Uganda is set to take a key step towards ensuring the enforceability of close-out netting under ISDA, GMRA and GMSLA contracts – at least in respect of financial institutions governed by the Financial Institutions Act. This follows a recent meeting hosted by Bank of Uganda (“BOU”) to discuss draft regulations titled “The Financial Institutions (Preference and Appraised Book Value) Regulations 2021”. The participants at the meeting included the leading financial institutions and market players as well representatives from the International Capital Markets Association (“ICMA”).
Netting is the mechanism that allows participants in the derivatives, securities lending and repo markets to set-off their mutual obligations with a counterparty that has become the subject of an insolvency-type proceeding. Up to now, although automatic early termination would be enforceable as a matter of contract law, the Act voids transfers, made within 6 months of a management takeover (or closure) of a financial institution, if the transfer was made to effect a preference or the transfer was made at below appraised book value. In effect this gave BOU impeachment power to negate close-out netting performed against such a financial institution.
The new regulations give effect to section 88 of the Financial Institutions Act and clarify BOU's power of impeachment as it applies to derivatives, repos and securities lending entered into by a financial institution that is closed or taken over. It will ensure that automatic early termination under an ISDA Master Agreement, GMRA or GMSLA is not obstructed or negated. The regulations will be made under the Financial Institutions Act and will only apply to specified financial contracts entered into with financial institutions. The result will be that market participants transacting with Uganda's banks can be confident that they close-out in accordance with the transaction documents.
The draft regulations were developed following a technical assistance memorandum of understanding signed between BOU and Frontclear. ENSafrica was appointed to advise and assist with the drafting of the amended regulation. ICMA and the International Swaps and Derivatives Association (ISDA) have also given input to the drafting.
It is expected that the new regulations will come into force before the close of 2021 and mark a new era for Uganda's financial markets by facilitating specified financial contracts among banks and thereby increasing liquidity and the number and type of financial products available.
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