Section 8 Derivative contracts

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Section 8 Derivative contracts

This section applies to derivative contracts entered into by an institution as mentioned in the Financial Institutions Act section 2-28 first paragraph e). The purpose of such derivative contracts shall be to ensure compliance with the asset coverage requirement of the Financial Institutions Act section 2-31 and to enable the institution to honour its payment obligations.

Derivative contracts may be entered into with the following types of counterparty:

  1. Clearing houses established in the EEA or the OECD area
  2. States and central banks in the EEA or OECD area
  3. Credit institutions established in the EEA or OECD area

Such counterparties shall have a risk classification conforming to the provisions of section 9 second and third paragraphs.

The Financial Institutions Act section 2-30 shall not prevent agreed set-offs of cash flows in the same currency and with the same due date from being completed between the counterparties to derivative contracts included in the same cover pool. An institution may also agree with a derivative counterparty to replace one or more ongoing derivative contracts with one or more new contracts, provided the asset coverage requirement under the Financial Institutions Act section 2-31 and the liquidity requirement under the Financial Institutions Act section 2-32 are met.

Any claim against a mortgage credit institution arising from a derivative contract may only be used for set-off against other contracts in the same cover pool provided the mortgage credit institution’s estate halts payments under section 17 in accordance with the rules concerning set-off in the Satisfaction of Claims Act chapter 8. The Securities Trading Act chapter 10 applies correspondingly following a halt to payments under section 17.

If, in the course of the contract period, a party to a derivative contract no longer meets the requirement as to risk classification in section 9 third paragraph, that party shall furnish adequate security in the form of a cash deposit, guarantee or charge over assets that meets the requirements of section 9 third and fourth paragraphs.