Master Agreements - Are Some Masters More Important Than Others? (2025)

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On 1 June 2023, Chapter 12A (Resolution of DesignatedInstitutions) of the Financial Sector Regulation Act, 2017(the "FSRA") came into effect, whichintroduced a system of resolution for certain designated financialinstitutions (including banks and systemically important financialinstitutions) and repealed the curatorship of banks. Theselegislative changes were introduced in response to South Africancommitment to the Group of Twenty's("G20") recommendations to issue a listof international standards to ensure the resolution of systemicallyimportant financial institutions. These are institutions that areconsidered "too big to fail" because their collapse wouldhave a significant national impact. As such, the new resolutionframework is a critical component of South Africa's financialsector safety net. It empowers the resolution authority (designatedas the South African Reserve Bank("SARB") in terms of Section 166A of theFSRA) to manage the failure of a designated institution in a waythat mitigates risks to financial stability, protects vulnerabledepositors, and reduces reliance on government bail-outs forprivate sector business. In South Africa, these measures areespecially important given that government resources need to bedeployed for infrastructure development, amongst other things.

As currently drafted, the FSRA excludes derivative instruments(as defined in Section 1 of the Financial Markets Act, 2012) fromthe application of Section 166S of the FSRA. This section sets outthe write-down and cancellation powers of the SARB. However, theFSRA does not exclude repurchase agreements and securities lendingtransactions from the write-down and cancellation bail-in powers ofthe SARB. By allowing the SARB to write down or cancel obligationsarising under repurchase agreements and securities lendingtransactions, there is a risk that the enforceability of nettingrights may be undermined, which could lead to legal uncertainty andincrease counterparty credit risk. This may, in turn, discourageparticipation in the South African markets and raise the cost ofshort-term funding for financial institutions. Moreover, manyinternational counterparties operate on the assumption that suchcontracts will be respected in resolution as this is consistentwith the approach in other jurisdictions. If South Africa'sregime diverges by exposing these instruments to bail-in, it couldreduce the willingness of foreign institutions to transact withSouth African counterparties or demand stricter collateral andpricing terms, thereby creating a competitive disadvantage forlocal financial institutions.

In light of this, the SARB published a binding interpretation ruling which came intoeffect on 1 June 2023 The interpretation ruling stipulates that theresolution powers of the SARB, as outlined in Section 166S of theFSRA, shall not apply to repurchase agreements and securitieslending transactions concluded under a "master agreement"as such term is defined in Section 35B of the Insolvency Act,1936.

Market participants and representatives of relevant institutionshad anticipated that the exclusion of master agreements, as set outin the interpretative ruling, would be further codified by anamendment to the FSRA through certain provisions of the Conduct ofFinancial Institutions Bill (the "COFIBill"). However, the COFI Bill has not yet beenpassed. In order to expedite the process to exclude all masteragreements from the scope of the bail-in provisions of the FSRA,National Treasury published the Draft General Laws (Anti-MoneyLaundering and Combating Terrorism Financing) Amendment Bill forpublic comment in December 2024. This bill contains a provisionwhich amends Section 166 of the FSRA by expressly prohibiting theSARB from utilising its powers to reduce the amount that is or maybecome payable in terms of a master agreement with a designatedinstitution and from cancelling such a master agreement. Thisamendment would also provide further comfort on the enforceabilityof the master agreements underlying these transactions. Althoughthis bill is yet to become effective, we see this as a step in theright direction toward making South Africa more accessible forparticipants who wish to transact within the republic throughsecurities finance, repurchase agreements, and over-the-counterderivative products.

*Reviewed by Deborah Carmichael, an Executive in ENS’Banking and Finance Department

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