the assets of a general insurer regulated under the Insurance Act in Australia are subject to a priority regime which would prefer other creditors ahead of a secured party; a secured party is restricted from enforcing its security interest over an Australian company’s property during the company’s administration and an administrator is given certain rights in respect of dealing with property subject to circulating security interests; certain may apply in respect of an entity due to the recognition of a foreign insolvency proceeding under the CrossBorder Insolvency Act 2008 (CrossBorder Insolvency Act); client money and client property rules may affect the way in which a secured party must hold, and enforce rights against, collateral provided to it; the PPSA imposes additional requirements governing the enforceability, validity and perfection of security interests; the PPSA and Corporations Act set out priority rules which may result in a secured party losing priority in respect of secured assets and those Acts set out circumstances in which property secured by a security interest may vest in the grantor; other security interests may arise in respect of the property of a grantor by operation of law; security agreements may need to be stamped to be admissible in proceedings; and the PPSA sets out rules governing the enforcement of security interests (including procedural requirements and duties). These legacy Australian law issues could prevent entities subject to Australian law from being able to grant, or enforce rights in, margin provided by way of security in the manner contemplated by the BCBSIOSCO Margin Requirements. The PSN Act is amended by this Bill to ensure that a party to a closeout netting contract can enforce security in respect of certain financial property, subject to safeguards to protect against abuse and limit the unintended consequences of such a powerful protection. The PSN Act is the preferred vehicle to make the proposed amendment because it covers the widest possible range of external administration proceedings conducted under Australian or foreign law and has the required authority to override provisions in any other legislation. The application of the PSN Act’s protective framework ‘despite any other law’ (subject to clarifying the matters described in part 2 below and the existing carveouts in
subsections 14(3) and (5) of the PSN Act) provides a strong foundation for the protections to be provided in this Bill. Additionally, the protection provided Part 4 in order for the termination of obligations, the netting of obligations and any payment made by a party under the contract to discharge a net obligation not to be void or voidable in the external administration will be extended to acts taken in respect of the provision of collateral, including creation and enforcement of security (including the application of proceeds). Subsection 14(3) One related issue which has arisen during previous consultation processes in 2011 and 2014 relates to a drafting oversight in the PSN Act regarding subsection 14(3) which prevents a party to a closeout netting contract misusing the protections granted under the PSN Act. The current wording of subsection 14(3) of the PSN Act may not adequately prevent a party from abusing the PSN Act protections. This Bill prevents such an outcome. Expanded definition of ‘external administration’ The existing definition of ‘external administration’ in section 5 of the PSN Act does not explicitly refer to certain types of resolution procedures that do not neatly fall into the traditional conception of an insolvency proceeding conducted for the benefit of creditors. This Bill will expand the definition to explicitly cover resolution measures for bank and nonbank financial institutions, such as the statutory management regime for Australian ADIs under the Banking Act and the judicial management regime for life companies and general insurers under the Life Insurance Act and Insurance Act respectively. Accordingly, the definition of ‘external administration’ will be amended to include all types of traditional insolvency proceedings and more recent processes in the nature of ‘resolution’ (the statutory management to which an ADI may be subject and the judicial management to which an insurer or life company may be subject). Part 2 — Certainty for application of stays on closeout rights Introduction Currently, the stays imposed under the Industry Acts are potentially inconsistent with the crucial protections provided to closeout rights under derivatives arrangements under the PSN Act. Similarly, the operation of Australian resolution stays is not consistent with the approach adopted in other important jurisdictions (such as the European Union). This Bill sets out amendments to ensure, to the extent possible, that Australian law more closely reflects international best practice which has developed in recent years following the financial crisis.