This is the essential meat of the Bill. Subsection (4) reads: "Where a person to whom subsection (1) of this section applies effects a contract with another person..." Is this the core of the legal case in the U.K.? Will the Minister take us through the implications of this? The provision seems to be pointing specifically to a vulnerability arising from the judgment in the U.K. Will the Minister clarify the position?
Financial Transactions of Certain Companies and other Bodies Bill, 1992: (Committee and Final Stages).
Section 1 agreed to.
SECTION 2.
Question proposed: "That section 2 stand part of the Bill".
Section 2 (4) applies to the contracts entered into by semi-State bodies other than the ACC and ICC. It provides that third parties dealing with such bodies in good faith may enforce such contracts notwithstanding that the semi-State body in question acted outside the powers given in the Bill.
The third party protection is analogous to that given to third parties dealing with building societies as set out in the Building Societies Act, 1989. The protection for third parties given by section 2 (4) is not relevant to either ACC or ICC as it gives protection against non compliance with provisions which do not apply to those two bodies, namely, the restriction on the range of purposes as provided for in section 2 (1) and the needs to comply with specifications issued by the Minister under section 2 (2).
This is not the only area of difficulty. Section 2 (1) (a) confirms the legal power of semi-State bodies to engage in financial transactions for the purpose of, first, reducing or eliminating the risk of loss arising from fluctuating interest rates, exchange rates, commodity prices or similar factors affecting their business or the business of another company in the group; second, reducing borrowing costs or the cost of other transactions carried out in the course of that business or, third, increasing the return on the investment. The provision confines bodies to transactions of an essentially hedging nature and broadly covers the semi-State bodies and their subsidiaries. As I said, these are effectively linked with the Building Societies Act.
I appreciate that this is a complex matter but am I correct in saying that the Minister is giving himself some powers in the course of legitimising trade in swaps? Subsection (2) (a) reads:
The exercise by a person after the passing of this Act of a power to effect contracts referred to in subsection (1) of this section shall be subject to and in compliance with——
(i) requirements specified by the Minister as to the type or types of contract that may be effected under that subsection,
(ii) any conditions specified by the Minister in relation to the particular person aforesaid, and communicated to the person by the Minister.
Are the Department of Finance now going to ride shotgun in relation to the bodies mentioned by the Minister in his Second Stage speech, set out constraints in relation to the nature of the swaps they may engage in and limit certain kinds of activities? What requirements do the Minister and the Department have in mind in relation to subparagraphs (i) and (ii)? I understand that a third party dealing directly with the person cannot be held responsible for someone who is engaged in certain transactions without the specific consent or authority which may be conferred under subsection (2) (a). Would the Minister outline the thinking of the Department of Finance as an element of departmental control is being sought that I do not fully appreciate or understand?
We are talking here about agencies which have been well tried and tested. The Department are familiar with the activities that they have been engaged in over the years. The purpose of this provision is to put the matter beyond legal doubt. If further State bodies wish to engage in this activity the Department would be concerned that the regulations are complied with.
Apart from swaps, it is not intended that ministerial consent will be required for day to day treasury transactions; that will continue to be a matter for the treasury management sections of semi-State bodies. They form part of the normal commercial activities of these bodies and it would not be practical or desirable for the Minister to become involved or have responsibility for individual transactions. As required by the Bill, the Minister, in consultation with each body or the relevant parent Minister, will specify the types of transactions which may be undertaken. He will also lay down general guidelines for the operation of these treasury transactions.
In response to Deputy Quinn, the guidelines are (i) the transactions may be undertaken only for the purposes related to a company's commercial borrowing or debt management activities and not for any speculative purpose as required by the legislation, and (ii) it will be the responsibility of the board of directors of the company to supervise and control the treasury operations of the company and lay down the parameters within which those operations are to be carried out by the management of the company.
In relation to swaps, the Minister's consent will continue to be required as these have the effect of fundamentally altering the basic financial terms on which the Minister had consented to borrowings. It is a totally different thing to approve a loan as against a swap which may give rise to fluctuations in relation to the currency involved.
Subsection (1) authorises persons, semi-State bodies or subsidiaries, to engage in swaps while subsection (2) states that the exercise of that power to effect contracts referred to in subsection (1) shall be subject to and in compliance with requirements specified by the Minister as to the type or types of contract that may be effected under that subsection. I am not an expert in this area and I am relying on my own briefing information but I understand, for example, that there is a range of contracts or swaps that one may engage in — asset swaps, forward swaps, amortising swaps, zero coupon swaps, callable swaps, swap options, voluntary swap, swap sales and reverse swaps. Is it conceivable that the Department of Finance may decide, in respect of Telecom Éireann for example, as distinct from the ESB and Aer Lingus, for some reason or another that the Minister should give a direction to the treasury management section not to engage in asset swaps or prevent them from engaging in amortising swaps?
What will happen in practice is that the Minister will issue approval in respect of a certain category. The treasury management section of the agency concerned would then have flexibility in relation to that category and the Department would not try to tie them down.
That is how I understand it; we were obviously talking about categories. Given the speed with which they happen, one could not be concerned about individual transactions. Therefore a cautious Department of Finance, having received good advice from the Central Bank and the National Treasury Management Agency, may well say that certain kinds of swaps have deficiencies or weaknesses. Is it envisaged, in order to protect the lending base of the company in question, so as not to put their repayments at risk, that the treasury management section would be prevented from engaging in certain kinds of swaps if the Minister considered that there was an unacceptable risk? Is that the intent?
Is the Deputy talking about swaps or their general activities?
I am talking about the power that the Minister is seeking from the House. In relation to the category of contracts and swaps which I have read into the record, before the treasury management section of the semi-State body can exercise this power they will have to seek clearance from the Minister through the Department that, for example, asset swaps, forward swaps, callable swaps and swap options are acceptable in principle.
We are talking here about swaps as a category for which the Minister's consent will be required. The Department of Finance do not wish to interfere with most of the commercial activities that the treasury management section of the semi-State body are engaged in but swaps are different. In respect of those categories the treasury management section would proceed with their activities but in relation to swaps, there could be fluctuations in the currency concerned as regards a fixed loan. Therefore, the approval of the Ministers concerned will be required for a category of swaps but not for the detail. It is intended that this will be given in respect of an annual programme involving an overall maximum nominal value.
The Minister's consent will be given based on four conditions — (a) swap agreements to be confined to licensed banks with a minimum level of assets, named insurance companies or, in the case of non-resident banks, those with at least an AA credit rating; (b) documentation to be in the standard form used in the swap market; (c) where debt has been swapped into fixed rates it is the responsibility of the relevant boards to set the maximum rates involved except in the case of Irish pound rates where the Minister for Finance may lay down a maximum rate and (d) details of swaps to be reported to the Department of Finance.
I thank the Minister for imparting that interesting information. However, this has taken on a slightly different character from the one I originally envisaged. Initially we are asked to give authorisation retrospectively for transactions which were taking place anyway and which were deemed to be legal and not subject to the cloud which was cast by the UK Government. We are now being asked to give the Department of Finance explicit policing powers in relation to a range of current ongoing activities.
This is the procedure at present.
Is the legislation reflecting current practice?
Exactly, in the case of swaps.
Is the Minister saying that somebody in the Department of Finance is tracking the treasury section of the ESB or Telecom Éireann in a specific deal by deal basis or on a category by category basis annually?
It is on a category by category basis annually. The day-to-day transactions of those on an ongoing basis are not tracked and the Department do not want in practice — or in this legislation — to take on that function.
In effect, the Minister is saying that what is being put into legislation here is a regularisation of current practice, including the reportage mechanism, annually or frequently, about the categories of activities in relation to swaps in which they get engaged and, presumably, the level of exposure at any time over a 12 month period.
Yes, and also setting down that if other semi-State bodies came into the swaps market they would know the practice for the future.
There is an implicit indemnity to third parties, notwithstanding any clearance that may have been given by the Department to a category of swap or contract between the Department of Finance and the ESB. If the Ulster Bank — or somebody else — entered into a contract in good faith with an agent their exposure and entitlements would not be invalidated because the person who had made the swap on the other side did not have explicit authority. In other words, this is a reassurance to the financial institution?
That is correct.
Even if somebody is technically, procedurally or indeed, as it will now be, statutorily offside in relation to a particular activity, their offside position would not invalidate the contract with a third party?
That is correct.
Question put and agreed to.
Section 3 and 4 agreed to.
Title agreed to.
Bill reported without amendment.
I wish to thank Opposition Deputies for agreeing to pass all Stages of the Bill today.