Circular 5/2011

Handling in Norges Bank’s settlement system of a participant under public administration or subject to bankruptcy proceedings

1. Purpose

Norges Bank’s settlement system (NBO) provides settlement of payments at the highest level of the payment system in Norway. If a participant in NBO is placed under public administration or filed for bankruptcy, this will affect the settlement of payments. The purpose of this circular is to provide information about how Norges Bank will handle such a situation on the basis of current legislation and agreements. Norges Bank has provided similar information in previous circulars, most recently in Circular no. 4/ 1 June 2006. This circular has been revised in view of changes during recent years, in particular new agreements in 2009 with participants of NBO on account maintenance, settlement and collateral for loans. The present circular replaces Circular no. 4/1 June 2006.

2. Legislation

The Norges Bank Act and the lending regulation

The Act on Norges Bank and the monetary system etc. (Norges Bank Act), Chapter IV, regulates the access of banks, other financial institutions and the government to borrowing and deposit facilities in Norges Bank. Pursuant to this Act, Norges Bank has adopted the lending regulation (1). Furthermore, pursuant to this regulation, Norges Bank has adopted guidelines for pledging securities and fund units as collateral for loans in Norges Bank. These guidelines are revised regularly and published in the form of circulars from Norges Bank. Pursuant to the Norges Bank Act, Norges Bank has also adopted criteria and terms for an account in Norges Bank held by a central counterparty for trades in financial instruments. cf. Circular no. 14/11 December 2009.

The Guarantee Schemes Act and the Bankruptcy Act

Banks resident in Norway may be placed under public administration pursuant to the Act on guarantee schemes for banks and public administration etc. of financial institutions (Guarantee Schemes Act), Chapter 4. Under certain terms and conditions, this also applies to a subsidiary in Norway of a bank resident in another state (2). Banks resident abroad, including their subsidiaries in Norway, may be subject to bankruptcy proceedings under home country legislation. A central counterparty for trades in financial instruments may be subject to bankruptcy proceedings under the Act relating to bankruptcy (Bankruptcy Act).

Agreement on account maintenance, settlement and collateral for loans

In order for a bank or other financial institution to open an account, settle payments and borrow in Norges Bank, the bank or the financial institution must enter into an agreement on account maintenance, settlement and collateral for loans. Norges Bank has entered into agreements with banks resident in Norway and abroad, subsidiaries in Norway of banks resident abroad, a central counterparty for trades in financial instruments, some central banks and the Bank for International Settlement (BIS). The standard agreement, referred to as “the Agreement” in this circular, has been entered into with banks resident in Norway and subsidiaries in Norway of banks resident abroad. Agreements with other participants have been adapted on the basis of the standard agreement.

The Agreement regulates the rights and obligations of all participants as regards the opening and use of their accounts and settlement of payments in Norges Bank. Norges Bank determines among other things the operating schedule for NBO, cf. Section 6 of the Agreement.

The Agreement also includes provisions concerning the responsibilities and rights of each party if a participant is subject to debt settlement or bankruptcy proceedings under the Bankruptcy Act, or if a bank is placed under public administration. Regulatory legislation referred to in the Agreement includes the Guarantee Schemes Act, the Bankruptcy Act, the Norwegian Creditors Recovery Act, the Financial Collateral Act and the Payment Systems Act. If a participant is placed under public administration or bankruptcy proceedings are initiated, Norges Bank has the right to apply close-out netting of the participant’s obligations and realise securities pledged by the participant as collateral for loans in Norges Bank, cf. Section 24 of the Agreement.

3. Account maintenance and payment settlement

The purpose of this section is to outline, on the basis of current regulations and agreements, how Norges Bank will handle account maintenance and participation in payment settlement in a situation where a participant in NBO is placed under public administration or is subject to bankruptcy proceedings.

a) Prior to placement under public administration or opening of bankruptcy proceedings

A payment order is final when it has been debited or credited one of the participant’s accounts in NBO, cf. Section 13 of the Agreement. Norges Bank, the participant or a third party may not revoke a final payment. This means that payments settled in Norges Bank before the decision to place a participant under public administration has been taken or bankruptcy proceedings are initiated are final and binding for the administrators in bankruptcy or the bankruptcy estate.

b) After placement under public administration or opening of bankruptcy proceedings

Payments that have not been settled when the participant is placed under public administration or bankruptcy proceedings are initiated will, as a general rule, be rejected by Norges Bank. In such circumstances, Norges Bank will block the participant’s account from accepting further deposits or payments. If the participant takes part in a netting which is settled in NBO, the netting result will in normal circumstances be rejected by Norges Bank. This pertains to netting results from the Norwegian Interbank Clearing System NICS (NICS Net), the Norwegian Central Securities Depository VPS (settlement of trades in securities) and Oslo Clearing (settlement of trades in derivatives). In order for the netting result to be settled in NBO, the operator responsible for the clearing will have to provide a new netting result without payments to or from the participant in question.

Once a participant is placed under public administration or bankruptcy proceedings are initiated, the Agreement on account maintenance, settlement and collateral for loans will cease to exist with immediate effect, cf. Section 31 of the Agreement. However, this termination does not include the sections relating to legal protection and security, cf. Section 10, invalidation of collateral and deposits, cf. Section 12, and collateral for loans, cf. Chapter IV.

Specific procedures if a bank is placed under public administration

If a bank is placed under public administration, the former governing bodies of the institution are suspended, cf. Guarantee Schemes Act, Section 4-6. The administrators in bankruptcy assume the authority of these governing bodies. Nevertheless, the bank may not accept deposits, provide new loans or increase existing loans without the consent of the Financial Supervisory Authority of Norway. Nor may the bank make payments to depositors or other creditors without the consent of the Financial Supervisory Authority of Norway.

On the request of the administrators in bankruptcy, and with the consent of the Financial Supervisory Authority of Norway, Norges Bank may settle one or more payments to or from a bank that is placed under public administration. In order to settle such payments, an agreement to this end must be signed in advance between Norges Bank as one party and the Financial Supervisory Authority of Norway or the administrators in bankruptcy/the bankruptcy estate as the other party. In such a case, Norges Bank will open the bank’s blocked account to enter payments. The administrators in bankruptcy are responsible for ensuring that there are sufficient funds in the bank’s account to cover any payment orders.

Pursuant to the provisions in the Payment Systems Act on legal protection for agreements on clearing and settlement, cf. Section 4-2, Norges Bank may enter into an agreement with each bank on payment settlement in the event the bank is placed under public administration. No such agreement has been entered into.

4. Cover for Norges Bank’s claims

The purpose of this section is to outline, on the basis of current regulations and agreements, how Norges Bank will cover its claims in a situation where a participant in NBO is placed under public administration or bankruptcy proceedings are initiated.

Norges Bank may have current and future claims against a participant in NBO regarding repayments of loans, interest, interest on overdue payments and fees and costs for the realisation of collateral. In order to cover any such claims, Norges Bank will realise the collateral the participant has posted, cf. Section 25 of the Agreement. Norges Bank may also cover its claims by netting against any deposits the participant may have in Norges Bank, cf. Section 24 of the Agreement.

If the deposits or the collateral posted by the participant are not sufficient to meet Norges Bank’s claims, uncovered claims will be reported to the administrators in bankruptcy or the bankruptcy estate as a claim for dividend. Any funds remaining in the participant’s accounts or collateral beyond what is needed to cover Norges Bank’s claims will be transferred to the administrators in bankruptcy or the bankruptcy estate.

5. Information

If a participant in NBO is placed under public administration or bankruptcy proceedings are initiated, Norges Bank will provide information about its handling of payment settlements in NBO. Such information will be communicated to other participants and institutions that deliver payment orders for settlement in Norges Bank. Norges Bank will also inform the Ministry of Finance and the Financial Supervisory Authority of Norway on how the payment settlements and other aspects of the situation will be handled.

 

 

Footnotes

1) Regulation on the access of banks to borrowing and deposit facilities in Norges Bank etc., adopted by Norges Bank on 25 February 2009, with subsequent amendments.

 2) Regulation on public administration of a subsidiary of a bank with headquarters in a foreign state, adopted by the Ministry of Finance on 12 October 2008, with subsequent amendments.

Published 31 August 2011 09:00