Federal cabinet set to approve Netting of Financial Contracts Bill

Bill will remove uncertainty about enforcing netting rights in case of bankruptcy

ISLAMABAD: The cabinet, which is scheduled to meet on Tuesday, is set to approve the Netting of Financial Contracts Bill 2020, designed to remove uncertainty about enforcing netting rights in case of bankruptcy and allow financial collateral arrangements in the domestic market.

The State Bank of Pakistan (SBP) has proposed the bill in consultation with the Securities and Exchange Commission of Pakistan (SECP).

Sources told The Express Tribune that the proposed law would remove any uncertainty about enforcing netting rights in case of a termination event, bankruptcy, insolvency proceedings, would limit the power of liquidators to prevent any cherry-picking of qualified financial contracts/ transactions, which fall under the ambit of netting provisions, and would allow financial collateral arrangements under such netting rights.

Once the law is enforced, qualified financial contracts will always be settled on the basis of netting in the presence of a netting agreement.

Netting is a method of reducing risks in financial contracts by combining multiple financial obligations to arrive at a net obligation amount. Netting is used to reduce settlement, credit and other financial risks between two or more parties.

The development of financial markets in Pakistan over the years has led to the introduction of innovative financial products and increased exposure of banks and other financial market participants.

The complexities caused by such new products and increased exposure of banks require the adoption of laws that could prevent and reduce risk in the financial system.

Credit Bureaus Act

The cabinet is also poised to approve a notification under Section 11 of the Credit Bureaus Act 2015 that will make it obligatory for utility companies, including gas and electricity providers, to share data of consumers with credit bureaus in order to develop anti-fraud products.

Anti-fraud products are developed using data from applications and other data sources in addition to the credit account data.

The Credit Bureaus Act 2015 was enacted on August 19, 2015 to provide a legal and regulatory framework for the incorporation and functioning of credit bureaus.

After the enactment of the Act, rules, regulations and licensing criteria were also issued. Based on the legal framework, the SBP has granted licence to two credit bureaus namely Data Check Limited and Acquitas Information Services Limited.

On the basis of data acquired from financial institutions, retailers and utility companies, these credit bureaus can provide value-added services.

The provision of data by the utility companies to the credit bureaus is a key reform under the ease of doing business (EODB), which if adopted by private credit bureaus will improve country’s ranking on the EODB index.

In terms of different sections the Credit Bureaus Act, the federal government will issue a notification to make it obligatory for the utility companies including telecom firms to share data with the licensed credit bureaus.

It has already been notified with approval of the cabinet that all companies providing wireless telecommunication services to consumers will be members of credit bureaus and furnish information in accordance with the Act and regulations made thereunder.

In order to move forward, awareness sessions have also been held in the Finance Division and the State Bank of Pakistan with different utility companies – electricity and gas firms – on the importance of sharing data with the credit bureaus.