(This note is not part of the Regulations)
These Regulations change the insolvency regime that applies to any exchange which is a “recognised investment exchange” (“RIE”) and any central counterparty clearing house which is a “recognised clearing house” (“RCH”) within the meaning of the Financial Services and Markets Act 2000 (c. 8) (see Part 18 of that Act). They do so by amending Part 7 of the Companies Act 1989 (c. 40) (“Part 7”); the Financial Markets and Insolvency Regulations 1991 (S.I. 1991/880) (the “1991 Regulations”) and the Financial Services and Markets Act 2000 (Recognition Requirements for Investment Exchanges and Clearing Houses) Regulations 2001 (S.I. 2001/995) (the “2001 Regulations”).
These Regulations amend Part 7, the 1991 Regulations and the 2001 Regulations so that they provide further protection for the actions of RIEs and RCHs in the event of default by any of their members on the obligations they have entered into in the course of buying or selling financial instruments. The amendments comprise:
a
a broadening of the definition of “market contracts” to which Part 7 applies;
b
inclusion of default fund contributions within the protections of Part 7;
c
provisions amending Part 7 so that it takes account of administration on a basis equivalent to bankruptcy and winding up;
d
provision to ensure default rules refer to and take into account cross margining agreements; and
e
provisions enabling the extension of the default rules of RIEs and RCHs so that a surplus held on a house account of a member may be used to make up a deficit on the client account of the same members.
Regulation 2 amends Part 7 as follows.
Paragraph (2) makes a consequential amendment to section 154. Paragraph (3) amends section 155 (market contracts). The effect of these amendments is that market contracts no longer have to relate only to transactions in investments. They will also include contracts with members for the provision of central counterparty clearing services, and contracts which make provision to allow for interoperability arrangements (including parallel clearing and margin set-off agreements) between RIEs and RCHs. Paragraphs (4) to (7), (10) and (12) amend various sections of Part 7 so that they take account of administration on an equivalent basis to bankruptcy and winding up. Paragraphs (8) and (9), (13) and (14) amend various sections of Part 7 so that where certain provisions of the Insolvency Act 1986 are disapplied in relation to margin, they are also disapplied in relation to default fund contribution (as defined by the amendment in paragraph (15)). This provides for equivalent protection in the application by a RIE or RCH of property held as default fund contribution as for property held as margin.
Regulation 3 amends the 1991 Regulations as follows.
Paragraph (4) amends paragraph (1) of regulation 10 (extent to which charge granted in favour of recognised investment exchange to be treated as market charge) so that it also applies to a charge granted over property provided as default fund contribution to a RIE and, in the case of a recognised UK investment exchange, it secures the obligation to pay to the exchange any sum due to it from a member in respect of unsettled market contracts. Paragraph (5) amends regulation 11 (extent to which charge granted in favour of recognised clearing house to be treated as market charge) in the same way in relation to RCHs. Paragraph (6) amends regulation 16 (circumstances in which member or designated non-member dealing as principal to be treated as acting in different capacities) omitting paragraphs (3) and (4) to remove the definition of relevant investment (to which the reference in sub-paragraph (a) is also removed) to broaden the scope of contracts falling within the regulation. The reference to client rules is updated to refer to the clients’ money rules made by the Financial Services Authority, and a consequential amendment is made to cover interoperability arrangements between RIEs and RCHs.
Regulation 4 amends the 2001 Regulations as follows.
Paragraph (3) amends the Schedule to the 2001 Regulations. Sub-paragraphs (a) to (f) amend the requirements relating to default rules in respect of market contracts with RIEs in Part 2 of the Schedule. These amendments change the requirements for the default rules relating to set off and aggregation so that, where applicable and in the prescribed order, they must also take account of a defaulter’s house account surpluses, margin set off agreements and default fund contribution. There is also provision that where an RIE has specified arrangements with another RIE or RCH its default rules must provide rules dealing with default of such other exchanges and clearing houses. The RIE and RCH must also be able and willing to share information with the Secretary of State (who is responsible for insolvency), any relevant insolvency practitioner and other specified authorities and bodies in relation to the default of another RIE or RCH. Sub-paragraphs (g) to (l) make equivalent amendments to the requirements relating to default rules in respect of market contracts with RCHs in Part 4 of the Schedule.
An impact assessment of the effect of this instrument on the costs to business, charities or voluntary bodies has been prepared. It may be obtained from the Financial Stability Resolution Team, HM Treasury, 1 Horse Guards Road, London SW1A 2HQ. It is also available on HM Treasury’s website (www.hm-treasury.gov.uk), and is annexed to the Explanatory Memorandum which is published alongside this instrument on the OPSI website ( www.opsi.gov.uk). Copies of the impact assessment have also been placed in the libraries of both Houses of Parliament.