Director Of Financial Services Explains Netting Bill 2006

Director of Financial Services in Anguilla, John Lawrence, was given the rare opportunity on Tuesday, October 10, to sit in the House of Assembly and participate in the proceedings like any member except that he had no voting rights.

Mr. Lawrence was summoned by the Speaker, David Carty, to the House to explain the provisions of the Netting Bill, a new piece of legislation which has some importance for Anguilla’s fledgling offshore business. After giving certain background information, he spoke on the provisions of the Bill as follows:
“The main element of the Bill, Mr. Speaker, is ‘set off or netting.’ The laws of many jurisdictions, particularly those whose legislation derives, or is influenced by English bankruptcy legislation, permit creditors who also owe a debt to the insolvent debtor to set off the debt owed to them by the debtor against what they owe.
“Without the statutory right of set off, the Netting Bill provides that a creditor would have to pay what he owes to the insolvent debtor in full and claim in the bankruptcy liquidation or other insolvency proceeding for his claim. In such circumstances, he would have to pay his debt in full but would receive back only a dividend if any is declared in respect of the debt owed to him.

“So in very simply terms, Mr. Speaker, if A owes B one hundred dollars and B owes A two hundred dollars, in the bankruptcy of B, A would still have to pay out his one hundred dollars but would probably not receive any of the two hundred dollars owed to him. Under a netting framework, he would only have to pay the difference, so he would not have to pay anything because he only owes one hundred but the debtor owes two hundred and when that is netted out he doesn’t have to pay anything.
“So the ability to set off is extremely important to participants in international financial transactions particularly to parties in the relative contracts. The main two benefits of netting are risk reduction and cost reduction. The risk reduction is two-fold; there is a reduction of credit risk and there is a reduction of systemic risk. In the second one, it is recognised that netting benefits capital adequacy and large exposures. Other benefits for market participants include more efficient use of credit lines and the ability to maintain low reserves to cover exposures.
“What is the need for netting legislation in Anguilla? Although there are no laws or regulations in Anguilla explicitly stating that netting would not be enforceable, many market participants and particularly the legal experts believe that law would benefit from setting forth a clear position on this issue.
“Mr. Speaker, just turning very briefly to the Bill itself, which follows almost exactly the draft model Act that the International Swaps Derivatives Association (ISDA) recommended, in part one the definitions of the Netting Bill present the essential elements of a bilateral netting regime. The Netting Bill contains a list of transaction types which fall within its scope and these are referred to as qualified financial contracts where netting can occur.
“The Netting Bill gives the [Financial] Commission the power to recommend additional transactions or types of transactions as qualified financial contracts. This permits the list to be updated through regulations. The definitions also contain the key provisions which establish the enforceability of netting agreements.
“In sections 2 and 3 of the Bill, these protect netting agreements from an regulatory or liquidator action which might otherwise be imposed upon the insolvency of one of the parties to the netting agreement. Section 4 deals with multi-branch netting. This is unlikely to affect Anguilla since Anguilla does not have a major financial institution which has multi-branches throughout the world, but we have included this just in accordance with the ISDA model.
“In summary, Mr. Speaker, netting legislation does not provide a product for financial services in the normal manner such as mutual funds. What it does do is provides a framework for international companies to undertake financial transactions with Anguillian entities.
“A summary of the benefits, Mr. Speaker: firstly, a reduction of risks, because under a netting agreement, parties dealing with Anguillian entities can offset what they owe against a debt owed to them by that same entity.
“Number two, in general terms, where a large amount of financial business is being done with an Anguillian entity, the ability to net out assets and liabilities on the Balance Sheet, reduces the need for capital for regulatory purposes. There is therefore a cost reduction benefit.

“Item number three: From Anguilla’s perspective, netting legislation makes Anguilla a more attractive jurisdiction in which to do business because of the setting off or netting framework that this Bill will provide.

“Fourthly, it also provides opportunities for Anguilla’s legal profession to render important legal opinions on the subject of ability to cater for netting when Anguillian entities are involved in financial transactions. So this is definitely a benefit for the private sector.

“As I mentioned Mr. Speaker, the Bill is based almost entirely on the ISDA’s Model Netting Act. The Commission has had this Bill reviewed by outside expertise namely KPMG, who consider that it is important for Anguilla to have netting legislation in the first place and secondly that it is also appropriate for Anguilla to use the ISDA model.
“I would also mention that in the Caribbean – the British Virgin Islands, the Bahamas, Bermuda and the Cayman Islands also have netting legislation.”