Contents:
March 2009
Contents:
In the case of Bofinger v Kingsway Group Pty Ltd & Ors [2008] NSWCA 332 (3 December 2008) the Supreme Court of New South Wales examined the subrogation rights of a guarantor in the context of a mortgagee sale. Subrogation operates where equity considers it unconscionable that the holder of the securities should use them to the prejudice of the guarantor. In such cases, the court places the guarantor exactly in the situation of the creditor.
Here, a developer entered into loans which were secured by first, second, and third mortgages over the development property. The plaintiffs were guarantors of each of these loans and their liability under the guarantee was secured by matching first, second, and third mortgages over their home and an investment property. The guarantors sold their properties and the net proceeds were paid to the first mortgagee.
The first mortgagee, in exercise of its power of sale of the development property, realised surplus proceeds which it delivered to the second mortgagee, along with certificates of title to two unsold strata units. It was common ground there would be no surplus available to the third mortgagee. The guarantors claimed to be entitled to the surplus delivered to the second mortgagee on the principles of subrogation and under s 3 of the Law Reform (Miscellaneous Provisions) Act 1965 (Cth).
The Court held that the guarantors were not entitled to be subrogated to the surplus proceeds in priority to the second mortgagee as neither the first or second mortgagee acted unconscionably in transferring or retaining the surplus proceeds.
Moreover, Giles JA and Handley AJA extended the rule in Otter v Vaux (1856) 2 K & J 650 which prevents a mortgagor who has paid off the first mortgage from keeping it alive against a later mortgage created by himself. The principle now also applies to prevent a guarantor who pays off a mortgage from keeping that mortgage alive against a later mortgage that he has also guaranteed.
The recent case of Ministry of Economic Development v Stakeholder Finance Ltd (DC Auckland, CRI-2007-004-28150; CRI-2007-004-28160; CRI-2007-004-28102, 9 December 2008, Cunningham J) addressed the issue of when a person can be regarded as a habitual investor under section 3(2)(a)(ii) of the Securities Act 1978 ("Act"). The case is significant because it appears to be the first time a court has considered this issue.
Dan McEwan ("McEwan") organised a "Forum" (Investors Forum NZ Ltd) to which persons interested in property investment could join for a fee. Members of the Forum could then apply to the group's legal adviser to be classified as "habitual investors", whereupon they were invited to invest in land development opportunities. This designation is important because the Act prescribes stringent disclosure requirements for any offer of security to the public. Section 3 of the Act states that an offer of securities to the public does not include an offer to habitual investors; persons whose principal business is the investment of money or who, in the course of and for the purpose of their business, habitually invests money.
After receiving legal advice, McEwan explained to members of the Forum that habitual investors were people who had made more than seven investments in the preceding 10 years.
Judge Cunningham decided that Mr McEwan's test was not determinative. A habitual investor is a person who constantly or continually invests money in the course and for the purpose of their business. Several factors needed to be taken into account: first, the number of investments the investor has made and over what period of time; second, the overall length of time the investor has engaged in investing money; third, the nature of investments that the investor was involved with; fourth, the amount of money involved in those investments; and fifth, the success or otherwise of those investments. In summary, the court said that in order to describe someone as a habitual investor, the nature and quality of their investment history must come into the mix when one reflects on the fact that an exception is being made to the statutory requirement to fully inform members of the public about the proposed offer of a security.
It was not clear whether that assessment had taken place. Mr McEwan was convicted as director of a company that offered, and allotted, a security to a member of the public in contravention of the Act. It is a defence if a person contravenes the Act but that contravention takes place without his or her knowledge or consent. This defence was not available to Mr McEwan. He could not argue that he had relied on the solicitors to apply the habitual investor test. The Court found that a company director cannot simply delegate the task to legal advisers. The issuer and promoter must be satisfied that the individuals who were offered their security have a sufficient understanding of the investment if they are covered by any of the exceptions set out in s 3(2) of the Act.
The case Pioneer Insurance Company Ltd V White Heron Motor Lodge Ltd [2008] NZCA 450 was an appeal by Pioneer Insurance Company Ltd against a decision of the High Court to decline to set aside a statutory demand under section 290 of the Companies Act 1993 ("Act"). The statutory demand related to an amount White Heron Motor Lodge Ltd claimed Pioneer owed White Heron under a guarantee granted in respect of the loan repayment obligations of a company named Policy Factoring Limited.
Pioneer claimed the statutory demand should have been set aside because, properly construed, the contractual documents limited Pioneer's liability to 75% of the amount set out in the statutory demand. In reply, White Heron claimed that the statutory demand should remain in place for two reasons: first, Pioneer's claim to have it set aside had become moot because since the High Court's decision Pioneer had paid the full amount to White Heron, so that Pioneer was no longer vulnerable to the commencement of liquidation proceedings, being the usual purpose of issuing a statutory demand; and second, the contractual documents ought not to be interpreted as Pioneer claimed.
In relation to White Heron's first point, Heath J found that the payment from Pioneer to White Heron was made on the basis of an undertaking that the money paid would remain invested pending the final resolution of the dispute, and therefore dismissed the claim that Pioneer's current claim was moot.
In relation to White Heron's second point, Heath J examined the relevant contractual documents and concluded that the parties cannot possibly have intended that Pioneer, as guarantor, would have greater liability under the loan than under the contemporaneously signed guarantee, and so dismissed White Heron's second point.
Section 290(4)(a) of the Act allows the Court to set aside the statutory demand if there is a "substantial dispute whether or not the debt is owing or is due". The Court heard no argument on whether "substantial dispute" should be measured by reference to a dollar amount or a percentage of the debt claimed and preferred to leave that question open.
Section 290(5) of the Act gives the Court jurisdiction to set aside a statutory demand if the Court is satisfied a "substantial injustice" would be caused were no order made. The Court was satisfied that the 25% differential was sufficient to warrant setting aside the demand on the basis that there had been such a material misstatement of the amount due, that a "substantial injustice" would be caused if Pioneer could not recover the lower sum.
The Insolvency Amendment Bill ("Amendment Bill") was introduced to Parliament on 9 March 2009 and proposes to amend the Insolvency Act 2006 by:
No asset procedure
- amending the "no-asset procedure" which was introduced under the Insolvency Act 2006 as an alternative to bankruptcy for individuals with minimal debt and few assets, but who have no means to repay the debt. The current law provides that a debtor is automatically discharged from the no asset procedure 12 months after the date when the debtor was admitted to it, and that on discharge, the debtor's debts (which became unenforceable on the debtor's entry into the no asset procedure) are cancelled.
The proposed amendments provide that:- the automatic discharge that occurs after the 12 month period can be delayed by the Official Assignee ("Assignee") where the Assignee is satisfied that the 12-month period should be extended for the purpose of properly considering whether the debtor's participation in the no-asset procedure should be terminated; and
- any debt or liability incurred by fraud or fraudulent breach of trust to which the debtor was a party, or any debt or liability for which the debtor has obtained forbearance through fraud to which the debtor was a party, will be expressly excluded from the automatic discharge;
Insolvent gift regime
- replacing sections 204 and 205 of the current "insolvent gift" regime. At present, a gift by a bankrupt to another person may be cancelled on the Assignee's initiative if the bankrupt made the gift within 5 years immediately before adjudication, and the bankrupt was unable to pay his or her due debts immediately after making the gift (section 204 of the Insolvency Act 2006). The burden of proof that a bankrupt is “unable to pay his or her due debts immediately after making the gift” is currently on the Assignee. The amendments will reverse this onus to the bankrupt. The new regime also proposes that a gift by a bankrupt to another person may be cancelled on the Assignee's initiative if the bankrupt made the gift within 2 years immediately before adjudication; and
- adding a new section which provides that the details of a person who has been bankrupt on two or more occasions or who has been both bankrupt and discharged from the no asset procedure shall be kept indefinitely on the public record.
The Securities Commission has extended its class exemption which allows issuers to use short form prospectuses when raising capital from existing security holders. The Securities Act (Short Form Prospectus) Exemption Notice 2009 ("New Exemption Notice") came into force on 23 March 2009 to replace the Securities Act (Short Form Prospectus) Exemption Notice 2002 ("2002 Exemption Notice"). The New Exemption Notice retains the existing exemptions (subject to the same conditions) contained in the 2002 Exemption Notice and includes the following additions:
Annual report notice provisions
- Issuers who have relied on section 209 of the Companies Act 1993, which permits a company to make its annual report available to shareholders by advising them of their right to receive an annual report rather than sending them a copy of the annual report itself, are now able to use the New Exemption Notice where the prospectus also contains, among other things, that notice of availability.
Interim financial statements
- The provision of interim financial statements which comply with the financial reporting standard NZ IAS 34 is now sufficient compliance with the requirements of Financial Reporting Act 1993 for short form prospectuses, instead of full form interim financial statements which comply with all the requirements of NZGAAP.
On 26 February 2009, the NZX Limited ("NZX") submitted to the Minister of Commerce ("Minister") proposed amendments to the NZSX/NZDX and NZAX Listing Rules ("Rules") following a consultation process with stakeholders.
The changes to the Rules focus on increasing the speed and reducing the cost of capital raising for NZX Listed Issuers in response to the prevailing market conditions. The proposed amendments to the Rules, as outlined in the NZX Exposure Draft dated 15 December 2008, include:
Per-shareholder capital offering
- increasing the upper financial limit of capital offerings to existing security holders under the Securities Act (NZX- Share and Unit Purchase Plans) Exemption Notice 2005 ("Exemption Notice") from $5,000 to $25,000 per security holder, permitting limited equity fundraising by Issuers without an investment statement or prospectus in any 12 month period;
Private placements
- raising the current limit on the issue of securities by a private placement (without shareholder approval) from 15% to 20% of the class or number of equity securities of NZSX Issuers in any 12 month period (and from 20% to 25% for NZAX Issuers);
- allowing directors, associated persons of directors and employees to participate in private placements, subject to the board certifying that their participation is in the best interests of the Issuer and shareholders generally. This amendment requires a corresponding change to the related party transaction rules as detailed below;
Rights issue timetable
- reducing the time frame within which an Issuer must complete a rights issue from 6 to 3 weeks. The notice period of the record date is reduced from 10 to 3 business days and the rights trading period is condensed from 18 to 12 business days;
Issue of equity securities carrying voting rights
- requiring directors to certify to NZX that they have made reasonable endeavours to get the best price possible where the issue price is 15% less than the 5 day volume weighted average price ("VWAP"). This removes the requirement that Issuers obtain NZX approval for non-pro-rata offers, if the 90% VWAP test on the issue price of voting equity securities is not satisfied;
Remuneration of directors by stock
- allowing directors (who elect) to be paid in stock, with shareholder approval. Stock can be issued at a price of 20 day VWAP without the need to obtain specific shareholder approval of the price;
Related party transactions - materiality
- increasing the thresholds of materiality for related party transactions from 5% of average market capitalisation to 10% for transactions and from 0.5% to 1% for the provision of services;
- when deciding if a private placement is a material transaction or not, only the proportion of a placement that is issued to directors, associated persons and employees is taken into account;
Employee share schemes and stock issuance
- removing the restriction on buyback of securities from employees; and
Financial assistance
- increasing the threshold of permitted financial assistance to employees from 5% to 10% of an Issuer's average market capitalisation.
Issue 3, 2009 of the Journal of International Banking Law and Regulation contains two articles of interest.
The first article is entitled Misrepresentation as applied to contracts of guarantee: A map through the thicket by Charles Chew. The article addresses concerns at guarantors signing contracts of guarantee with insufficient information regarding the transaction. Chew also examines the issues surrounding misrepresentation as applied to guarantees and the possible remedies available from such misrepresentation.
Generally, a guarantor may be granted relief from the contract if there has been a misrepresentation of a material fact by the debtor, relied on by the guarantor. Chew discusses the courts' broad interpretation of these requirements. For example, misrepresentation occurs where there is a false statement of a material fact rather than opinion. However, the Courts have been willing to find that a statement of opinion is a statement of fact where the opinion was not honestly held or there was no basis for that opinion.
The typical remedy for misrepresentation is rescission of the contract under common law. Equity also has a general jurisdiction in setting aside contracts to ensure the requirement of good conscience is met. In Australia, statutory remedies are playing an increased role. Section 52 of the Australian Trade Practices Act 1974, gives a right to damages in relation to conduct "in trade and commerce" but does not supplant the general law on misrepresentation. Many concepts from the old law are still relevant and employed by the courts.
In conclusion Chew acknowledges the difficulty in applying the wide range of remedies available for misrepresentation, founded in tort, contract, equity and statute, each developed independently with no unifying theory.
The second article is entitled COMI: The sun around which cross-border insolvency proceedings revolve: Part 2 by Simona Di Sano. The article addresses the different approaches of the Courts in the EU and US, when determining the centre of main interest, or COMI, of a company facing cross-border insolvency.
The author compares the decisions in the EU cases of 'Eurofood' and 'Eurotunnel', with the US cases of 'SPhinX' and 'Bear Stearns Master Funds'. The author considers the approach of the ECJ in 'Eurofood' unsatisfactory, as it failed to provide clear guidance for future cases on COMI of a subsidiary. The ECJ determined that only in the case of a 'letterbox' subsidiary would the presumption in Article 3(1) of the EC Insolvency Regulation (that a company's COMI is the same as its registered address) be overturned. The limits of this ECJ decision were highlighted by the later 'Eurotunnel' case. Despite the ECJ's decision in 'Eurofood', in 'Eurotunnel' the local courts of the Member State were still inclined to consider the COMI of the insolvent company's subsidiaries to be within its territory, in practice rebutting the presumption in Art.3(1).
In 'SPhinX' the NY Bankruptcy Court considered that the Cayman insolvency proceedings filed in the US could be acknowledged as foreign main proceedings, as the majority of parties with an interest tacitly supported this approach. The author considers this a questionable conclusion, as the view of interested parties should not have been of any relevance. Despite this conclusion, Drain J relied on universally accepted principles, or alternatively the public policy exception in s1506 of Chapter 15 of the Bankruptcy Code, for not recognising the proceedings, as they were sought by the party for an abusive purpose. Di Sano notes that the proceedings should have been dismissed on preliminary procedural grounds, as neither the COMI nor any insolvent debtors were within the jurisdiction of the US. The subsequent 'Bear Stearns Master Funds' case supports Di Sano's view, as Lifland J refused the idea that recognition of a foreign main proceeding may simply be reduced to a 'rubber-stamp exercise'. This approach places the burden on the foreign representative to prove that the COMI is in the same country as the registered office, when there is evidence that the COMI might be elsewhere.
The December 2008 issue of the Reserve Bank of New Zealand's Bulletin, Vol 71, No. 4,contains two articles of interest.
The first article is entitled New legislation for regulation of non-bank deposit takers by Noemi Javier. The article provides an overview of the regulatory framework for non-bank deposit takers ("NBDTs") and the role of the Reserve Bank of New Zealand ("RBNZ") as the sector's prudential regulator. The framework and the RBNZ's new role were introduced by way of new Part 5D of the Reserve Bank of New Zealand Act 1989. The new regime requires NBDTs to comply with minimum prudential standards issued by the RBNZ, including credit rating, capital and liquidity requirements and restrictions on related party exposure.
A non-bank deposit taker is defined as a person, other than a registered bank, that offers debt securities to the public within the meaning of the Securities Act 1978, and is in the business of borrowing and lending money or providing financial services or both.
The RBNZ's responsibility over NBDTs is in line with its purpose of promoting the maintenance of a sound and efficient financial system, and avoiding significant damage to the financial system if a deposit taker fails. In addition, it is expected that the RBNZ will in due course be the prudential regulator and supervisor of insurance companies making them the single prudential regulatory authority for the New Zealand financial system.
However, unlike for registered banks where the RBNZ is both the regulator and supervisor, for the NBDT sector the RBNZ is the regulator only. Trustee corporations are responsible for ensuring that prudential requirements are included in each NBDT's trust deed and are required to report to the RBNZ any actual or possible non-compliance.
The RBNZ may issue regulations on the following matters:
- Designating entities to be covered or not covered by the scheme
- Requiring credit ratings
- Imposing minimum capital and a minimum capital ratio requirement
- Restricting associations with related parties
- Setting liquidity requirements
- Risk management
The RBNZ expects that this new legislation will result in improvements in the capacity of the New Zealand financial system to manage and cope with stresses and difficulties in the NBDT sector as they arise.
The second article is entitled "Evolution of the Reserve Bank's liquidity facilities" by Ian Nield, detailing the evolution of the liquidity management regime over the past few years in the context of prevailing financial market stresses. There have been two major changes in the RBNZ's liquidity facilities over the past decade: first the change to the official cash rate ("OCR") regime for implementing monetary policy in 1999, and second, the adoption of a 'fully cashed up' settlement account system in 2006.
Operationally, the RBNZ's liquidity management system has three broad elements: supporting monetary policy by keeping liquidity conditions consistent with the current setting of the OCR, providing facilities to registered banks enabling them to maintain sufficient settlement cash at the RBNZ and meet payment obligations to other banks, and balancing flows between the government and private sectors. How the appropriate level of settlement cash is assessed, and tools used for injecting and withdrawing liquidity are outlined.
The RBNZ began a review of its domestic liquidity management operations in 2003. There was a move to cash up the liquidity system, and factors such as the scalability of the system and the use of supranational ('Kauri') securities were considered. As a result, registered banks' demands for cash now determine the overall level of cash in the system and liquidity is provided at prices linked to the OCR. A tiered approach to remuneration settlement account balances was also introduced to encourage banks to hold a diverse range of liquidity instruments.
Liquidity facilities were further widened and adapted at the onset of the crisis conditions in 2007, providing back-up for a loss of access by New Zealand banks to offshore funding. It was decided that the RBNZ should use assets held as a natural part of a commercial bank's business as liquidity instruments, including for example RMBS.
Neild considers that it is not possible at present to determine whether or not the measures put in place by the RBNZ have been fully successful, but that early indications are encouraging. The domestic financial system has coped well in the present financial environment, but will need to continue to adapt with the markets.
The February issue of Australian Banking and Finance Law Bulletin contains the article Antipodean wholesale funding schemes: a silver bullet? by Miles David. The article compares the wholesale funding guarantee schemes provided by the Reserve Bank of Australia and Reserve Bank of New Zealand. On 12 October 2008, the Australian treasury unveiled details of a wholesale funding scheme. This was followed by the New Zealand Government unveiling a very similar scheme on 1 November 2008. These schemes are designed to promote financial stability, enhance market confidence and ease liquidity problems.
In New Zealand, guarantees are available to investment grade financial institutions which have substantial New Zealand borrowing and lending operations. The scheme operates on an opt-in basis, by institution and by instrument. Similar to Australia, all newly issued senior unsecured negotiable or transferable debt securities, with a maturity of 60 months or less, in any of the specified major currencies, issued by eligible institutions will be eligible for cover. Cabinet estimates suggest that uptake of the scheme's usage will be approximately NZ$40 billion.
While the overall impact of the scheme should be to minimise the financial crisis for all banks, David suggests that it is the smaller, low-rated issuers that have the most to gain from the scheme. Backed by the government guarantee, these issuers could now compete with AAA rated issuers for funding. However, David believes these schemes will not be a silver bullet solution to the financial crisis as they cannot reverse the credit crunch.
The website of the Reserve Bank of New Zealand contains a presentation from the 2009 Job Summit by Alan Bollard, Governor of the Reserve Bank of New Zealand entitled World recession & how we cope.
Click on http://www.rbnz.govt.nz/speeches/3568964.html to view this presentation.
The presentation looked at the global recession, and New Zealand's place in it. Bollard made the following observations:
- The size of the destruction of wealth in the global economy, based on IMF estimates, is the biggest ever seen. Massive policy moves and a rise in government spending have been a major part of the response to this global destruction of wealth.
- In world growth terms we are somewhere below the recession of the early 1980s with unemployment rates on the rise. Trading partner growth has slowed dramatically.
- To counteract the situation, a new global balance must be created. Western Anglo economies will need to save more, reduce household deficits, build exports and improve external balances. Emerging economies will need to increase domestic consumption growth.
- New Zealand has certain factors in its favour to help it through this crisis including its past strong growth, low unemployment levels, good institutions, flexible labour markets, freely floating exchange rate, responsive monetary policy, strong and transparent government accounting and its strong, well-capitalised banking system. However, there is no doubt that challenges lie ahead for New Zealand and responses will need to be implemented to counteract the financial situation.
- The recession in New Zealand, although occurring comparatively early due to the drought, is mild by international and historical standards.
- Domestic bank lending has slowed, particularly in relation to housing. The slowdown in business lending is more recent, and is attributed to a fall-off in demand rather than the credit supply.
- Employment and investment by businesses has become more cautious. The Reserve Bank encourages households and firms to continue borrowing and banks to continue lending.
At the end of the presentation Bollard stated that the RBNZ will ensure that monetary policy is appropriately stimulatory, that there is appropriate domestic liquidity available to banks and that actions are co-ordinated with other governments. It was noted that banks will also have a key role in assisting the New Zealand economy; that they need to:
- Keep seeking international funding.
- Keep passing on wholesale interest rate cuts.
- Keep lending on sensible proposals.
A press release from Her Majesty's Treasury gave an overview of the United Kingdom's recently enacted Banking Act 2009.
The Banking Act 2009 was introduced into the House of Commons on 7 October 2008 and attained Royal assent on 12 February 2009. It came into effect on 21 February 2009.
The Act strengthens the UK's statutory framework for financial stability and depositor protection. Under the Act, a new permanent special resolution regime ("SRR") is implemented, providing the Bank of England, the Financial Services Authority and the Treasury ("Authorities") with the means to deal with failing banks and building societies. This regime replaces the temporary powers provided by the Banking (Special Provisions) Act 2008 which was used to bring Northern Rock plc into temporary public ownership and to resolve issues relating to Bradford & Bingley plc and UK subsidiaries of Icelandic Banks and which expired on 20 February 2009.
The Act also seeks to improve the legal framework and increase the efficiency of the Financial Services Compensation Scheme, enhance the operation of regulatory frameworks for preventing firms from failing, protecting consumers, strengthening the Bank of England and create powers for the Treasury to lay regulations to deal with Investment Bank insolvency.
A code of practice was published and laid before Parliament on 23 February 2009. The code was intended to support the legal framework created by the Banking Act's SRR and provide guidance as to how, and in what circumstances, the Authorities will use the tools created by the SRR.
The March issue of Linklaters' Banking Client Alert also contains an article on the new UK Act. The Banking Act 2009 and its impact on UK banks and their stakeholders and counterparties examines the Banking Act 2009 UK ("Act") and its "controversial" special resolution regime ("SRR"). The Act was designed to deal with and stabilise banks experiencing financial difficulties and has made a substantial change to banking law in the UK.
The SRR contains three stabilisation options:
- Private sector transfer - the Bank of England ("BoE") can transfer all or part of a bank's business via a property or share transfer to a commercial buyer. This option allows for continuity of banking services and the best outcome for creditors without public funding.
- Bridge bank transfer - the BoE can transfer all or part of a bank's business to a new "bridge bank" established by the BoE. The deteriorating assets would be retained by the residual bank, which would then go into administration. The failing bank would also help the BoE support the bridge bank and facilitate its sale into the private sector.
- Temporary public ownership - the failing bank is taken into public ownership by transferring the shares to a company owned by, or a nominee of, the Treasury. The aim is to stabilise the bank and return it to the private sector at a later date. For this to happen there must be a serious threat to the stability of the UK financial system.
In order to facilitate the transfer of shares or business of a facility bank, the BoE or the Treasury (in the case of temporary public ownership) may make share or property transfer instruments or orders.
The Act also provides for two new bank insolvency and administration procedures. These aim to ensure depositors' accounts are transferred to another financial institution as fast as possible, and to wind up the affairs of the bank in such a manner as to achieve the best outcome for creditors.
The SRR has a number of potential impacts:
- Shareholders of a bank that is placed under the SRR may effectively lose all of their rights
- The extension of the scope of a share transfer order to non-equity securities is a significant change to investor expectations
- Creditors' interests that may remain in the residual bank will be subject to a moratorium and will have to rely on recovery from the failing bank or compensation as a result of non-performance
- A partial transfer could cause some security and netting-off arrangements to become ineffective if the obligation to be netted off is located in two different entities (however, most arrangements are protected by the Safeguards Order under the Act)
The powers given to the relevant authorities under the Act are extensive, including the possibility to override contractual law, property rights and other legal principles. While the Act erodes the rights of stakeholders and creditors of a UK bank, it sets out a clear legal framework within which the BoE, the FSA and the Treasury may exercise intervention powers.
The February issue of KangaNews contained the article Bouncing the basis swap by Kimberley Gaskin. The article addressed the effect the introduction of the sovereign guarantee has had on the basis swap in the Australian capital markets.
The basis swap has traditionally been a finely balanced mechanism poised atop the combined flows of capital on and offshore. Examining the patterns of its movements traditionally involved an analysis of the flow of capital offshore from the Australian issuers, Aussie dollar Uridashi issuance, and Kangaroo issuance. However, in recent times the equilibrium of the basis swap (and the Australian markets) has been disrupted by the heavy one-way flows out of Australia, the sell-off on the Australian dollar, the decreased volume of Kangaroo issuance and the unwinding of dual currency structures out of Japan. Even before the introduction of the Australian sovereign guarantee in October 2008, the basis swap had been extremely volatile.
Against this volatile background there has been a surge of issuance from Australian banks in both the domestic market and in Japan. In 2008 Australian banks leveraged their credit profile in the Uridashi market to access Samurai bond markets as Japanese investors looked to place their yen. Despite the low cash rates in Australia and New Zealand, the currency yield remained attractive to Japanese investors. It remains to be seen the impact the sovereign guarantee will have on Australian banks' Samurai issuance. The article notes that the lack of domestic issuance by foreign borrowers is putting one-way pressure on swap spreads.
The article also examines the funding outlook for the rest of the year for the major banks and semi-government funding authorities such as New South Wales Treasury Corporation and Treasury Corporation of Victoria and suggests the US private placement market may become an increasingly attractive option for Australian corporates though this will depend more on the swap spreads than the basis swap.
On 2 March 2009, the International Swaps and Derivatives Association, Inc. ("ISDA") announced the review and implementation schedule for the draft Auction Settlement Supplement and Protocol and for the Credit Derivatives Determinations Committee, the so-called hardwiring process.
Through hardwiring, ISDA incorporates the auction settlement of contracts after a default or other credit event into its standard documentation. The Auction Settlement will amend ISDA's credit default swap definitions to incorporate the CDS settlement auction terms currently included in the auction protocols. It will also include provision for the ISDA Determinations Committee, which will make binding determinations for issues such as whether a credit event has occurred; whether an auction will be held; and whether a particular obligation is deliverable. The Protocol is expected to be open for adherence through 7 April 2009.
On 18 March 2009 the United Kingdom's Financial Services Authority ("FSA") published the Turner Review of global banking regulation. Lord Turner, chairman of the FSA, was asked by the Chancellor of the Exchequer to review the events that led to the financial crisis and to recommend reforms.
The Turner Review identifies three key reasons for an increase in systemic risk in the financial markets and outlines proposals to address perceived shortcomings in regulation and supervision.
The three underlying causes identified by Lord Turner are macro-economic imbalances, financial innovation of little social value and important deficiencies in key bank capital and liquidity regulations. In Lord Turner's view all three causes were based on an exaggerated faith in rational and self-correcting markets.
Lord Turner recommends fundamental changes to regulatory policy. Regulation and supervision should take a "macro-prudential" approach instead of focussing on firms individually. The Turner Review proposals include:
- fundamental changes to bank capital and liquidity regulations, including:
- an increase in required Tier 1 capital;
- a substantial increase in capital required to be held by banks against their trading books; and
- the introduction of a 'capital buffer' of highly liquid assets to protect against capital deficiencies in a downturn,
- regulation of shadow banking activities (including the use of off-balance sheet SIVs) on the basis of economic substance not legal form
- increased reporting requirements for unregulated financial institutions such as hedge funds
- regulation of credit rating agencies to limit conflicts of interest and inappropriate application of rating techniques
- greater international co-ordination of regulators to oversee and share information on large international financial institutions
- national and international action to ensure that remuneration policies are designed to discourage excessive risk taking
- major changes in the FSA's supervisory approach with a focus on business strategies and system wide risks
Lord Turner also posits the need to undertake a more radical review of risk measurement of banks' trading books than encompassed in the recent Basel proposals. Basel II is presented as promoting risk-taking in so far as it has the effect of lowering capital requirements during good economic times. This analysis underpins the suggestion that a counter-cyclical 'capital buffer' be introduced.
The Turner Review does not advocate a Glass-Stegall approach to regulation (the separation of deposit-taking from other more risky commercial banking activities such as proprietary trading).
While Lord Turner agrees that a European financial regulator needs to be created, as suggested by the recent De Larosière report, he appears to reject a strongly centralised model in favour of greater powers at a national level.
Published alongside the Turner Review is an FSA discussion paper which sets out more detail on specific policy proposals. Click on www.fsa.gov.uk/pubs/discussion/dp09_02.pdf to view this discussion paper.
This publication is included in Russell McVeagh's website on the Internet: www.russellmcveagh.com
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