Legislative developments on financial derivative and repurchase agreements

29.12.2009

Legal Update No. 101

Goltsblat BLP law firm advises that Federal Law of 25 November 2009 No. 281-FZ “On Amendments to Parts One and Two of the Tax Code of the Russian Federation and Certain Legislative Acts of the Russian Federation” (“the Federal Law”) came into effect (with the exception of certain provisions) on 1 January 2010.

The Federal law modifies substantially the Tax Code of the Russian Federation, the Law of the Russian Federation “On Commodity Exchanges and Exchange Trading” and certain other federal laws in relation to the concepts of “financial instruments”, “financial derivatives” and “repurchase agreements” and their use.
The definitions given of these concepts in the additional provisions and new articles of the Federal Law “On the Securities Market” are established as the basic ones for their use:

  • Financial instrument – a security or financial derivative;
  • Financial derivative – an agreement, apart from a repurchase agreement, consisting of one or several of the following obligations:

(а) to pay monetary sums, either periodically or in a lump sum, depending on the change in the prices and (or) other established indicators or occurrence of certain events (with or without the obligation to hand over securities, goods or currency or to conclude a financial derivative agreement);

(b) if a claim is submitted and on conditions agreed in the agreement, to purchase or sell securities, currency or goods or to conclude a financial derivative agreement;

(c) to hand over ownership of securities, currency or goods no earlier than the third day after conclusion of the agreement (one party) and to accept and pay for this property (the other party), with the agreement indicating that it is a financial derivative;

  • Repurchase agreement – an agreement consisting of two parts:

(а) under the first part, one party (the seller) undertakes, by the time set in the agreement, to hand over ownership of securities to the other party (the buyer), while the other party undertakes to accept and pay a specific sum of money for them;

(b) under the second part, the buyer undertakes, by the time set in this agreement, to hand over ownership of the securities to the seller and the seller undertakes to accept and pay a specific sum of money for them.

In relation to a repurchase agreement, requirements are also established on the parties to the agreement, the securities constituting the subject-matter of the given agreement, the procedure for the parties to agree the terms on the quantity and price of the securities, the timeline for payment of the price and for discharge of the obligations to hand over the securities, the procedure for fulfilment, amendment and termination of the obligations of each of the parties, the grounds for and consequences of early fulfilment, non-fulfilment or improper fulfilment of the obligations of either of the parties. The provisions of the Civil Code of the Russian Federation on sale and purchase are Applicable to a repurchase agreement, provided this does not run counter to the given rules and the essence of the repurchase agreement.

A separate article is devoted to the specific aspects of concluding financial derivative agreements. This interprets the specifics when such agreements are intended for qualified investors and stock exchange trading; applies more stringent requirements on the parties to such agreements; for the purpose of agreeing individual terms and conditions of agreements between the parties, allows for the possibility of applying a general agreement, specifications and rules of stock exchanges, clearing rules, and reconciliation conditions developed by self-regulating organisations on the securities market.

The Federal Law specifies the rights of the federal executive authority for the securities market (currently the Federal Service for the Financial Markets or the FSFR of Russia) in regulating financial derivatives and repurchase agreements. In particular, the FSFR of Russia is entitled to establish the list of financial derivatives (including forward, futures, option and swop contracts); to determine financial derivatives intended for qualified investors; to establish the requirements on the procedure for providing information connected with conclusion of financial derivative agreements; to determine the requirements on securities, goods and indicators, a change in the price (values) of which determines the obligations of the parties to financial derivative agreements.

The new Federal Law contributes to fulfilment of the task set by Russia’s leadership of creating due legal conditions for the functioning of a full-scale financial centre in Russia.

For additional information, please contact:

Anton Sitnikov
Partner, Head of Corporate / M&A,
Goltsblat BLP,
E:  info@gblplaw.com


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