The Bank of Ghana has issued netting arrangements for qualified financial contracts in accordance with the Bank and Specialised Deposit-Taking Institutions Act, 2016 (Act 930) to be adhered to with immediate effective.
Accordingly, starting from January 2021, the general public is thereby informed that all “global standard documentation” for all dealings in financial instruments such as derivatives, securities repurchase and lending transactions, as well as commodities transacted in Ghana, “qualify as eligible financial contracts,” the Bank of Ghana revealed.
This means that the netting arrangements described under Section 134(5) of the Bank and Specialised Deposit-Taking Institutions Act, 2016 (Act 930) shall apply to the above listed prescribed types of financial contracts which must be observed with all diligence.
Netting is a general concept with a number of specific uses in the financial market. In simple terms, netting refers to offsetting claims arising from financial dealings between two or more parties to determine the net amount payable or receivable from one party to the other by combining multiple financial obligations. This goes a long way to help reduce risks such as credit, settlement, and other financial risks associated with financial contracts.
This netting arrangement is going to reduce the net exposure and further reduce credit exposure of banks and specialized deposit-taking institutions which is anticipated to bring some savings to the financial system.
All relevant regulatory authority in the financial sector such as the Bank of Ghana (BoG), National Insurance Commission (NIC), Securities and Exchange Commission (SEC) and the National Pension Regulatory Authority (NPRA) may therefore designate firms functioning under their jurisdiction, as qualified financial market participants eligible to deal in qualified financial contracts.
Detailing some of the provisions of the Act, in determining the rights and obligations between a financial institution and its client, priority shall be given to the termination clause in the initial agreement between the two parties of the eligible financial contract unless the Bank of Ghana prescribes a temporary stay on the exercise of a right.
“The temporary stay of termination provision shall be subject to the safeguards that the Bank of Ghana shall prescribe in order to facilitate the liquidation of the bank or the specialized deposit-taking institution and simultaneously minimize any disruption to the markets for eligible financial contracts”.
It should be further noted that the ‘net termination value’ determined under a financial deal is the net amount obtained after setting off the mutual obligation between the parties to an eligible financial contract in accordance with the provisions of the agreement undertaken.
The net termination value shall however be admitted by the parties to the financial contract only if indeed it can be validated as a claim of the client on the bank or specialized deposit-taking institution or vice-versa.
‘Net’ used in this context means what remains from the full amount after certain deductions are made.
The Bank of Ghana finally encouraged the general public to adhere to the notice and be guided accordingly when undertaking financial contracts.