I move:
That, pursuant to Standing Order 125, it be an instruction to the committee to which the Investment Funds, Companies and Miscellaneous Provisions Bill 2006 may be recommitted in respect of certain amendments, that it has power to make provision in the Bill to amend the Netting of Financial Contracts Act 1995 to provide for an expanded definition of ‘party' for the purposes of the 1995 Act.
Last year, the Investment Funds, Companies and Miscellaneous Provisions Act 2005 provided for the establishment of common contractual funds that are not undertakings for collective investment in transferable securities. These are known as non-UCITS CCFs. Prior to the enactment of the 2005 Act, common contractual funds, CCFs, could only be established as undertakings for collective investment in transferable securities, UCITS, introduced by the 2003 UCITS regulations, namely, SI 211 of 2003, as amended.
The Netting of Financial Contracts Act 1995, as amended, provides certain super-protections in insolvency for certain netting and related credit support arrangements that come within its ambit. At it simplest, it allows for amounts owed to a party A under one or more financial contracts entered into by that party with another party B to be netted off, or offset, against any amounts due by party A to the other party B under separate financial contracts.
The definition of who is a party for the purposes of the netting Act is central in determining to whom the 1995 Act applies. In the netting Act, "netting agreement" is defined as an agreement between two parties only with regard to current or future financial contracts providing, inter alia, for their termination, the determination of termination values and the set-off of those termination values so as to arrive at a net sum. The concern in this context is the implications of the reference to “between two parties only” for the availability of netting Act protections for agreements entered into by the manager, or its delegate, of a common contractual fund in its capacity as such.
The netting Act defines the term "party" as "a person constituting one of the parties to an agreement". It is the view of the financial services funds industry that the term "party" should not be restricted to a single legal or natural person. However, whereas the reference to a netting agreement being "between two parties only" should not preclude either party to a netting agreement being composed of one or more legal or natural persons where they all share a single, identical interest in the contract and there is no differentiation of rights or obligations drawn as between those individual persons, this is not the position in the case of a CCF.
A CCF, whether formed under the 2005 Act or the 2003 regulations, is an unincorporated body established by contract, under which the participants, by contractual arrangement, participate and share in the property of the collective investment undertaking as co-owners. Pursuant to the deed of constitution of the CCF, the manager of the CCF, acting in its capacity as such, transacts on behalf of the CCF. However, whereas neither the 2005 Act nor the UCITS regulations specifically address the identity of the principal to transactions effected by the manager or its delegate, the view is, on the basis of first principles, that the participants in the CCF, that is, the unit holders, comprise the principal to such transactions.
In the case of a CCF, each participant shares in the assets and suffers liabilities, up to a maximum, in the case of liabilities, of the amount subscribed by it for units in the CCF, as tenants in common with all other participants and in the proportion that the nominal value of its holding of units bears to the aggregate nominal value of all units issued in the CCF.
Therefore, the participants in a CCF do not share a single, identical interest in an agreement for netting that may be entered into by the manager in its capacity as such; and there is a differentiation of rights or obligations drawn as between those individual participants. In short, what all of this means is that investment vehicles constituted as UCITS or non-UCITS CCFs cannot benefit from the Netting Act 1995. Likewise, there is a legal doubt as to whether partnerships, whether constituted as an ordinary partnership or a limited partnership, including under the Investment Limited Partnership Act 1995, benefit from the Netting Act 1995.
The proposed amendment to the Netting Act would deem the CCF to comprise a single party for this purpose and extend the super-protections of the Netting Act to CCFs.
