Draft Prudential Standard – Transfers of assets and liabilities of designated institutions in resolution
4 min read
The Prudential Authority (the "PA") published, for public comment, the Prudential Standard on the transfer of assets and liabilities of designated institutions1 in resolution (the "Draft Prudential Standard" or the "Standard"). The Draft Prudential Standard gives effect to the requirements of the Financial Sector Regulations Act 9 of 2017 (the "FSR Act") as amended by the Financial Sector Laws Amendment Act 23 of 2021 (the "FSLA Act") and applies to all designated institutions, unless exempted by the PA, based on the resolution strategy set out by the South African Reserve Bank (the "SARB"). The Draft Prudential Standard is issued in terms of section 105(2)(c) of the FSR Act with the objective of stipulating the requirements to be complied with by designated institutions so as to enable the SARB to execute transfer of powers - in line with the international standards and principles - for the orderly resolution of designated institutions.
The Standard provides for SARB's powers to transfer some or all of the assets and liabilities of a designated institution in resolution to a new acquiring institution, a bridge institution or an Asset Management Company. This would be in spite of any law or agreement that would otherwise restrict or prevent it from doing so, including a law or agreement that requires consent or approval by any specified person.
In accordance with the provisions of section 98 of the FSR Act, the following documentation has been published:
(i) Annexure A – the Draft Prudential Standard;
(ii) Annexure B – the Statement of need, for intended operation and expected impact; and
(iii) Annexure C – the Comments Template
The Comments template incorporates some specific questions to be completed by institutions that fall within the definition of a designated institution in terms of sections 29A(1)(a) to (d) of the FSLA Act. The responses received to Section C of the Comments template ("Section C"), which contains a set of questions to solicit industry inputs on the expected impact of implementing the Draft Prudential Standard, will be used to ascertain the full extent of the expected impact or any other unintended consequences of the Standard. An example of suchan unintended consequence is that whilst paragraph 9 of the Draft Prudential Standard importantly refers to "safeguards to protect the integrity of financial arrangements" and, in particular, provides that the SARB will not cherry-pick the transactions to be transferred in relation to financial contracts such as derivatives transactions in order to preserve netting sets, paragraph 9.5 of the Draft Prudential Standard contains a reservation of rights for the SARB to apply safeguards to the extent that such safeguards do not compromise the "feasibility and effectiveness" of the resolution tool. The inclusion of this reservation of rights provision introduces uncertainty as this could mean that the SARB has a discretion as to whether or not a financial contract can, in fact, be partially transferred. Another example of an unintended consequence is the fact that The Draft Prudential Standard places the obligation of defining the transfer perimeter for assets and liabilities on to the Designated Institutions. The definition of Designated Institution will include a branch of a foreign bank. It is not clear whether South African branches of foreign banks should have to comply with the Draft Prudential Standard given the fact that a branch cannot be resolved independently from the parent bank. Clarity from the SARB in this regard would be useful. As such, designated institutions that fall within the definition - as set out in terms of sections 29A(1)(a) to (d) of the FSLA Act - are encouraged to respond to the questions under Section C and to identify any potential risks or unintended consequences that might arise from the implementation of the Standard and to submit those to the PA as part of the public consultation process.
Following the public consultation process, the PA will make the necessary changes to the Draft Prudential Standard.
The Draft Prudential Standard, together with the accompanying documents, are accessible on the Prudential Authority's webpage here.
Comments on the Draft Prudential Standard and accompanying documents must be submitted using the attached comments template to FST-RPD email for the attention of Mr Jacques Botes and Mrs Linah Masoha, by no later than 20 December 2022.
1 A 'designated institution' means an institution as defined in section 29A(1) of the Financial Sector Regulations Act (FSR Act). In terms of s 29A(1) of the FSR Act, a 'designated institution' means each of the following: a bank; a systemically important financial institution; the payment system operator and participants of a systemically important payment system; a company that is a holding company of a bank, a systemically important financial institution, or a payment system operator of a systemically important payment system; and subject to any determination in terms of subsection (2), if a bank or a systemically important financial institution is a member of a financial conglomerate in terms of section 160, each of the other members of the financial conglomerate.
Lara Taylor (Associate, White & Case, London)Gail Dendy (Senior Researcher, White & Case, Johannesburg), Denise Mulenga (Trainee Lawyer, White & Case, Johannesburg) and Michelle du Plessis (Trainee Lawyer, White & Case, Johannesburg) co-authored this publication.
White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.
This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
© 2022 White & Case LLP