International derivatives rules prompt RBNZ, MBIE to look at law change

International efforts to remove some of the risks associated with over-the-counter derivatives products have spurred the Reserve Bank and the Ministry of Business, Innovation and Employment to look at changing the law to make sure New Zealand's lenders access to overseas funding isn't stifled.

Reforms led by the Group of 20 biggest economies will capture New Zealand-registered banks and could make it harder for them raise funds from overseas using derivative products to hedge against foreign exchange movements. About 15 percent of the country's banking sector non-equity funding could be put at risk and ultimately increase credit costs which would raise domestic interest rates.

"Ensuring New Zealand banks can comply with the margin requirements of their foreign counterparts will bolster the cost efficiency of our financial markets, assist in the effective mitigation of risks and promote the stability of the financial system as a whole," the agencies say in a consultation document released today. "If New Zealand banks cannot trade with a broad array of international counterparties, and cannot freely access (at competitive rates) liquidity pools in key foreign markets, this may result in higher costs of funding and a loss of cross-border competitiveness at individual institutions, increasing the domestic cost of credit."

Late last year MBIE and the Reserve Bank coordinated with the Treasury to engage with the local industry and overseas regulators to weigh up the domestic impact of the global requirements. They want feedback on proposals which would likely see the agencies recommend legislative change to remove barriers in New Zealand laws covering statutory management and creditor priorities.

"The agencies recognise the risk mitigation techniques that are increasingly being employed in global financial markets and the importance of ensuring New Zealand businesses can comply with emerging market practice around this," they said. "Targeted legislative change is the agencies' preferred response to support derivative margin arrangements in New Zealand, resolving potential barriers created by existing New Zealand law in an effective, timely and proportional way whilst mitigating the risk of unintended consequences from legislative change."

The consultation is open for six weeks with submissions closing on Aug. 24. The G20 wants to have the regulations in place on a staggered timetable running through to 2020, and the New Zealand agencies said their response to the consultation and final policy will respond to that timeframe.

(BusinessDesk)