Uganda has published rules to secure the enforceability of close-out netting under ISDA Master Agreement, GMRA and GMSLA contracts with financial institutions. The Financial Institutions (Preference and Appraised Book Value) Regulations 2023 (the "Regulations") were published on 14 April 2023.
The new Regulations are made under the Financial Institutions Act (the "Act") and apply to transactions under the ISDA Master Agreement (including its credit support documents), the GMRA and GMSLA (defined as specified financial contracts) entered into with financial institutions.
The Regulations address the existing challenge of the enforceability of the close-out netting provisions under the specified financial contracts in the event of the insolvency of a financial institution counterparty. If a financial institution is taken over or it gets closed down by the Bank of Uganda ("BoU"), the Act states any transfer of assets made within six months of the take over or closure will not be allowed if the transfer was done to show a preference or if the assets were sold at less than their appraised book value. The transfer will be considered invalid. This created undue uncertainty within the market concerning the enforceability of transactions conducted under these global standard-specified financial contracts including close-out netting against a financial institution.
The new Regulations clarify that the transfer of any asset (including the exchange of variation margin or collateral) by a financial institution under a specified financial contract, is deemed not made with intent to create a preference nor at less than the appraised book value if made in good faith on commercial terms under the the Regulations. This means that, subject to the application of (automatic) early termination upon management takeover or closure of a financial institution, market participants transacting with financial institutions in Uganda can be confident that they can close-out and net transactions under the specified financial contracts by those agreements.
The Regulations were developed following a technical assistance memorandum of understanding signed between the BoU and Frontclear. ENSafrica acted as the legal advisor. The process involved wide consultation with the BoU, the leading financial institutions and market players as well as representatives from the International Capital Markets Association and International Swaps and Derivatives Association.
The introduction of the new Regulations facilitates specific financial contracts with financial institutions, thereby increasing liquidity and expanding the range of available financial products. This is expected to contribute to the growth and development of the financial industry in Uganda.
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