The Reserve Bank will shortly issue its second discussion paper on netting, responding to submissions made on initial proposals that it floated last year and outlining proposed new law. Below we summarise key issues that the Bank is seeking to resolve. Netting is a mechanism used by financial institutions to reduce credit, liquidity and settlement risk in transactions such as swaps, derivatives, repos and securities lending. Recognising that netting arrangements benefit financial markets as a whole, the Reserve Bank is promoting their enforceability on insolvency. In so doing it seeks to align New Zealand with other countries that recognise netting arrangements.
Netting can take various forms.
Current problems affecting netting under New Zealand law Several problems may limit the enforceability of netting arrangements under current insolvency law. The Reserve Bank proposes to specifically exclude netting arrangements from this moratorium. Many netting arrangements currently seek to avoid the moratorium by providing for the automatic termination of all transactions immediately before the statutory manager's appointment. But there is a risk that close-out netting may not be achieved before the moratorium comes into effect. Another risk is that an automatic termination clause could be deemed invalid as an avoidance mechanism.