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Seanad Éireann debate -
Friday, 14 Jul 1995

Vol. 144 No. 11

Netting of Financial Contracts Bill, 1995: Second Stage.

Question proposed: "That the Bill be now read a Second Time."

The Netting of Financial Contracts Bill seeks to provide for greater stability in an area of financial trading which is comparatively new. This legislation is needed urgently so that a forthcoming EU directive can be implemented which will, in effect, allow banks in member states to compete more effectively with their counterparts in non-EU countries. The fact that such a Bill is being introduced serves to reinforce the ongoing commitment of the Government to make the financial services sector grow as a means of producing high quality employment and wealth for this country.

The Bill is short, containing only five sections, and seeks simply to ensure that agreements between two parties to set off their mutual liabilities to arrive at a single net amount owing by one party to another are enforceable. The ability of both parties to reduce their mutual exposure to risk to the net amount owing between them at any time is clearly of benefit to both parties. The calculation of this net amount is called set off or netting.

I stress that it is only the netting of liabilities in respect of "financial contracts" that is provided for in the Bill. These are interest rate, foreign exchange and commodity based contracts, more commonly called derivative contracts. The liabilities of the same two parties in respect of other trading activities between them will not benefit from the provisions of this Bill.

Stability, through prudent risk management, is a substantial concern of financial services companies, particularly banks, in view of the large sums involved in their business and the volume of business they may transact with individual major clients. In the case of banks and other credit institutions, there are special requirements that they hold reserves in proportion to their risk exposure.

These requirements are embodied in the EU Solvency Ratio and Capital Adequacy Directives and their implementation is supervised by the Central Bank. The European Commission, however, is currently finalising an amending directive to the Solvency Ratio Directive which will allow supervisors, such as the Central Bank, to recognise the risk reducing effects of the type of set off or netting I described.

Netting agreements are already recognised in many countries, particularly non EU countries, and banks based in those countries benefit from increased stability since enforceable netting agreements reduces their exposure. Just as importantly, because they are permitted to carry lower reserves than their EU counterparts, they benefit from lower operating costs. The draft directive, which I expect to be finalised within the next two months, represents the Commission's response to concerns that credit institutions in member states are not disadvantaged vis-a-vis their non EU counterparts.

However, Irish law does not refer specifically to netting and so there are doubts about the enforceability of netting in cases of insolvency. The company law area contains, as far as the provisions relating to examinership are concerned, specific barriers to the operation of netting or set off. This Bill seeks to address the issue of doubt and specific barriers only to the extent that they interfere with the operation of netting agreements and even then, as I mentioned already, only to netting agreements that cover derivative contracts. The more general issues in relation to examinership legislation and the interpretation of that legislation by the courts are the subject of recommendations by the company law review group and are being considered in the first instance by my colleague, the Minister of State at the Department of Enterprise and Employment, Deputy Rabbitte. These issues have broader implications for business in general and will be dealt with by company law amendment, if appropriate.

The Government, however, is satisfied that the narrow case in relation to netting agreements should be dealt with separately because of the capital adequacy benefits on offer to banks and similar institutions, building societies and investment firms authorised under the investment services directive, for example, fund management companies, collective investment companies, unit trusts, etc., and recognised third country investment firms, when the forthcoming EU directive is finalised because of the need to maintain the most favourable environment for financial service, consistent, of course, with the highest regulatory and prudential requirements. In fact, the forthcoming directive will require those institutions seeking its benefits to furnish the Central Bank with written and reasoned opinion confirming that the netting agreements are legally enforceable. Many banks operating in the domestic market and from the International Financial Services Centre have made clear the importance they attach to the new directive. I understand that it was the undertaking to move ahead more quickly than many of our competitors in this regard that has secured one major international project for the IFSC already and that a number of major players in the North American market have signalled their interest in Dublin as a result of the enhanced overall package — combining advanced communications, quality labour, high specification accommodation and an accessible and responsible regulatory and fiscal environment — now on offer in the IFSC. I mentioned that the Bill is short and that its purpose is simple. However, some of its provisions are complex and highly technical, reflecting the nature of the transactions and the agreements which cover them.

I will now turn to the major elements of the Bill. Section 1 is the interpretation section. It contains standard definitions of the Central Bank of Ireland, the Minister for Finance and Companies Acts. "Party" to a netting agreement is defined as a person — relying on the meaning of person in the Interpretation Act, 1937, so that an individual, partner, company of any kind, etc. may be one of the two parties to a netting or master netting agreement. The term "money" is also defined, to include foreign currency.

The term "financial contracts" is defined to include those contracts, basically derivative contracts, which are contained in Annex III of the EU solvency ratio directive. Annex III is currently being revised and the definition anticipates the outcome of that revision, especially as regards the inclusion of commodity based contracts. It is the contracts in Annex III that the forthcoming directive on netting will recognise. Other contracts which are regularly used in the market but which are not recognisable by the Central Bank for capital adequacy purposes are included in the definition, in particular foreign exchange contracts of less than 14 days' duration and contracts traded on exchanges. Finally, provision is made within the definition of "financial contract" for the Central Bank to formally add to the definition any contract contained in Annex III or any contract contained in any revised annex or equivalent and for the Minister of Finance to include contracts within the definition, thereby allowing for the inclusion of new contracts which are rapidly evolving.

The term "netting" is defined to include the termination of individual financial derivative contracts, the calculation of the amount owing on each contract to either party and the addition of all amounts due and owing to each party to arrive at a single amount due by one party to the other. A netting agreement would contain provisions setting out the circumstances under which it would operate.

"Netting agreement" is defined so that any agreement providing for netting of financial contracts will be within the scope of the legislation. Such an agreement may also provide for security, guarantees and collateral to be supplied by either party — where one party to an agreement requires security to be supplied for use in the event that a net amount is owing to that party as a result of the operation of a netting agreement. It is sometimes the practice in the industry that two parties would have separate netting agreements in relation to interest rate, foreign exchange and commodity based contracts and, accordingly, master netting agreements are used to sum the outcomes of each netting agreement.

"Master netting agreement" is defined as any agreement where provision is made to offset the amounts due between two parties under a number of netting agreements. For operational reasons, two parties might have separate agreements in relation to their interest rate, currency and commodity based transactions but, in the event of the agreements being triggered, they would require that the net amount under each, in both directions, be aggregated. As with netting agreements, master netting agreements may contain provisions in relation to security, guarantees and collateral.

Section 2 deals with the powers of the Central Bank. The bank is given the power by this section to include in the definition of "financial contract" any contract included in Annex III of the solvency ratio directive or any contract added to same from time to time. The bank will give effect to any changes by the issuance of notice under this section. As I have already indicated, the definition of financial contract in the Bill is based on, but is more comprehensive than, Annex III of the relevant EU directive, so it is not anticipated that the bank will have to issue a notice under the section on enactment.

Section 3 deals with the powers of the Minister for Finance. The Minister for Finance is empowered to include, in consultation with the Central Bank, contracts or types of contracts within the definition of financial contracts. He is also empowered to exclude contracts within the scope of the definition — and therefore from within the scope of the legislation — whether or not they were included. The Minister exercises his powers under this section by issuance of regulations which must be laid before the Houses of the Oireachtas. As a safeguard, to ensure that contracts in Annex III are not inadvertently ruled out, any regulation by the Minister which excludes any contract from within the definition of financial contract cannot exclude any contract which has been included by the Central Bank under its powers at section 2.

Section 4 deals with the enforceability of netting, set off and collateral under netting and master netting agreements. This is the core section of the Bill. Subsection (1) (a) provides certainty, by disapplying any prohibitions which may exist in case law in bankruptcy, liquidation, examinership or receivership, or in the Companies Acts or the Bankruptcy Act, 1988, that netting is legally enforceable where a netting agreement exists. It also ensures that, where security guarantees and collateral are provided for in the agreement, a party will be entitled to use these against any net amount owing to it as a result of the netting provisions of the agreement. The provision is drafted so that its terms will apply to security in the form of money, securities, guarantees and secured guarantees, provided specifically to meet any net amount due under a netting agreement. Identical provisions are included in subsection (1) (b) in relation to enforceability of master netting agreements and security, guarantees and collateral given in relation to them.

Section 4 (2) ensures that the relevant rules of law and sections of the Companies Acts and the Bankruptcy Act, 1988, in particular, which deal with fraud, misrepresentation, etc., will not be set aside by subsection (1). It also seeks to ensure that neither a netting or master netting agreement can be enforced by virtue of section 4 where the terms of the agreement would render it void or unenforceable.

The final two subsections of section 4 provide for two other matters which are deemed necessary to remove doubt in relation to derivative trading in general. Section 4 (3) disapplies the provision in the Statute of Frauds, 1695, which obliges contracts with a duration of greater than one year to be committed to writing before being enforceable. This recognises the industry practice of screen to screen or telephone based trading, and that such trading is often in relation to two and three year contracts. Such contracts will now be immediately enforceable. Section 4 (4) clarifies, for the avoidance of doubt, that financial contracts are excluded from the scope of the Gaming and Lotteries Acts, 1956 to 1986, and that they always were excluded. Clearly, that legislation was never intended to apply to derivative contracts. Section 5 provides for the Short Title of the Bill.

I have tabled a number of amendments with which I will deal on Committee Stage. The majority of them arise from drafting changes only and, together with some others which seek to make explicit the intention of the legislation on guarantees, they serve to clarify the text as passed by the Dáil rather than add anything to the scope or powers provided for in the legislation.

The main purpose of the Bill is to ensure that banks and other parties trading in derivatives will have the certainty that netting agreements entered into by them for the purpose of reducing their risk exposure will be legally enforceable in the event of bankruptcy, insolvency or examinership, providing always that the agreements are properly drafted. The Bill will ensure, where security is provided by either party specifically to secure potential obligations in the event of a netting or master netting agreement being acted upon, that the security so provided can be set off against amounts owed to that party under an agreement.

My appointment as Minister of State with responsibility for the IFSC demonstrates the commitment of this Government to the continued development of Dublin as a financial services centre which can compete internationally. The decision by the European Commission to extend the deadline for new entrants to the centre by an additional six years coincided with the formation of this Government. This focused my attention on developing a strategy so that those extra years could be used to best advantage. Having said that, six years is a relatively short time. I am also intent on looking beyond that again, where appropriate, to seek to secure the long term expansion and development of the centre. To this end, I am currently engaged in a series of meetings with senior public sector and industry figures aimed at developing an agreed way forward to capitalise on the opportunities provided by the extension of the deadline.

There is still a very significant flow of new projects being brought forward by IDA Ireland. The desired expansion for the centre will come naturally as the number of IFSC companies builds, as the range of products and services on offer grows and as the experience and reputation of IFSC companies increases.

I have set the following objectives for the economic development of the centre. First, to substantially increase the level of direct employment from the current level, which is approaching 2,500, over the next five years to bring the total to between 4,000 and 6,000 — 6,000 is the figure I have in mind. Second, to create at least 1,000 jobs in related back office activity. The provision of 5,000 additional jobs over a five year period by these first two aims is a reasonable target. Third, to maximise consequential employment in associated legal, accounting and general services — such as software development and security, cleaning and catering — in the domestic economy.

In addition, I have set up a long term review group under my chairmanship, consisting of representatives at senior level from the Department of the Taoiseach, the Department of Finance, the National Treasury Management Agency and the IDA, to plan in a concerted way the long term development of the centre.

I am intent on taking a pro-active role in the development of the centre which has now achieved its critical mass stage and is accepted as a player on the international stage. With this in mind, I recently visited Boston and New York and met some of the most senior figures in the financial world, many of whom have interests in the IFSC or are interested in locating there, to hear at first hand their views on Dublin. It was clear to me that the chief executives of major companies are acutely aware of the centre and the benefits of locating there, and many of them visited Dublin to see for themselves.

I intend to appoint an international ministerial advisory committee to advise on realisable targets to ensure that the great progress made in establishing the IFSC continues to gain momentum and is maximised. As part of my overall strategy for the centre I intend to ensure that a continuous programme of legislative change, consistent with a well regulated environment, is maintained so that we can keep our competitive position. This Bill is one such step in that programme and I commend it to the House.

I welcome the Minister of State to the House and compliment him on this legislation. I also compliment his office on its willingness to facilitate Opposition Members who wish to be briefed on this highly technical Bill. That is a good way to make progress and I thank the Minister of State and his officials for the courtesy and consideration they have shown us over the last few days.

As the Minister of State said, this is a highly technical Bill which achieves three fundamental objectives. It brings legal certainty to an area where there was some ambiguity. The concept of netting is not entirely a novel one, as the view was often taken over the years in company law that netting arrangements between creditors offsetting separate bills were acceptable. However, as the Minister of State pointed out, there are very good and cogent reasons why this issue should be put on a statutory basis, not least because of the sheer volume of trading involved, as we saw recently in the Barings Bank case, and the speed of the transactions. The whole issue is focused on the interesting area of derivatives which is a relatively new area of trading where the exposures can be massive. The Bill brings legal certainty where there was ambiguity and risk, which is welcome. The steps which have been taken in the Bill are, by and large, ones which all sides of the House can accept.

The Bill anticipates a Directive which is slowly winding its way through the machinery in Brussels. In that sense, it achieves the third objective, in that it gives the Irish Financial Services Centre a distinct edge on its competitors. While the netting of financial contracts is common in the United States and the Far East, it is not dealt with on a legislative basis in most EU states. By taking this step and changing a factor in the environment of the IFSC, the Government is putting the centre in a very competitive position to take advantage of changes in a rapidly changing environment.

The Minister of State adverted to the fact that the promise of early legislative action in this area was critical to the final decision by Merrill Lynch to site in Dublin rather than in Zurich which is a well established hub. That decision by Merrill Lynch last December adds considerably to a long list of prestigious companies locating in the IFSC. That company, which is extremely well regarded in the United States and internationally, will ultimately transfer the bulk of its non-dollar capital marketing activities to Dublin. The competition on that occasion was very real. The main competition we faced was from Zurich.

The Irish Financial Services Centre has been a remarkable success story in Irish political and financial life and the begrudgers and cynics have been shown to be people of straw. There has seldom been such a success which can be so readily identified with a small number of individuals. The former Taoiseach, Mr. Haughey, had the tremendous political courage to grasp and run with an idea and push it through. There was a positive ocean of cynicism at the time from financial institutions and the media. There was a degree of political cynicism and harassment, which we all understand because we live in a political world.

However, there were politicians on all sides who saw the value of this project and pushed it forward. The IFSC is also an enduring tribute to Mr. Dermot Desmond, who showed incredible foresight and who, like Mr. Haughey, was harried by his peers. There was a great deal of political and institutional jealousy of both men. It is interesting that in a few short years their dream has been realised to the extent that it has.

It is extraordinary that over 240 operations have received primary licences to operate through the IFSC. When the IFSC proposals were first mooted, I wondered whether it could ever get off the ground and whether we would ever see Ireland becoming a financial services centre; this was probably due to my cynicism as an ex-employee of the Department of Finance.

We have unique advantages which I do not think we recognise. We have a unique time zone advantage being between the far eastern and US markets. We never saw this advantage and did not wish to exploit it before people like Mr. Desmond and Mr. Haughey proposed the establishment of a financial services centre.

We have another extraordinary advantage in the young men and women who are Irish ambassadors in every financial service centre in the world. A few years ago I visited Hong Kong and was amazed at the number of Irish graduates I met, particularly from UCC but also from other universities and third level institutions. They were the cream of the crop and we exported them to enhance and bolster financial service institutions abroad. This expertise and extraordinary resource can now be turned to Ireland's advantage.

The IFSC is an extraordinary success. It has 240 licensed operations; this figure does not include 100 treasury and 100 insurance facilities which are managed on an agency basis through the IFSC. The Minister is right in saying it is appropriate that there should be a partnership between the financial services of the State — the National Treasury Management Agency, the Central Bank and the Department of Finance — the management of the IFSC, development corporations and the financial institutions which have set up in the centre to enhance and expand the centre. The Bill is welcome and it shows there are people in the public sector willing to think ahead, to seek advantage and with the courage to exploit it.

There are areas of innovation which the Minister and the task force he is establishing should keep in mind. They should consider two major changes which are taking place in the financial world, one of which is evident and the other less so but will become more evident in the years ahead. The first is the situation in Hong Kong. The ending of its colonial status offers a unique opportunity to Ireland. A significant proportion of the European graduates who work in the financial services sector there are Irish citizens and are the products of Irish third level education institutions.

The ending of Hong Kong's colonial status provides two opportunities to Ireland. Its financial services centre gained its predominance because of its location, the fact that it initially operated a relaxed regime, but has not done so the same extent in recent times, and because wealthy people in the wider Pacific region were willing to invest their funds in it because of its relations with London and they saw it as a centre of excellence with a great deal of stability.

After 1997 several of these advantages will disappear but only for a relatively short time because I think Hong Kong's importance will not cease but will re-emerge. There will be a window of opportunity for a relatively short time. The review group which the Minister is contemplating should look at the window of advantage which will result from the demise of Hong Kong as a colonial power in 1997. Through the Department of Foreign Affairs and the alumni association of colleges, which includes UCD, the Minister could establish people on the ground in Hong Kong who are well familiar with the realities of life and the fears of banking and financial institutions there. I am not suggesting we should unduly take advantage of fears and perceptions, but if we do not exploit this opportunity somebody else will. The Minister and the task force he is setting up should consider the issue of Hong Kong and further innovations which would facilitate the transfer of institutions and operations from Hong Kong to Ireland.

We seem to have an almost self-destructive attitude to going after business aggressively. Since the early 1970s Canada has been exploiting this reality through the operation of relatively flexible investment, visa and passport operations etc., and it has attracted a large number of people. We have been discouraging ourselves because we came into this field at a late stage and we are doing ourselves a disservice.

Paradoxically, the other extraordinary advantage which will appear in the financial services area over the next 20 to 25 years will be the re-emergence of China as an economic giant. As has been the case historically, this re-emergence will depend on capital movements from Europe and the United States. As happened in the past, a number of centres will provide the locus of this capital movement. Oddly, while the demise of Hong Kong's colonial status could provide one short term window of opportunity, a longer term one will arise in the Far East. Ireland has a unique time location, we have improved our telecommunications system and we have the talent, infrastructure and the base in law to operate. This could be another focus for the Minister and the task force.

The Minister has tabled a number of amendments which we will discuss on Committee Stage. Accounting bodies have circulated correspondence, which I think the Minister has received, about concerns which are somewhat arcane. When he is responding he may take the opportunity of informing us of how he has met these concerns. While we are all anxious that Irish law contains the flexibility to respond to a changing environment, we also wish to ensure the changes we make will not become an opportunity for people who are not necessarily motivated by the highest ethical considerations.

There is logic in what is being proposed in this Bill and we will facilitate the Minister in every way in giving it a speedy transition through this House.

I welcome the Minister and compliment him for his clear speech which simplified what in some ways is a complex subject. I also congratulate him on the forward looking nature of what he had to say.

In some respects, the most important part of the Minister's statement was not strictly relevant to the Bill. At the end of his contribution, he emphasised the commitment of the Government to the future development of the International Financial Services Centre and gives as an indication of its commitment the appointment of a Minister with specific responsibilities for the future guidance and direction of the centre.

I liked the fact that the Minister is thinking far ahead, not in terms of one or two years. I was struck by him saying that six years is a relatively short time and I suppose it is when one thinks about a long term strategy. The changes in financial practice and technology over the past six years have been truly extraordinary and there will be more in the next six years. Therefore, the need to constantly look ahead is vital if the International Financial Services Centre is to remain at the forefront.

The Minister also said that he intended taking a proactive role in the development of the centre and I believe him. I would never accuse the Minister of being laid back in his approach to matters but it is good to know there will be a dynamic hands on approach with the Minister directly answerable to the Government for what happens.

Is the membership of the long term review group not unduly restrictive and narrow and should other groups not be involved? The Minister's Department, the Department of Finance, the National Treasury Management Agency and the IDA will plan the future development of the centre in a concerted way.

I agree with Senator Roche about the quality of briefing offered by the Minister's Department. The fact that Departments offer briefing on an issue of this kind on a cross party basis is a welcome development. I compliment the civil servants who gave the briefing. They were extremely helpful and clear and are a credit to the Minister's Department.

The International Financial Services Centre has been one of the great success stories of the past decade and continues to be. Senator Roche raised the question of its origin. History may recall who the true begetters were but the credit must go to two people in particular. The idea of setting up the centre was that of Dermot Desmond, who developed in considerable detail the component parts of the centre and saw its possibilities, and Charlie Haughey, the then Taoiseach, who was prepared to recognise these possibilities and run with it.

Senator Roche also referred to the cynicism in certain circles at the time in the face of the hugeness and novelty of the concept. I remind Senator Roche and others that this has always been the reaction to almost every major development. The first major developments made by the State were the Shannon scheme and setting up the ESB. On that occasion, all the Irish banks said it could not be done and would not co-operate. The engineering profession to a man — there were no women — said the same. Only a handful co-operated. The Irish Times thought it was a socialist conspiracy to bring the Teutons in by the back door. Almost every major idea had its critics and cynics at the time of its conception. We should all be grateful they were not listened to in this instance and that the centre went ahead.

What was once a derelict area in the heart of our city is now a thriving, prosperous and, for the most part, architecturally pleasing area. However, it still needs a great deal of humanising. It requires more shops, homes, pubs and hotels and the centre is moving in this direction. It would be a pity if it went the way of many major international financial centres in other cities which tend to have a soullessness and lifelessness about them after 6 p.m. If the centre can develop in a way which allows it to be a thriving and living community, so much the better.

The language in this Bill is complex. It is no accident that the longest section sets out the definitions. Some of them are hard to understand, especially for somebody who is not very financially literate. When I first saw the Netting of Financial Contracts Bill, I thought it had to do with marine matters. I have learned a great deal by having to plough through it and I am sure other Members have as well. I compliment the Minister and his scriptwriter for the clarity of language and the way in which he pointed out the issues at stake.

The net point of the Bill is clear. It seeks to ensure that agreements between two countries to set off their mutual liabilities to arrive at a single net amount owing by one party to another are enforceable. That is straightforward and I do not intend to make it more complex. There are some complexities about which I want to ask the Minister on Committee Stage but we need not delay the House in commending the Bill.

I welcome the Minister and congratulate him on introducing the Bill, which I welcome unreservedly. I would like to highlight some aspects of our approach to the International Financial Services Centre. Although this has already been commented on by Senator Roche and Senator Manning, I want to single out one aspect of this approach which is worthy of emulation in other spheres of our national life. This Bill is a prompt response to competitive pressures. It has been produced to remove an obstacle to attract firms to locate in the IFSC. It is an appropriate, simple and fast response. A situation arose in the marketplace and we are now moving quickly to address it. This is not a coincidence. It is happening because a particular approach has been taken all along with the International Financial Services Centre and this is the latest example of what has been happening through the history that has been generously commented upon by Senator Manning.

From the beginning it was recognised that constant legislative change would be necessary to remove obstacles as they arose and to keep the centre fully competitive in the cutthroat world of international mobile investment. The mechanism used for this was a high powered committee which acted as a bridge between the financial community, the IDA and the Custom House Docks Authority on the one hand and the Government of the day on the other. Now it will be strengthened by the two new committees, the long term review group which the Minister set up under his own chairmanship and the international ministerial advisory committee. It seems this grouping, since the foundation of the International Financial Services Centre, identified problems, suggested solutions and passed them on to the Government. Time after time, this quick and rapid action has resulted in the formation of new legislation that specifically addresses the issues raised in the International Financial Services Centre and that approach has been a central part in making the centre such a success. We can all be proud of the IFSC. The Government's approach and commitment to the project have been shown by the appointment of a Minister with specific responsibility for it. I wish the Minister well in his task and I am sure he will bring his legendary energy, enthusiasm and hands on approach to bear on it.

I would like the IFSC model or a group which identifies problems extended to other national priorities. Some problems need constant monitoring and adjustment of the legislative framework. The IFSC model should remind us that Governments can act quickly and responsibly when they put their minds to it. The solution to some problems depends on the laws which are in place to deal with them. We should extend the model of the committee which the Minister has been using in the IFSC to other national priorities, in other words, we should set up an action group in the areas concerned, charge it with responsibility for monitoring the situation and then ask it to identify matters which can be improved by new legislation.

I am not suggesting that all problems can be solved by legislation. If they could, the political process would be more popular that it is. However, in some cases progress is hampered by the fact that legislation is falling behind the pace of change or does not exist to deal with new problems which arise. This applies to the nuts and bolts of the problem.

An example of this is the drugs problem which is constantly raised in this House. Nobody questions the seriousness of the drugs problem and the threat it poses to people living in disadvantaged areas. Many people agree that the Garda Síochána and the Customs and Excise are seriously hampered by the way the drug barons and dealers can exploit the law. The law is not strong enough to deal with this problem. Perhaps we need new laws to effectively address it and lance that boil; in other words, special legislation is needed for special situations, as in the case of the IFSC. The drugs problem is an example which springs to mind but I am sure this approach could be used to great benefit in other areas.

The IFSC model provides us with an administratively simple and inexpensive way to operate and to respond quickly and effectively to rapidly changing situations. I am sure this system of speedy legislative change to face up to immediate problems can be used in other ways. The IFSC is an example of what can be done if we take action in certain situations. It provides useful, high quality employment and is producing a bonanza in tax revenue. It also provides a flagship for the services sector, rather than the manufacturing sector, which is the key economic reality.

Senator Roche mentioned Hong Kong, which I had the opportunity to visit. We should not take our eyes off its success story if we want to create jobs in this country. One of the benefits of the IFSC is the legislative model before us today. We should try to emulate that on a wider basis in order to tackle problems in a simple, speedy and responsible way.

I congratulate the Minister and wish him well with this legislation.

I welcome the Minister of State, Deputy Gay Mitchell, to the House. This is my first occasion to be in the House with him, although it is not our first occasion to exchange views on a variety of issues.

The Government must be complimented on the speedy way it has reacted to the ever-changing and complex world of financial services, especially the derivatives market. I am impressed by the Minister's commitment and enthusiasm — this was acknowledged by Senator Manning and Senator Quinn — to Dublin. People accused me and my late father of being parochial in our approach. However, the Minister is the epitome of a Dublin Deputy as regards protecting not only the interests of his immediate constituency but of the wider Dublin area.

I will not suggest that the IFSC is the Minister's toy, but I have been impressed in recent months by his attitude and approach to this success story. It reminds me of a small boy who treasures his most prized possession and informs everyone of its importance. The Minister has batted well for Ireland as regards the IFSC and I hope he continues to do so.

Derivatives have been described as a banking time bomb. A world banking meltdown could occur if such financial risk management got out of control. The world derivatives market is worth $12 trillion a year. Seven or eight of the world's top 20 banks could go under in a 24 hour period if their exposure to risk was not covered. This almost happened last year when the bull run resulted in investors buying positions in anticipation of the market's direction. They then watched in horror as 40 per cent of their profits disappeared with the collapse of the bond market in January. This shows the vagaries of such financial risk.

The Irish banks are active on the derivatives market. They have a gross exposure of £144 billion, which is an astonishing amount of money to play around with in the market. This represents 40 per cent of AIB's shareholders' funds and 45 per cent of Bank of Ireland's shareholders' funds. Even in the event of a meltdown, there is no risk of either bank going under. These percentages include the two areas, fixed interest rates and foreign exchange, in which the derivatives market is operated by banks and financial houses. Derivatives have been in existence in one form or another for hundreds of years.

This Bill refers to a law on fraud which dates back to 1695. It originated in the House of Commons and the parliamentarians at that time were mainly people of property and finance. Consequently, their priorities had little to do with the public interest but had everything to do with property, the maintenance of their lifestyle and the manner in which they did business with their fellow man — and I say "man" because it accurately fits the situation.

Derivates have been around for hundreds of years but their growth in popularity in the last three years is nothing short of phenomenal. Derivatives are usually used to reduce a company's exposure to volatile interest rates and foreign currency movements. The treasury department of major corporations usually use them in a defensive manner to reduce the company's overall liability. However, greed is never too far from the surface and the temptation to speculate has proved irresistible. Consequently, some of the world's largest corporations have been burned badly as a result of speculative investment in the derivatives market. The most recent and famous of these is Barings Bank but the list is breathtaking in its diversity and variety.

Some examples over the last 12 months include a Japanese oil company, which lost US$1.5 billion trading in foreign derivatives; Metallgesellschaft, the German industrial conglomerate lost US$1.5 billion on oil futures trading; mutual funds run by Piper Jaffray companies lost US$700 million of their value investing in mortgage derivatives; Eastman Kodak revealed last month that the cost of unloading its interest rate derivatives portfolio had risen to US$220 million; the UK pharmaceuticals company, Glaxo, a high-flyer in the equities market, invested US$1 billion in derivatives and now admits to making losses of £220 million sterling; Procter & Gamble — you cannot use any washing powder without Procter & Gamble being involved at some level — lost US$157 million on leveraged swaps with Bankers Trust; and the list, which includes greeting card companies, paper manufacturers and brokerages, goes on and on.

This area needed to be regulated stiffly. The point has already been made that the Government has moved in advance and in anticipation of our European partners in this regard, and this needs to be emphasised. I am not surprised because the guiding hands which initiated the concept of the International Financial Services Centre in the mid to late eighties, have maintained a steady grasp on the tiller ever since, irrespective of the changes of Government. This group of people — Mr. Dermot Desmond has been mentioned here but I am sure there are many more — has ensured at every step of its development that Ireland is not only in touch and aware of the complex and accelerated changes in financial services but that we are ahead of the posse.

Dublin is fast overtaking many of the more traditional financial services centres as a leader in this field. The impressive figures which have been conveyed by the Minister in terms of job creation targets and jobs realised is but one indication. As late as yesterday, the Minister was present at yet another unveiling of objectives realised at the IFSC. The chairman of IDA Ireland, Mr. Kieran McGowan, stated that not only had the original targets been reached but they had exceeded the aspirations of some years ago and that a total of 50 companies had set up this year with many more to come.

Although this legislation and the activities of the IFSC bear little relation to the world in which we normally operate, it has proved to be an extremely important net contributor to the economy. I have no doubt, indeed I have every confidence given the present Minister's enthusiastic commitment to developing the potential of the centre, that, while it will never replace London as a major centre of financial services, in years to come Dublin will spring to traders' lips in most financial markets around the world whenever financial services are being discussed.

Briefly, in the context of the Bill, I want to examine the term "derivatives". The term seems to have been skirted around to some degree — not by omission I hasten to add. Derivatives are a financial product with a jargon all their own. I am not going to suggest that we adopt all the words, such as "butterfly", "diagonal calendar spread", "ladder", "strangle", "naked options", "futures", "options", "puts" and "calls", etc.

That is like a sex manual.

That is it exactly. Senator Manning has anticipated my remarks. If it was not in the financial services context, I might be accused by the Chair of being somewhat prurient in using such language.

Derivatives are now a major part of world finance. The reason the word "derivatives" is used is that all these financial products are derived from underlying assets, such as corporate shares, gilts, bonds, commodities and foreign exchanges. The key derivatives are options; where an option is taken on a gilt or equity, there is no obligation to buy but one pays for the privilege. The Bill is directed towards the area of interest rates and foreign exchange.

At its simplest, the consumer is bombarded by banks and building societies encouraging him to take out mortgages for a two year period at a fixed rate of interest; he can then manage his finances more easily. He will know the portion of the household budget which will be paid on the mortgage for the next two years. With a variable rate, which depends to a large extent on interest rate fluctuations, one could find — as I did since I have a variable rate mortgage — that, as a result of the interest rate increases earlier this year, one's mortgage repayments have risen by several pounds per month. In the context of a fixed rate mortgage, at least one can manage one's finances reasonably well.

Expanding that example into the banking and corporate sectors, how much more advantageous is it for the treasury department of a bank or corporation to be able to anticipate their liability in the area of repayments on loans over a specific period of time? For example, if the rate is fixed for what is usually a five year period, or if one was purchasing foreign currency, one could make an arrangement with another party to buy and sell foreign currency at a specific rate for a specific length of time. It is only in the event of a default occurring with either party when the initiating party is unable to recover their losses that a financial meltdown would be triggered. In that context the Bill is welcome. It sends a strong signal, particularly to the US and Asian markets, which are already more advanced than those in Europe, that we are a safe house in which to play.

I do not wish to burden the House further on what everybody agrees is technical legislation. I enthusiastically endorse the comments which have been made by my colleagues on all sides of the House, especially the Minister. In endorsing his commendation of the Bill, I wish him continued success in his efforts to attract jobs not only to Dublin but to the whole country.

I thank Senators for their kind words of encouragement. I join them in praising the civil servants who prepared the Bill so expeditiously and efficiently. It is a short Bill but it is technical and it required hard work.

I share the view of Senator Roche and others about the begrudgers and cynics. They have been put in their place on this subject and when the Dublin Olympic bid is made I hope they will be put in their place again. We do not believe nothing can work in Dublin; we should begin from the position that everything is possible until proven otherwise and when we have a scientific report stating we should do something, we should do it.

I join with those Members who congratulated the former Taoiseach, Mr. Charles Haughey and Mr. Dermot Desmond not only for having the vision to put this idea into practice but for taking on the begrudgers. I have a low opinion of these cynics and we as politicians, who are more prepared to follow up ideas, should be prepared to take them on. We are elected to represent the public and, having that mandate, have a better view of their needs than so-called experts and cynics.

Senator Roche referred to the quality of the manpower resource and from my discussion with players located here and abroad, I know that is a significant factor in locating here. A central point in the success of the centre is its status as a partnership between the State, State agencies and the private sector and I intend that shall continue. He also mentioned Hong Kong; I have already undertaken to keep an eye on that market.

He mentioned the points raised by the Consultancy Committee of Accountancy Bodies of Ireland and I will respond to those points, the first of which related to insolvency and the second to balance sheet classification. On the first point, the text of section 4 is designed to ensure that case law and general principles of law in so far as they relate to bankruptcy, insolvency and receivership do not prevent netting agreements, etc., from being enforceable. The term "insolvency" is used in its general sense and is intended to cover rules of law relating to liquidation and examinership.

However, the section goes on specifically to mention the Companies Acts, which cover each case or type of liquidation even where insolvency is not an issue, as in a voluntary liquidation. Those Acts also contain the statutory provisions on examinership and are also disapplied when it comes to the enforcement of netting agreements. Accordingly, while I am aware of the views of the CCAB, I do not agree with the point it raises.

On the second point, the Bill is silent on balance sheet classification, etc. It is not intended to address such an issue and so it is not clear why any such amendment should be necessary. I would have thought the CCAB and other similar bodies would be the primary groups to be consulted if such changes had been envisaged; they might even have been the authors of such change if necessary. However, they were not consulted as no change is intended. I do not propose to fill legislation with disclaimers without real need and will not do so in this instance.

I am grateful for the kind comments and welcome of Senator Manning and other Senators. He is right to say the Government has set targets and has made a commitment to achieve them. He asked whether the long term review group was too restricted. Of necessity, that group will be like a public service agency because I will need to discuss confidential matters with it, perhaps relating to legislation. Separate to that I am about to set up a ministerial advisory committee. It will feature people who know the markets and have international experience, who will give me the private sector view. I in turn will be able to use the other group as a vehicle for advancing that. I note the other comments made by Senator Manning about critics; I already dealt with that point and I agree with his sentiments.

Senator Quinn singled out one example as worthy of being followed, which was the response to market need. I agree with him. Perhaps in future we might not always wait until we have a long compendium of measures before bringing legislation before both Houses. Shorter Bills to deal with specific needs might be a better way to continue to meet our objective in the IFSC, which is to respond to market needs and ensure legislative requirements do not hamper its advance, once it complies with regulation.

Senator Mooney's list of potential vehicles indicates how complicated this area is. To add to the confusion, there could be a hybrid of these vehicles, which shows how fast the market is moving. I will bring his comments on the Statute of Frauds, 1695 to the attention of the Minister for Justice, who has responsibility in this area, to see if this legislation needs to be updated.

I have responded to the points raised and I am grateful to the House for facilitating this legislation.

Question put and agreed to.