Legislation was recently introduced into New Zealand's parliament to reform various aspects of the law on payments finality and netting arrangements. The aim of these amendments is to increase the efficiency of, and reduce the risk in, New Zealand's financial system. The amendments have been promoted by the Reserve Bank of New Zealand in conjunction with the introduction of real-time gross settlement of high value interbank transactions (see International Financial Law Review, April 1998, page 55). It should be noted, however, that it is proposed that these amendments apply to companies and individuals as well as banks.
The proposed amendments in relation to payments finality mean that payments completed on the day of liquidation, bankruptcy or statutory management, but before the time of liquidation, bankruptcy or statutory management, will not be automatically reversed. The amendments require that the time at which a liquidator or statutory manager is appointed or a person is adjudged bankrupt must be recorded rather than simply the date of appointment or adjudication, as is now the case. The amendments also remove the concern that a bank could be put into statutory management with retrospective application.
Further amendments provide that netting agreements will generally be enforceable if a participant is put into liquidation, bankruptcy or statutory management. The protection applies to written bilateral netting agreements, specifically close out netting, netting by novation and payments netting arrangements. It also covers written multilateral netting agreements which provide for multilateral netting through a clearing house recognized for that purpose by the Reserve Bank of New Zealand. Even with the introduction of real-time gross settlement, some lesser value interbank transactions in New Zealand still rely on netting arrangements.
These amendments will therefore address the uncertainty as to whether commonly used netting arrangements are valid on liquidation.
James Aitken and Vaughan Spurdle
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