Interim wholesale funding and Foreign ADI guarantee deed released

The Federal Government has released an interim Deed of Guarantee covering wholesale funding by Australian and Foreign ADIs. It also covers deposits with Foreign ADIs. The extension of the guarantee to Foreign ADI deposits supplements the guarantee of so called "protected accounts" (which are effectively deposit products) with Australian ADIs under the Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Act 2008.

The Deed was entered into by the Commonwealth on 2 November 2008 and, unless it is extended by publication on the Treasury website at www.treasury.gov.au, will expire at midnight on 27 November 2008, when it is intended that it will be replaced with a separate facility.

The Commonwealth may effect amendments to the Deed by publication on the Treasury website.

Guarantee of Wholesale Funding for Australian ADIs

The wholesale liabilities of ADIs (other than Foreign ADIs) that are guaranteed in the Deed are called "Guaranteed Eligible Institution Liabilities". These liabilities must have the following features:

• they must be a "senior unsecured debt". In other words, the guarantee will not cover subordinated debt;
• have arisen from a payment obligation in a debenture, certificate of deposit, bank bill, commercial paper, bond or note drawn or made by that ADI with a term of 60 months or less. Additionally, there is a requirement that such an instrument not be "complex". It is unclear what "complex" means. Recent statements by the Treasury suggest that this requirement is intended to exclude any structured instruments;
• they must not have become due and payable due to the operation of a cross-default clause; and
• they must not have become due and payable due to the operation of an acceleration clause other than as a result of the ADI being placed under external administration.

Guarantee of Foreign ADIs

The liabilities of Foreign ADIs that are covered by the guarantee are called "Guaranteed Foreign ADI Liabilities". These comprise wholesale liabilities and deposits.

In relation to wholesale liabilities, the definition is in materially identical terms to the liabilities of Australian ADIs that are being guaranteed subject to the following:

• the instrument the subject of the guarantee must be issued, drawn or made "in Australia" by the Foreign ADI; and
• the payment obligation must be held by an "Australian resident".

The guarantee of Foreign ADIs' deposits is limited to liabilities "to an Australian resident in respect of a deposit in Australia". Significantly, the word "deposit" is used in this Deed whereas the relevant equivalent definition of "protected account" in the Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Act 2008 does not use the term "deposit" but uses the concept of an "account" with certain features.

"Australian resident" is defined as a person treated as an Australian resident for the purposes of the Australian income taxation law.

How the guarantee works

The guarantee is a unilateral obligation undertaken by the Commonwealth of Australia in favour of persons to whom the Guaranteed Liabilities are from time to time owed. These are defined as the 'Beneficiaries". The Deed, therefore, although not expressed as such, is a Deed Poll.

The obligations undertaken by the Commonwealth are to guarantee to the Beneficiaries payment of the Guaranteed Liabilities. The Commonwealth also undertakes that whenever an Australian ADI or a Foreign ADI does not pay a Guaranteed Liability on its due date, the Commonwealth, following a claim made in accordance with procedures set out in the Deed and following the expiry of "the applicable grace period" must pay that liability in accordance with the procedures set out in the Deed.

The procedures set out in the Deed are:

• claims made by Beneficiaries must be in the particular form set out in Schedule 1 to the Deed and delivered to the Australian Government Solicitor in Canberra;
• the Commonwealth must pay the amount specified in a valid claim as soon as is practicable;
• the Beneficiary must have made a claim on the Australian ADI or Foreign ADI prior to claiming under the Guarantee; and
• the claim must be in respect of a Guaranteed Liability with a due date of on or before 27 November 2008.

Notwithstanding that the Guarantee terminates on 27 November 2008, the Guarantee will still apply to claims made by Beneficiaries in respect of a Guaranteed Liability with a due date of on or before 27 November 2008 provided the claim is validly made and lodged prior to 5.00 pm on 4 December 2008.

Although the Commonwealth will presumably seek to rely upon general law rights of subrogation against Australian and Foreign ADIs whose liabilities are being guaranteed, the Deed also provides that in consideration of making any payment to a Beneficiary, the Commonwealth may require the Beneficiary to assign to it the liability which is the subject of the claim.

The Commonwealth may publish other information relevant to the Deed from time to time on the Treasury website.

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