Insurance Act;
·
if the party is under judicial management under the Insurance Act-an order under existing section 62ZF of that Act cancelling the judicial management comes into force; or
·
if the party is under judicial management under the Life Insurance Act-an order under existing section 172 of that Act cancelling the judicial management comes into force. [Schedule 5, item 29, paragraph 15D(5)(d) and subsections 15D(6) and 15D(7) of the PSN Act]

6.52 Subsections 15D(8), (9) and (10) mirror the equivalent existing 15C provisions, so that:

·
a declaration made under section 15D cannot be varied or revoked;
·
a declaration made under section 15D is not a legislative instrument (this provision is included to assist readers, as the instrument is not a legislative instrument within the meaning of subsection 8(1) of the Legislation Act 2003); and
·
the regulations may do any of the following:

-
prescribe requirements relating to how declarations made by APRA are to be made (including requirements relating to the content or form of declarations);
-
prescribe requirements relating to the notification or publication of declarations;
-
include provisions that apply to determining, either generally or for a particular purpose, the time when declarations are taken to be made. [Schedule 5, item 29, subsections 15D(8), 15D(9) and 15D(10) of the PSN Act]

New section 15E of the PSN Act: 'Declaration under subsection 15D(3) - total or partial transfer of business'

6.53 New section 15D refers to new section 15E for determining which entity is covered by subsection 15D(2) when there has been a partial transfer of business. This, and other functions of section 15E, are discussed below. [Schedule 5, item 29, sections 15D and 15E of the PSN Act]

6.54 Section 15E applies if:

·
paragraph 15D(1)(a) is satisfied in relation to a trigger event (that is a trigger event has happened to a trigger body and this has triggered rights in relation to a close-out netting contract with a related body corporate of that trigger body in the same relevant group of bodies corporate, and a relevant stay provision applies); and
·
a certificate of transfer will come into force under the Transfer Act for:

-
a total transfer of business from the trigger body to a receiving body; or
-
a partial transfer of business from the trigger body to a receiving body. [Schedule 5, item 29 subsection 15E(1) of the PSN Act]

6.55 Section 15E sets out a general condition on APRA's ability to declare that a specified stay provision is to continue to apply to a trigger contract where there is a transfer of business, whether that transfer is total or partial. In general terms, it provides that APRA must be satisfied that the declaration will not have a detrimental effect on any counterparty to a close-out netting contract to which the declaration would apply. [Schedule 5, item 29, subsection 15E(2) of the PSN Act]

6.56 As noted above, subsection 15D(2) specifies the body to which the subsection 15D(5) tests must be applied, depending on how the trigger body has been resolved. If there is no transfer, the tests are applied to the trigger entity. If there is a total transfer from the trigger body, the tests are applied to the receiving body. If there has been a partial transfer of business from a trigger body to a receiving body, paragraph 15D(2)(b)(ii) provides that the subsection 15D(5) tests are to be applied to an entity specified in a determination under subsection 15E(3). Subsection 15E(3) provides that APRA may make a written determination specifying either or both of the following to be the entity covered by subsection 15D(2), namely the entity to be tested under subsection 15D(5):

·
the trigger body;
·
the receiving body. [Schedule 5, item 29, subsection 15E(3) of the PSN Act]

6.57 The written determination cannot be varied or revoked. [Schedule 5, item 29, subsection 15E(4) of the PSN Act]

6.58 A determination under section15E is not a legislative instrument. The provision is included to assist readers and is merely declaratory of the law, as the instrument is not a legislative instrument within the meaning of section 5 of the Legislative Instruments Act 2003. [Schedule 5, item 29, subsection 15E(5) of the PSN Act]

6.59 The Bill allows for regulations to be made. The regulations may do any of the following:

·
prescribe requirements relating to how determinations under subsection15E(3) (that is, written determination specifying which entity or entities are covered by subsection 15D(2) in the case of a partial transfer of business) are to be made by APRA (including requirements relating to the content or form of declarations);
·
prescribe requirements relating to the notification or publication of determinations under subsection15E(3);
·
include provisions that apply to determining, either generally or for a particular purpose, the time when determinations under subsection 15E(3) are taken to be made. [Schedule 5, item 29, subsection 15E(6) of the PSN Act]

Incorporating the widened moratorium provisions for statutory and judicial management into the PSN Act

6.60 Consequential amendments are made to the PSN Act to ensure that the enhanced moratorium provisions related to statutory and judicial management (see Chapter 2 for further detail) do not disturb the protections afforded to counterparties to relevant close-out netting contracts under the PSN Act.

6.61 In this regard, it is intended that the provisions of the PSN Act relating to RTGS settlement systems, multilateral netting arrangements, close out netting contracts and market netting arrangements operate despite the new moratorium provisions.

6.62 It should also be noted that the litigation moratorium provisions (section 15B of the Banking Act and its counterparts in the statutory and judicial management provisions in the Insurance and Life Insurance Acts) will operate according to their tenor and will not be subject to any express reference in the amendments to the PSN Act.

6.63 Therefore the Bill inserts a new definition of 'specified moratorium provision' to the PSN Act. It lists the following in its definition:

·
section 15BA of the Banking Act;
·
section 15BB of the Banking Act;
·
section 15BC of the Banking Act;
·
section 62PA of the Insurance Act;
·
section 62PB of the Insurance Act;
·
section 62PC of the Insurance Act;
·
section 62ZOS of the Insurance Act;
·
section 62ZOT of the Insurance Act;
·
section 62ZOU of the Insurance Act;
·
section 161A of the Life Insurance Act;
·
section 161B of the Life Insurance Act;
·
section 161C of the Life Insurance Act;
·
section 179AS of the Life Insurance Act;
·
section 179AT of the Life Insurance Act; and
·
section 179AU of the Life Insurance Act. [Schedule 5, item 10, section 5 of the PSN Act]

6.64 These moratorium provisions are, as noted above, broadly intended to prevent action being taken in relation to securities given by, and other property of, a body that is under statutory or judicial management.

6.65 The new concept of 'specified moratorium provision' is then added in to the definition of 'specified provisions' in the PSN Act. This affects the meaning of the existing subsections 6(2), 6A(2), 10(3) and 14(3) of the PSN Act (located in Parts 2 (RTGS Payment systems), Part 3 (approved netting arrangements) and Part 5 (market netting contracts) of the PSN Act) because they refer to 'specified provisions'. The effect of this is that the existing PSN Act provisions have effect despite these new 'specified provisions'. [Schedule 5, item 11, section 5 of the PSN Act (paragraph 5(fc) of the definition of specified provisions']

6.66 As noted above, the amended section 15B of the Banking Act (Moratorium-effect of Banking Act statutory management on court and tribunal proceedings), and its equivalents in the Insurance Act (sections 62P and 62ZOR) and Life Insurance Act (sections161 and 179AR), are not included in the 'specified provisions' list in the PSN Act. This preserves the status quo under which the existing section 15B (and its equivalents in the Insurance Acts) are not defined as 'specified provisions'. This is because the PSN Act is generally designed to ensure the effectiveness of processes, including self-help processes such as close-out, and is not intended to preclude court proceedings that might arise in relation to such processes. [Schedule 1, item 190, section 15B of the Banking Act; Schedule 2, items 33 and 58, sections 62ZOR and 62P of the Insurance Act; Schedule 3, items 28 and 52, sections179AR and 161 of the Life Insurance Act]

6.67 Section 15BD of the Banking Act ('Moratorium-effect of Banking Act statutory management on supply of essential services') and 15BE of the Banking Act ('Moratorium - effect of Banking Act statutory management on annual general meeting'), and their equivalent provisions in the Insurance Act (sections 62ZOV, 62ZOW, 62PD, 62PE) and the Life Insurance Act (sections 179AV, 179AW 161D, 161E), do not relate to financial contracts, or other arrangements supported by the PSN Act. Accordingly, it is not necessary to make consequential amendments in the PSN Act to clarify the relationship between those sections and the PSN Act. [Schedule 1, item 190, sections 15BD and 15BE of the Banking Act; Schedule 2, items 33 and 58, sections 62PD, 62PE, 62ZOV and 62ZOW of the Insurance Act; Schedule 3, items 28 and 52, sections 161D, 161E, 179AV and 179AW of the Life Insurance Act]

6.68 Subsection 14(3) of the PSN Act provides, and will continue to provide, that the protection afforded to close-out netting contracts in section 14 of the PSN Act operates despite any 'specified provision' (which, as noted above, will include the new 'specified moratorium provisions'). , Therefore the protections in paragraphs 14(1)(ca) and (2)(fa) of the PSN Act in relation to certain securities will apply despite the moratorium provisions relating to enforcement of securities. However, it should be noted that the protections given in paragraphs 14(1)(ca) and (2)(fa) only apply to securities in relation to 'eligible obligations'(that is, securities relating to derivatives and securities lending arrangements). The moratorium provisions relating to enforcement of security will still have scope for operation in relation to close-out netting contracts that do not relate to those kinds of obligations, or which otherwise fall outside the scope of paragraphs 14(1)(ca) and 14(2)(fa).

Consequential amendments

6.69 The definition of 'related' in the Transfer Act (subsection 4(1)) is repealed and replaced with a new definition of 'related body corporate'. The new definition (section 4) defines related body corporate to mean, in relation to a body corporate, a body corporate that is related to the first-mentioned body, as determined in accordance with section 4A. [Schedule 4, items 11, 12 and 15 , subsection 4(1) and section 4A of the Transfer Act]

6.70 As a result of introducing the concept of 'relevant group of bodies corporate' into section 36AA of the Transfer Act, a new definition of 'relevant group of bodies corporate' was added to the Transfer Act. The new definition defines it as a regulated body and its subsidiaries, or an authorised NOHC (within the meaning of any of the Industry Acts) and its subsidiaries. [Schedule 4, items 12 and 15, subsection 4(1) and section 4B of the Transfer Act]

Application and transitional provisions

6.71 The amendments in the Bill relating to stay provisions in the Banking Act (items 43, 102, 143 and 191 of Schedule 1), Insurance Act (43, 49, 110 and 120 of Schedule 2) and Life Insurance Act (items 38, 44, 80 and 89 of Schedule 3) apply in relation to directions and actions taken on or after the Bill receives Royal Assent. [Schedule 1, items 253 and 263; Schedule 2, items 139 and 145; Schedule 3, items 118 and 127].

6.72 The amendments to cease non-direction stays for derivatives contracts (items 18 - 29 of Schedule 5) apply in relation to events that occur on or after the Bill receives Royal Assent. [Schedule 5, item 31]


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