A new era for Uganda’s Financial Markets – Rules on Enforceability of Netting

Uganda took a significant step towards ensuring the enforceability of close-out netting under the International Swaps & Derivatives Association Master Agreement (ISDA Master Agreement), the Global Master Repurchase Agreement (GMRA) and the Global Master Securities Lending Agreement (GMSLA) contracts when it enacted The Financial Institutions (Preference and Appraised Book Value) Regulations 2023.

The new Regulations are made under the Financial Institutions Act, 2004 as amended and apply to transactions under the ISDA Master Agreement, GMRA and GMSLA entered into with financial institutions. Collectively these agreements are defined as Specified Financial Contracts under the Regulations. 

Netting is the mechanism that allows participants in the derivatives, securities lending and repo markets to set off their mutual obligations with a counter party that has become the subject of insolvency proceedings. The goal of netting is to offset losses in one position with gains in another. Previously, automatic early termination had been enforceable under contract law. However, this was not adequate as the Act voided transfers conducted within six months of a management takeover or closure of a financial institution by the Central Bank (Bank of Uganda) including when the transfer was made at below appraised book value.

This situation created uncertainty within the market in regard to the enforceability of transactions conducted under specified financial contracts. These Regulations spell out Bank of Uganda’s (BoU) powers relating to derivatives, repo and securities lending exposures held by a financial institution that has closed or whose management has been taken over. These changes ensure that automatic early termination under the specified financial contracts is not negated by BoU.

What this means is that participants in Uganda’s financial markets, dealing with financial institutions can be confident that they can close-out and net transactions under the specified financial contracts.

The enactment of these regulations supports the use of specified financial contracts with financial institutions. In so doing, this will increase liquidity but also offer a wide range of financial products, which in turn will stimulate the growth of the financial industry in the country. 

The content of this article is intended to provide a general guide on the subject matter. Should you want specialist advice for specific circumstances, please get in touch with our Mr. Kefa Kuteesa Nsubuga on email: k.k.nsubuga@maa.co.ug or Tel No. +256 393 256 620.