The Financial Sector Laws Amendment Act: A new dawn for South Africa's Bank Resolution Regime – A look at what you need to know about the recently published prudential standards
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In January 2022, the President assented to the Financial Sector Laws Amendment Act, 2021 (the "FSLAA"), which adds a new Chapter 12A (Resolution of Designated Institutions) (the "Bank Resolution Regime") into the Financial Sector Regulations Act, 2017 (as amended by the FSLAA) (the "FSR Act").
On 24 March 2023, it was announced by notice in the Government Gazette (GN 3203 in GG 48294 of 24 March 2023) (the "Notice") that, as at the date of the publication of the Notice, various sections of the FSLAA would come into effect. The remaining sections came into effect on 1 June 2023. Included in these latter provisions are the Bank Resolution Regime provisions of the FSR Act, in particular, sections 166A to 166I; sections 166J to 166P; section 166Q to 166Y and section 166Z.
The delay in the implementation of the Bank Resolution Regime was due to the fact that no prudential standards had been published by the Prudential Authority (the "Authority") to deal with a number of open issues that had been identified within the Bank Resolution Regime. Such issues included: (i) the lack of clarity in relation to the length of the moratorium on the enforcement of contractual obligations once a "designated institution" as defined in the FSR Act ("Designated Institution") has been placed into resolution; (ii) the lack of clarity in relation to the treatment of foreign-law governed contracts of Designated Institutions in resolution; and (iii) the protection of netting sets to the extent that the South African Reserve Bank (the "Resolution Authority") exercises its powers in relation to the transfer of the assets and liabilities of a Designated Institution in resolution. Thus, it was determined by the Authority that it needed to publish the prudential standards in order to ensure that the South African resolution framework complies with international best practices.
On 31 May 2023, the Authority issued the following prudential standards:
- Prudential Standard RA01 – Stays on Early-Termination Rights and Resolution Moratoria on Contracts of Designated Institutions in Resolution ("Prudential Standard RA01");
Prudential Standard RA02 – Transfers of Asset and Liabilities of a Designated Institution in Resolution ("Prudential Standard RA02"); and
(Prudential Standard RA01 and Prudential Standard RA02, each a "Prudential Standard" and together the "Prudential Standards").
Prudential Standard RA01: A brief overview
The purpose of Prudential Standard RA01 is to set out the principles and requirements for stays on early termination rights and resolution moratoria on contracts of Designated Institutions in resolution that must be complied with by all Designated Institutions in line with the principles, practices and processes relating to soundness for their orderly resolution of a Designated Institution.
This Prudential Standard requires the adoption of contractual recognition provisions in certain types of contracts that are governed by foreign law (the "Covered Contracts"). These Covered Contracts include contracts for the purchase, sale or loan of securities, options, repos and reverse repos, swaps, futures and master agreements in respect of any of the transactions identified above. Prudential Standard RA01 also provides essential clarity by stipulating that stays on early termination rights and resolution moratoria will not exceed 48 hours.
Included in the Prudential Standard is provision for governance requirements under a stay. This includes ensuring internal capabilities on the part of the Designated Institution, having a clear understanding of exposures in respect of covered contracts, and having specific understanding and details of the Covered Contracts, such as the governing law, the counter party type, and the contract type.
Prudential Standard RA02: A brief overview
The purpose of Prudential Standard RA02 is to set out the principles and requirements for the transfer of the assets and liabilities of Designated Institutions in resolution, which must be complied with by all Designated Institutions, in line with principles, practices and processes for the orderly resolution.
The requirements in the Prudential Standard will only apply to Designated Institutions that have been informed or notified by the Resolution Authority that transfers will form part of their resolution strategy. Once so informed, a Designated Institution will have two years after being so notified by the Resolution Authority to ensure that it complies with the requirements of Prudential Standard RA02. This Prudential Standard sets out the minimum requirements for a separability analysis (the "Separability Analysis") and a transfer playbook (the "Transfer Playbook"). The Separability Analysis refers to the analytical process of assessing and describing all relevant aspects of the proposed transfer transition by the Designated Institution. In the Separability Analysis, Designated Institutions must include inter alia: (i) an identification of assets and liabilities to be transferred; (ii) an assessment of interconnections; and (iii) a financial analysis and business plan for the transfer perimeter. In addition, a Designated Institution is required to prepare and use a Transfer Playbook, which is an operational document used by the Designated Institution to demonstrate its ability to implement the transfer of assets and liabilities when placed in resolution.
Importantly, the Prudential Standard also makes provision for protected arrangements. There are certain instances where the Resolution Authority will apply safeguards to protect the integrity of financial arrangements such as netting arrangements and collateralisation in partial transfer with the aim of protecting the counterparties involved and the economic effect of the arrangement. This will include ensuring that there is no "cherry picking" or selective transferring of individual contracts with a particular counterparty, where the contracts are subject to the same netting arrangements – contracts will be transferred as a whole or not at all.
It is further important to note that both Prudential Standards make provision for general compliance requirements, the consequences of non-compliance, and reporting requirements. For the purposes of general compliance, the Resolution Authority will, on an ongoing basis, assess the Designated Institution's compliance with the Prudential Standards. Failure to comply with the Prudential Standards will result in penalties. Such penalties will include: (a) an increase in the Designated Institution's financial loss-absorbing capability instrument (commonly known as FLAC instruments) holdings; (b) an increase in the Designated Institution's required regulatory capital; and/or (c) an acceleration in the triggering of resolution action. In relation to the reporting requirements, the form, manner, and period for regulatory reporting on the Prudential Standards will be determined by the Authority as directed by the Resolution Authority. These reporting requirements will be published on the Authority's website.
Prudential Standards RA01 and RA02 are intended to provide the market with certainty and with guidance relating to how to prepare for, and successfully effect, orderly resolution so as to retain and protect South Africa's market integrity and financial stability.
Both conduct standards are available on the Prudential Authority website and may be accessed by clicking the following links:
- Prudential Communication 4 of 2023-RA01-Stays and resolution moratoria (resbank.co.za);
- Prudential Communication 5 of 2023-RA02-Transfers (resbank.co.za); and
- The Government Gazette notice announcing the coming into effect of the Resolution Regime provisions is available at the following link: Financial Sector Laws Amendment Act: Commencement of certain provisions (www.gov.za).
Siphosetu Matebese (Associate, White & Case, Johannesburg) contributed to the development of this publication.
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