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REC 4.5 FSA supervision of action by UK recognised bodies under their default rules

REC 4.5.1GRP

UK recognised bodies which, under their rules, have market contracts are required to have default rules enabling them (among other things) to take action in relation to a member who appears to be unable to meet his obligations in respect of one or more unsettled market contracts. The detailed recognition requirements relating to the default rules are set out in REC 2.17.

REC 4.5.2GRP

The default rules are designed to ensure that rights and liabilities between the defaulter and any counterparty to an unsettled market contract are discharged, and for there to be paid between the defaulter and each counterparty one net sum. The Companies Act 1989 contains provisions which protect action taken under default rules from the normal operation of insolvency law which might otherwise leave this action open to challenge by a relevant office-holder.

REC 4.5.3GRP

The Companies Act 1989 also gives the FSA powers to supervise the taking of action under default rules. Under section 166 of the Companies Act 1989 (Powers of the FSA to give directions) (see REC 4.5.4 G), the FSA may direct a UK recognised body to take, or not to take, action under its default rules. Before exercising these powers the FSA must consult the recognised body concerned. The FSA may also exercise these powers if a relevant office-holder applies to it under section 167 of the Companies Act 1989 (Application to determine whether default proceedings to be taken) (see REC 4.5.9 G).

REC 4.5.4GRP

The Companies Act 1989: section 166

The FSA may issue a "positive" direction (to take action) under section 166(2)(a) of the Companies Act 1989:

Where in any case a [UK RIE] or [UK RCH] has not taken action under itsdefault rules- if it appears to [the FSA] that it could take action, [the FSA may direct it to do so,

but under section 166(3)(a) of the Companies Act 1989:

Before giving such a direction the [FSA] shall consult the [UK RIE] or [UK RCH] in question; and [the FSA] shall not give a direction unless [the FSA] is satisfied, in the light of that consultation that failure to take action would involve undue risk to investors or other participants in the market,

The FSA may issue a "negative" direction (not to take action) under section 166(2)(b) of the Companies Act 1989:

Where in any case a [UK RIE] or [UK RCH] has not taken action under its default rules - if it appears to the [FSA] that it is proposing to take or may take action, [the FSA] may direct it not to do so.

but under section 166(3)(b) of the Companies Act 1989:

Before giving such a direction the [FSA] shall consult the [UK RIE] or [UK RCH] in question; and the [FSA] shall not give a direction unless [the FSA] is satisfied, in the light of that consultation that the taking of action would be premature or otherwise undesirable in the interests of investors or other participants in the market.

REC 4.5.5GRP

The FSA's view is that the exercise of these powers will only be justified in exceptional circumstances. The most likely case in which the FSA would consider exercising them is if there were a need to coordinate action by different UK recognised bodies because, for example:

  1. (1)

    the likelihood of a default may not be apparent to all UK recognised bodies; or

  2. (2)

    there was a need to avoid premature default action by one UK recognised body; or

  3. (3)

    significantly different settlement prices had been fixed by different UK recognised bodies.

REC 4.5.6GRP

Under section 166(6) of the Companies Act 1989, a negative direction cannot be given if, in relation to the defaulter, either:

  1. (1)

    a bankruptcy order or an award of sequestration of the defaulter's estate has been made, or an interim receiver or interim trustee has been appointed; or

  2. (2)

    a winding-up order has been made, a resolution for voluntary winding-up has been passed or an administrator, administrative receiver or provisional liquidator has been appointed;

and any previous negative direction will cease to have effect on the making or passing of any such order, award or appointment.

REC 4.5.7GRP

Under section 166(5) of the Companies Act 1989, a negative direction may be expressed to have effect until a further direction is given, which may either be a positive direction or a revocation of the earlier negative direction.

REC 4.5.8GRP

Under section 166(7) of the Companies Act 1989, where a UK recognised body has taken action either of its own accord or in response to a direction, the FSA may direct it to do or not to do specific things subject to these being within the powers of the UK recognised body concerned under its default rules. However, the FSA cannot give such a direction unless it is satisfied that this will not impede or frustrate the proper and efficient conduct of the default proceedings.

Section 167 of the Companies Act 1989

REC 4.5.9GRP

Where, in relation to a member (or designated non-member) of a UK RIE or a member of a UK RCH:

  1. (1)

    a bankruptcy order; or

  2. (2)

    an award of sequestration of his estate; or

  3. (3)

    an order appointing an interim receiver of his property; or

  4. (4)

    an administration or winding-up order; or

  5. (5)

    a resolution for a voluntary winding-up; or

  6. (6)

    an order appointing a provisional liquidator;

has been made or passed and the UK recognised body has not taken action under its default rules as a result of this event or of the matters giving rise to it, a relevant office-holder appointed in connection with the order, award or resolution may make an application to the FSA under section 167 of the Companies Act 1989 (Application to determine whether default proceedings to be taken).

REC 4.5.10GRP

The effect of an application under section 167 of the Companies Act 1989 is to require the UK recognised body concerned to take action under its default rules or to require the FSA to take action under section 166 of the Companies Act 1989 (see REC 4.5.4G).

REC 4.5.11GRP

The procedure is that the FSA must notify the UK recognised body of the application and, unless within three business days after receipt of that notice, the UK recognised body:

  1. (1)

    takes action under its default rules; or

  2. (2)

    notifies the FSA that it proposes to take action forthwith; or

  3. (3)

    is directed to take action by the FSA under section 166(2)(a) of the Companies Act 1989;

the provisions of sections 158 to 165 of the Companies Act 1989 do not apply in relation to market contracts to which the member or designated non-member is a party or to anything done by the UK recognised body for the purpose of, or in connection with, the settlement of any market contracts.