Kganyago intervenes over the passage of crucial amendments

Reserve Bank governor Lesetja Kganyago has intervened in an 11th-hour bid to get parliamentary authorities to pass crucial amendments to the Insolvency Act passed before parliament closes down at the end of the month.

Parliamentary authorities have ruled there will be no time before parliament rises to deal with the proposed amendments, which form part of the Financial Matters Amendment Bill. They have given the approval for only two matters in the bill to proceed: one relating to the establishment of a state bank by state-owned enterprises (SOEs); and the other providing for equality in the payments of military pensions.

On Wednesday, Treasury officials attempted to get the authorities of the National Assembly and the National Council of Provinces to agree to the inclusion of the amendments to the Insolvency Act as part of the bill that will be processed by parliament over the next few weeks.

Kganyago sent a letter to finance committee chair Yunus Carrim stressing the need for the amendments if SA is to comply with international banking requirements.

“If the proposed amendments to the Insolvency Act are not processed as part of the Financial Matters Amendment Bill there will be serious ramifications for local market participants and SA financial markets more broadly,” Kganyago warned in his letter.

This failure would have major implications for the ability of SA entities to transfer risk offshore instead of concentrating it in SA financial markets.

The Banking Association SA (Basa) has also written to Carrim, warning that the amendments “are critical to the stability of our financial market”. Basa MD Cas Coovadia said in the letter that US banks have already indicated they will have to terminate current agreements with SA banks if the Insolvency Act remains as is.

The proposed amendments to the Insolvency Act would protect financial obligations under derivative contracts from automatic incorporation into an insolvent estate.

Basa senior GM for the prudential regulation division Mark Brits explained that the amendments will provide the international banking partners of SA banks with certainty regarding contractual arrangements in the event of insolvency. “These are international contracts that financial markets use between parties to guarantee these payments will take place.” 

Brits said that from September, SA banks will be required to provide a guarantee of repayment under derivative contracts. If they are unable to provide this, international banks might decide not to transact with them on these particular contracts, or charge much more for them.

This would mean that SA banks will not be able to provide these products to their corporate clients who want to transfer their risks (related, for example, to commodity prices, exchange rates and interest rates) onto the banks, which then hedge this risk with offshore banks. It is customary for the parties to provide security for their obligations under these hedge transactions.

ensorl@businesslive.co.za