| Previous Section | Back to Table of Contents | Lords Hansard Home Page |
Credit default swaps are an important means for a counterparty to limit its exposure to a particular entity, and if the proper functioning of such products is called into question by the Bill, quite serious damage could be done to the market for such products. Against that background, Amendments 40 and 65 limit the application of the termination rights clauses to agreements to which the bank is a party; so if bank A is referenced in a contract between parties B and C, the default event provision will be unaffected by Clauses 22 or 38.
Amendments 44 and 69 are a little more complex. Clause 22(2) allows the share transfer order or instrument to be either completely or partially disregarded in determining whether a default event provision applies. The words added by Amendment 44 mean that the default event provision is to be left unaffected by the
14 Jan 2009 : Column 1295
When the Minister responds, I hope that he will also comment on the relationship between Clauses 22 and 38 and the EC financial collateral directive. It has been suggested to us that these clauses are not compatible with Article 4(l) of the directive, which requires that on the occurrence of an enforcement event, the collateral-taker should be able to realise the financial collateral as provided for in the article. I beg to move.
8.30 pm
Lord Davies of Oldham: I am grateful to the noble Baroness for the way that she explained the objectives behind her amendments, and I will certainly do my best to respond to the particular issue she raised. The amendments seek to amend the definition of a “default event provision” so that it only includes events of default in agreements to which the bank in question is a party. This definition would exclude any contract between two third parties that, for example, had a link to the bank. It will be recognised that the earlier government amendments took into account the necessity of covering that position.
Normally, the bank will be a party to contracts which contain events of default linked to SRR powers, or steps preparatory to this, but I sought to bring to the attention of the Committee in the previous group of amendments the fact that the Government consider that the flexibility to amend default event provisions that are part of a contract between parties other than the bank may indeed be necessary.
Suppose that party A provides an essential service to a bank, such as an IT facility. Suppose that party B in turn provides a service to party A which is necessary for party A to provide the service to the bank. The contract between B and A, setting out the service agreement between the two parties, will be likely to contain events of default. If an event of default is included which, for example, is triggered if stabilisation powers are exercised in respect of the bank, this could bring the business relationship between A and B to an untimely end. This could have serious adverse consequences for the bank, even though it was not a party to the contract, as the IT facility upon which it depended could be disrupted.
I put it to the Committee that there is a public interest issue concerned with these measures of resolution. In some circumstances it will be necessary to amend default event provisions in contracts where the bank is not a direct party. It should be remembered that in each case the termination event would have to relate to the bank in some way in order to satisfy the test set out in Clauses 22(5) and 38(5). The clauses could not be used to override a termination event simply because, for example, one of the third parties defaulted on its obligation to pay for a service that was provided to it by another party, which in turn it used to provide the service to the bank.
14 Jan 2009 : Column 1296
Without flexibility there may be potential for parties to redraft their contracts and their events of default in a way which evaded the provisions of the special resolution regime. I am sure that the noble Baroness will appreciate our anxieties. For example, the provision of a service could be subcontracted in such a way that a contract between two third parties, to which the bank was not a party, was an essential link in the chain of provision of a service to the bank.
I understand that there have been considerable representations on this issue. The example provided in those representations relates to the bank being a reference entity in a derivatives contract between two third parties. Of course the Government will listen carefully to concerns about this and related matters, but we do not consider that a blanket limitation of the nature proposed by the amendment is appropriate. We continue to think that various constraints on the powers of Clauses 22 and 38 should provide reasonable assurances. I have already noted that the event of default must in some way relate to action taken in respect of the bank, rather than a default by one of the third parties. As is the case for all their actions in a resolution, the authorities will be obliged to act proportionately and have regard to the special resolution objectives.
Those guiding principles underpin the whole of these operations. I also point out that this is an area where, in the light of further analysis and consultation, we have felt obliged to adopt a more restricted form of the powers than those taken in the Banking (Special Provisions) Act last year, which, for example, extended to allow changes to be made to the agreements of any person with a specified connection to a deposit taker or any of its group undertakings. We have learnt from experience, and we are seeking to make these clauses as effective and accurate as we can and to have limits upon them in terms of the impact on third parties, but we need to safeguard the special resolutions procedure. I hope that the noble Baroness will feel able to withdraw her amendment on the basis of the Government’s proper anxieties.
The second pair of amendments, Amendments 44 and 69, seek to carve out any default event provision that relates to a set-off or netting arrangement from the scope of the powers. I reiterate the Government’s commitment to putting in place appropriate safeguards to ensure that the market can have legal certainty in its dealings with banks. That is why we have put in place the safeguarding provisions of Clause 48—the power to protect certain interests—and why we have consulted on draft orders designed to protect set-off and netting agreements. It has been said before, but I reiterate that we are working closely with the expert liaison group to make sure that the outcome of this work achieves the right balance between certainty for the market and the necessary flexibility for the authorities to act quickly to resolve threats to financial stability and depositors. The consultation period on the recently published safeguards document has just ended and we will closely scrutinise the responses in advance of preparing the final regulations.
The Government accept that the scope of the termination clauses may cause concern with regard to how they may affect the integrity of a netting
14 Jan 2009 : Column 1297
I stress that we are concerned only with default events that relate in some way to the exercise of the powers of the special resolution regime which may lead—and in fact are intended to lead—to an improved position for the institution concerned. If, theoretically, a bridge bank committed an event of default following the transfer—for example, through failing to meet a payment obligation—the counterparty’s right to close out in those circumstances would be unaffected by these provisions. On the other hand, if a counterparty’s contracts were not transferred in a partial transfer and remained in the residual company, then the Government accept that there would be a case for allowing the party to close out.
I am all too well aware that this is a complex area. If the noble Baroness frowns at me, I know that she knows that I am having difficulty with a complex technical area that is no doubt entirely lucid as far as she is concerned, and therefore I say with less than my usual generosity how pleased I am to reply to her amendment. However, we intend to reflect on the points that she made in introducing the amendments and in the light of responses to the consultation document. If we think that we do not have it right, we will bring forward amendments on Report if necessary. However, I hope that from this discussion the noble Baroness will at least have derived some insight into the strength of the Government’s argument—or perhaps its less than convincing strength in one minor instance that I may have overlooked—before she considers how to respond.
The noble Baroness asked me, in particular, about the financial collateral arrangements directive. The power may not be used to override financial collateral agreements, which are protected by the directive and broadly must be allowed to take effect in accordance with their terms. I hope that the noble Baroness thinks that we have advanced the debate somewhat and that she will feel able to withdraw her amendment.
Baroness Noakes: I have gained some insights into the arguments on the government side but I cannot say that I am in any sense convinced by them. I think that the Minister said that these clauses cannot override the financial collateral arrangements directive, but there are those who would wish to see that more explicitly reflected. I shall reflect on it, as I hope the Government will if that is indeed the position.
14 Jan 2009 : Column 1298
My first pair of amendments relates to contracts to which the bank is not a party. There is a balancing act here. The Minister is saying that we want a lot of flexibility because we do not know what kind of contracts might be in a chain related to the bank. I understand that point but I am not convinced that these are likely to be the usual contracts. On the other hand, I am told that using a reference entity or an underlying share is perfectly normal in driving the derivatives and similar markets. Therefore, on the one hand there is the possibility of putting major uncertainty into those markets and, on the other, the possibility that the Government might, in some slightly ill-defined circumstances—if they had a failing bank and some of these complex contractual terms down the line—want to unwind them. At the end of the day the Government will have to decide where the balance lies. If the Government leave major uncertainty in relation to the legal effect of contracts such as derivatives, which are an essential part of the financial services industry, they could be destroying the UK as a location for such contracts and English law as the law governing them, which may take a whole raft of business out of UK markets. That is the main danger.
We then went on to the issue of set-off and netting which, with respect, I do not think the Minister dealt with any better. He referred to the consultation that has just ended, which I acknowledge, but that is in relation to partial transfers only. The powers in Clauses 47 and 48 to protect set-off and netting relate only to partial transfers and not to the provisions that I have been talking about, which are not related to partial transfers. I have some difficulty in seeing how the Minister expects to provide a form of legal certainty around those contracts. I think the Minister is saying, “We will be reasonable when we come to them, so we won’t upset contracts”, but that is not good enough for contracts that are traded in marketplaces. I am sure that we will discuss that later when we get to Clauses 47 and 48.
The Minister could see from the look on my face that I was far from convinced by his response. These are important issues, and the Government need to reflect on whether their theoretical imaginings of things that might go wrong when dealing with a failing bank are more important to them than the impact they will have on some financial markets. That is a really serious issue for the Government to reflect on between now and Report. The Minister has said that he will reflect on it. The Treasury knows the people who have been analysing this, and it should have further analysis available. I would not like to leave the Government in any doubt that we thought this a serious issue that needed to be resolved. I beg leave to withdraw the amendment.
8.45 pm
14 Jan 2009 : Column 1299
43: Clause 22, page 10, line 27, at end insert—
“(1B) A Type 2 default event provision is a provision of a contract or other agreement that has the effect that a provision of the contract or agreement—
(a) takes effect only if a specified event occurs or does not occur,
(b) takes effect only if a specified situation arises or does not arise,
(c) has effect only for so long as a specified event does not occur,
(d) has effect only while a specified situation lasts,
(e) applies differently if a specified event occurs,
(f) applies differently if a specified situation arises, or
(g) applies differently while a specified situation lasts.
(1C) For the purposes of subsections (1A) and (1B) it is the effect of a provision that matters, not how it is described (nor, for example, whether it is presented in a positive or a negative form).”
Lord Stewartby: I apologise to the Committee for being so dim but I cannot understand Amendment 43. Proposed new subsection (1B)(a) says that a provision,
in other words, whether it occurs or not. I do not understand that. It is bound to either occur or not occur, just as my dinner tonight was bound to occur or not occur. I think I have said enough.
Lord Davies of Oldham: I am not here to dispute whether the noble Lord’s dinner did or did not occur. We were discussing some technical government amendments on the special resolution procedure. As we recognised from the debate that we have just had, these are complex issues. The noble Lord has asked such a specific point that I shall have to write to him. The government amendments were considered with the greatest care. They are the products of significant representations and the noble Lord will give the Government the credit of knowing when a dinner has taken place or not. We are talking about events that are somewhat different from a dinner. This relates to the technical aspect of the description in the clause, but I will write to the noble Lord.
Lord Eatwell: Perhaps I can help the noble Lord, Lord Stewartby. Surely the provision is about contracts that define a referenced event that occurs, or contracts that define a referenced event that does not occur. In other words, the sentence covers two distinct events, not a single event which may occur or may not occur.
Lord Stewartby: I shall reflect on that.
Lord Davies of Oldham: I am grateful to my noble friend. I was hopeful that the noble Lord, Lord Stewartby, would recognise that my noble friend could not have been more explicit or accurate and has abrogated the need for me to write to him. I will write and say the same thing that my noble friend has just said.
14 Jan 2009 : Column 1300
Lord Eatwell: With relation to the noble Lord, Lord Stewartby, and his dinner, the reference could be to either his dinner or his breakfast, but not simultaneously to his dinner.
47: Clause 22, page 10, line 44, at end insert “, cases or circumstances;
(b) differently for different purposes, cases or circumstances.”
Clause 22, as amended, agreed.
Clause 23: Incidental provision
Clause 23, as amended, agreed.
Clause 24: Procedure: instruments
50: Clause 24, page 11, line 13, at end insert—
“( ) As soon as is reasonably practicable, the Treasury shall lay a copy of the copy share transfer instrument sent to it under subsection (1) before each House of Parliament.”
Baroness Noakes: I shall speak also to the other three amendments in the group. Two of them, Amendments 51 and 76, derive from the first report of the Delegated Powers and Regulatory Reform Committee in 2008-09, which is a signal to the Minister that we expect its recommendation to be taken seriously, and I shall start with those two amendments.
Where the Treasury makes a share transfer order, it must make it by statutory instrument subject to the negative procedure. There is therefore accountability to Parliament of a sort. The Committee will doubtless recall that the equivalent provisions in the Banking (Special Provisions) Act 2008 were the subject of a
14 Jan 2009 : Column 1301
The Bill takes new powers for the Bank of England to make share transfer instruments and property transfer instruments to give effect to its private sector purchaser and bridge bank powers. Those instruments are subject to no parliamentary scrutiny whatever. The Delegated Powers and Regulatory Reform Committee pointed out that a transfer by the Bank of England may be considered by some to be similar to temporary public ownership, the implication being that the parliamentary procedure should be the same. The noble Lord, Lord Armstrong, who is unfortunately no longer in his place, raised that point earlier this afternoon.
In any event, the committee stated in paragraph 4 of its report that,
- “the House will wish to seek a justification from the Government for the proposed absence of any Parliamentary procedure for instruments relating to transfer to a private purchaser, and in particular for instruments relating to transfer to a bridge bank. In the absence of such a justification, the House may wish to consider applying a measure of Parliamentary control over such instruments”.
Amendments 51 and 76 do just that. They give the same degree of parliamentary control over share and property transfer instruments as over share transfer orders.
I had already drafted Amendment 50 before the Delegated Powers and Regulatory Reform Committee’s report was available. I have left it on the Marshalled List as a possible alternative way forward. It requires the Treasury to lay a share transfer instrument before Parliament, but has no other parliamentary procedure attached to it. I should have tabled a twin of that amendment for Clause 41, but failed to do so.
Amendment 52 relates to share transfer orders, which are subject to parliamentary procedure, and raises a slightly different point. The clause places an obligation on the Treasury to act as soon as reasonably practicable in telling the Bank and the world in general, but there is no sense of urgency about telling Parliament. Amendment 52 rectifies that and ensures that Parliament is at least informed at the same time as everyone else.
It should be noted that subsections (2) of both Clauses 24 and 41 require the Bank to put the share transfer on its website and publish it in two newspapers. The focus appears to be on informing those who may have had dealings with the failed bank. There is nothing wrong with that, but it is certainly not the appropriate way for Parliament to be informed, which is why my amendment refers to the customary method of informing Parliament by way of laying a copy before each House.
| Next Section | Back to Table of Contents | Lords Hansard Home Page |