malaysia focus

2
34 CORPORATE TREASURER APRIL / MAY 2015 In an effort to develop its domestic financial markets, Malaysia has enforced close-out netting on a large swathe of financial transactions. Corporate treasurers will benefit. Ann Shi reports THECORPORATETREASURER.COM Malaysia nets a financial winner I n theory, the development of close- out netting in Malaysia should give treasurers more legal assurance to manage risk exposures, cheapen transaction costs and even bring greater banking competition into the country. It is a positive development. As of March 30, all relevant trades, such as repo agreements, need to be netted in line with standards set by the International Swaps and Derivatives Association. In the event of a counterparty default, financial institutions and other market participants, including corporates, often reduce risk by netting off their total financial exposures to each other. This is especially relevant for transactions that bear high market risk such as derivatives and repos.

Upload: annnicolesilver

Post on 09-Apr-2017

82 views

Category:

Documents


1 download

TRANSCRIPT

Page 1: Malaysia focus

34 corporate treasurer april / may 2015

In an effort to develop its domestic financial markets, Malaysia has enforced close-out netting on a large swathe of financial transactions. Corporate treasurers will benefit. Ann Shi reports

thecorporatetreasurer.com

Malaysia nets a financial winner

In theory, the development of close-out netting in Malaysia should give treasurers more legal assurance to manage risk exposures, cheapen transaction costs and even bring

greater banking competition into the country. It is a positive development.

As of March 30, all relevant trades, such as repo agreements, need to be netted in line with standards set by the International Swaps and Derivatives Association.

In the event of a counterparty default, financial institutions and other market participants, including corporates, often reduce risk by netting off their total financial exposures to each other. This is especially relevant for transactions that bear high market risk such as derivatives and repos.

Page 2: Malaysia focus

april / may 2015 corporate treasurer 35

malaysia focus

thecorporatetreasurer.com

The new law, Netting of Financial Agreements Act 2015 (NFA), was put together to clarify a previously cloudy legal position on the enforceability of netting when dealing with a Malaysian counterparty. Previous provisions in a handful of acts in Malaysia gave no rise to a right to terminate an agreement or clear out an obligation when a counterparty defaults.

Transactions include over-the-counter derivatives, repos and securities lending and any borrowing conducted under the Malaysian Real Time Gross Settlement system. The above transactions need to be covered by a master agreement.

Malaysia is not the first nation to enact netting legislation. Hong Kong, Singapore, and Australia all have implemented their own versions, for example, and India is deliberating how to push more comprehensive netting legislation by the end of next year (see box, “India’s Net Woes”).

Why should i care?To understand netting’s principal benefits for corporate treasurers, it is worthwhile reading the Monetary Authority of Singapore’s (MAS) extensive, but very clear, consultation paper on the subject.

Released in 2002, prior to The Payment and Settlement Systems Bill coming into law, it addressed three major benefits, namely: cutting down on administrative paper flows, minimising losses to other counterparties in the event of one counterparty defaulting, and reducing the gross exposure to settlement risk across different time zones.

“Those who make lots of intra-company transactions…will clearly benefit the most”

india’s net WoesTo take a parallel situation to malaysia, india could have the capacity to enforce netting nationwide, the country’s finance minister arun Jaitley promised in a budget speech in February.

presently, private banks can practice bilateral netting in the event of insolvency, but the legislation (i.e. bankruptcy laws) on netting enforceability has been “ambiguous” for the public banks, which is why india has not encouraged netting practice across the board, Jaitley said.

The inconsistency is an obstacle in introducing netting to the country. india will launch a new bankruptcy regime that should bring a “comprehensive bankruptcy code” to provide “judicial capacity” to enforce netting nationwide, Jaitley said.

In brief, if one corporate counterparty is insolvent, without netting, the solvent counterparties are left with a gross exposure. This could lead to a risk of domino insolvencies of the other participants, including banks that have been extending credit to them.

In addition, due to different opening hours of trading, there is a settlement risk when a counterparty delivers a FX currency without having received the corresponding payment and the recipient becomes insolvent before paying. If all the FX transactions between two counterparties are netted, the gross exposure to settlement risk would be considerably reduced, the MAS stated.

more competitionIf counterparty risk is not your bag (and we strongly advise that it should be), the new netting law could spur more foreign lenders to the fray. With the assurance of manageable risks, “we hope to see more international financial institutions as well as corporates come into Malaysia”, said a Singapore-based lawyer consulted by the Malaysia’s central bank when drafting the NFA.

The lawyer further speculated the new law could help banks reduce capital required for corporate loans and increase available credit for corporates in Malaysia.

Because less capital needs to be tucked away to meet the regulatory requirements, treasurers should benefit from lower transaction costs, the lawyer said. For example, with lowered costs for managing

risk products, banks will be able to offer automation services for corporate payments and centralised fund management.

The head of a shared service centre of a large Malaysian conglomerate shared his view on the impact: “Those who take lots of intra-company transactions, such as a fully integrated oil and gas company, where there’s a lot of money transferred from downstream to upstream, will benefit the most,” he said.

The enforcing of the netting mechanism in Malaysia is “a good thing for all”, according to the association lawyer. “At least, I haven’t come across anyone who’s not happy about it,” he added. Let’s hope it delivers what it has the potential to. n

take With one hand…Well, if close-out netting does push banks to lower transaction costs, it is not all gravy for malaysia’s treasurers. The recent introduction of goods and services tax (GST) in april has caused quite a stir, with a reasonable chunk of bank services subject to 6% in levies.

in a very badly managed run-up to its introduction, the government failed to communicate exactly how these taxes would be applied, with many fearing the

notional amounts of any transaction were the target. Fortunately, a senior executive at the country’s royal malaysian Customs Department customs clarified on march 30 that new tax would only be imposed on fees in every banking transaction. phew.

in short, investments and holdings on bonds and financial instruments are exempt from GST, while for malaysian Electronic payment System services GST is imposed on the transaction charges.

Fees or charges in the provision of loans, advances or credit such as, where applicable, documentation fee, loan application fee, redemption statement request fee and/or processing fees will attract GST.

Transactions involving credit and debit cards are also exempt from GST, but the annual credit card fees would be subject to the new tax.

Additional reporting by Daniel Flatt