---

Banking Bill

Amendment 40 40: Clause 22, page 10, line 16, after ““agreement”” insert ““to which the bank is a party”” I shall also speak to the other three amendments in this group. There are two pairs of identical amendments here; Amendments 40 and 44 amend Clause 22, which deals with termination rights in relation to share transfers, and Amendments 65 and 69 are in a similar form and amend Clause 38, which deals with termination rights in relation to property transfers. The amendments have been suggested to us by one of the leading City law firms and have been supported by the representative banking bodies. I am sure that the Treasury is aware of them. Clauses 22 and 38 do not restrict contractual overrides to default event provisions in contracts to which the failing bank is a party. As drafted, they appear to apply to contracts that reference the failing bank, even where the failing bank is not a party. This can arise in a number of derivative products, for example, credit default swaps, equity derivatives, bonds options and forward contracts. The failing bank may be the ““reference entity”” or the ““underlying share”” in respect of a contract between two other parties not connected to the failing bank. If we take the case of credit default swaps, these 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 share transfer when it is involved in set-off, netting or security interests as defined in Clause 48—a clause which we will have the pleasure of debating in due course. Amendment 69 makes identical changes to Clause 38. This is to ensure that the more complex contracts that exist in the world of set-off and netting are equally unaffected by Clauses 22 or 38. 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.