AFS Explains Legal Norms on Repo Transactions
OREANDA-NEWS. February 05, 2009. The Agency of the Republic of Kazakhstan on Regulation and Supervision of Financial Market and Financial Organizations (AFS) released at its website the following information message, reported the press-centre of KASE:
Letter No. 05-03-21/451 of the Agency of the Republic of Kazakhstan on Regulation and Supervision of Financial Market and Financial Organizations dated January 30, 09 addressed to the Association of Kazakhstan Financiers regarding explanations of norms of the legislation of the Republic of Kazakhstan on repo transactions
The Agency of the Republic of Kazakhstan on Regulation and Supervision of Financial Market and Financial Organizations (further - the Agency), in connection with enactment beginning December 25, 2008 of resolution No. 168 of the Board of the Agency dated October 29, 2008 "On making amendments to resolution No. 377 of the Board of the Agency of the Republic of Kazakhstan on Regulation and Supervision of Financial Market and Financial Organizations dated August 27, 2005 "On approval of rules on carrying out of brokerage and dealer activities on securities market of Republic of Kazakhstan" (further – the Resolution), deems it necessary to explain the following on repo transactions concluded by brokers and (or) dealers before enactment of the Resolution.
The Resolution is supplementing the Rules on carrying out of brokerage and dealer activities on securities market of Republic of Kazakhstan approved by resolution No. 317 of the Board of the Agency dated August 27, 2005 (further - the Rules) with the norms in accordance with which:
1. repo transactions carried out by a broker and (or) a dealer in the stock exchange trading system shall be executed during a term not exceeding ninety calendar days with account of extension of initial repo transaction term;
2. repo transactions carried out by a broker and (or) a dealer in the stock exchange trading system shall be executed at the expense of own money of a broker and (or) a dealer or in accordance with a client order within the bounds of the agreement on broker servicing, which is a commission agreement;
3. the minimum cost of client assets placed at accounts with a broker and (or) a dealer shall constantly equal to at least thirty percent of the sum of all repo opening transactions executed by a broker and (or) a dealer in the stock exchange trading system by direct method upon request of the client, with account of restrictive margin level at presence of concluded margin transactions.
On running of repo transactions open before and after the Resolution was effected.
In accordance with article 4 of the Civil code of the Republic of Kazakhstan (further - the Code) acts of civil legislation have no retroactive force and apply to relations arising after they were made effective. Legal force of civil legislation acts cover relations that arisen before such acts were made effective in the explicitly specified cases.
In regard of relations arisen before a civil legislation act was made effective, such act shall apply to rights and obligations that arisen after the act was made effective. Relations of parties in regard of the agreement concluded before a civil legislation act was made effective shall be regulated in accordance with article 383 of the Code.
In connection therewith, taking into account that the Resolution does not specify extension of its effect on repo transactions executed in the trade organizer trading system before the Resolution is made effective, the term of such repo transaction executed at the expense of own money of a broker and (or) a dealer or in accordance with a client order within the bounds of the broker service agreement, which is a guarantee or a commission agreement, shall be valid up to the date of repo closing transaction, set by participants at repo transaction opening and (or) stock exchange internal documents.
At that, repo transactions, executed after the Resolution is made effective, must comply with requirements set by the Resolution, that is such repo transactions must be executed at the expense of own money of a broker and (or) a dealer or in accordance with a client order with a broker service agreement, which is a commission agreement, for a term not exceeding ninety days with account of all extensions.
In regard of extension of the term of repo transactions concluded by direct method before enactment of the Resolution.
In accordance with article 405 of the Code the parties may extend effect of the agreement for a new term. The effective term of an agreement shall be extended in accordance with article 397 of the Code. Thus, extension of an agreement shall in fact mean conclusion of an agreement on the former conditions with change of term of its effect, as being made in accordance with article 397 of the Code regulating the order of agreement conclusion.
The aforementioned norm of the Code is confirmed by item 23 of the Rules on repo transactions (effective before making changes by the Exchange Council decision dated January 8, 2009 for purposes of bringing in line with the Resolution), in accordance with which parameters (closing date or price) of a repo closing deal related to a repo transaction executed by direct method may be changed. For this, participants of this repo transaction must execute in the trading system necessary actions on change of parameters of a closing deal, which shall be considered as changed only in the case of confirmation of such changes by both participants of this repo transaction, and corresponding participants of the Confirmation system (in case trading accounts controlled through the Confirmation system are used for execution of this closing deal).
That is, the term of repo transaction, executed by direct method, is extended as an agreement is concluded; on accept of an offer by the other party (accepter) of the conditions, which were proposed by the offerer.
At that, according to comments to the Code, extension of the effective term of an agreement must be distinguished from prolongation of an agreement for a new term, when effect of the agreement after expiry of its effect is automatically extended for the term specified by the agreement.
Thus, taking into account that the Rules on carrying out of repo transactions do not provide for automatic extension of the term of repo transaction executed by direct method, in case of change of the date of closing of this repo transaction, participants of the deal shall conclude an agreement for a new term, not prolonging the agreement.
At that, item 23 of the Rules on carrying out of repo transactions by the Exchange Council decision dated January 8, 2009 was supplemented with a norm, which bans extension of the term of a repo transaction, executed by direct method, in case such extension entails violation of the maximum term of a repo transaction set by the first paragraph of item 10 of the Rules (90 days).
On the basis of the aforementioned, and taking into account, that in accordance with item 1 of article 383 of the Code an agreement must comply with the binding rules, set by the legislation (imperative norms), acting at the moment of its conclusion, we think that the term of repo truncation must be extended in accordance with requirements set by the current legislation of the Republic of Kazakhstan and internal documents of the stock exchange.
That is, after enactment of the Resolution, a trade participant (a broker and (or) a dealer) may not extend the term of a repo transaction executed by direct method (open before or after enactment of the Resolution), if as a result of such extension the total term of a repo transaction will exceed 90 days.
In regard of extension of terms of repo transactions concluded automatically.
In accordance with item 23 of the Rules on carrying out of repo transactions with account of changes made by the Exchange Council decision dated January 8, 2009, January 25, 2009, it is prohibited to extend terms of repo transactions executed automatically.
Thus, repo transaction executed automatically shall be closed on the date of closing of such transaction, set at its opening in accordance with standardized terms, set by the Specification on automatic repo market, approved by decision No. 137/0 of the Board of Kazakhstan Stock Exchange dated December 24, n2002.
In regard of availability of client funds at accounts of a broker and (or) a dealer at carrying out of repo opening transactions by a direct method upon request of the client.
In accordance with item 38-4 of the Rules, effective December 25, 2008, the minimum cost of client assets placed at account of a broker and (or) a dealer, must at all times be equal to at least thirty percent of the sum of all repo opening transactions, executed by a broker and (or) a dealer in the stock exchange trading system by direct method upon request of the client, without account of restrictive margin level on presence of concluded margin deals.
At that, whereas this norm is of an imperative nature, the minimum cost of client assets, placed at accounts of a broker and (or) a dealer, shall include all open repo transactions executed by direct method on request of the client, regardless of the date of opening of such repo transactions (before and after enactment of the Resolution).
On the basis of the aforementioned, for purposes of prevention of violation of requirements of the legislation of the Republic of Kazakhstan, we request you to bring this letter to notice of members of the Association of Kazakhstan Financiers for brining of activities of organizations carrying out brokerage and (or) dealer activities on the securities market in accordance with the Rules mentioned above.
At the same time we call attention to article 45 of the Law of the Republic of Kazakhstan "On Normative Legal Acts" saying this explanation is not an official interpretation of norms of the legislation.
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