Latest pieces of guarantee scheme for large deposits and wholesale funding released

On 21 November 2008, the Government released:

• the Guarantee that will apply to deposit liabilities held with eligible Australian authorised deposit-taking institutions (ADIs) in excess of $1 million and to wholesale funding liabilities of eligible ADIs; and
• the Rules that will govern access to the Guarantee.

The eligible ADIs are listed in Schedule 1 to the Rules and include Australian-incorporated ADIs which are subsidiaries of foreign banks and branches of foreign banks.

Liabilities of eligible ADIs will only be "Guaranteed Liabilities" (and therefore covered by the Guarantee) if they are the subject of an Eligibility Certificate issued in accordance with the Rules.

The Rules prescribe the criteria which must be satisfied before an Eligibility Certificate may be issued in respect of eligible liabilities. The Rules also set out the application process (including application forms) which ADIs who wish to access the Guarantee must comply with and the fees payable on the amounts guaranteed.

The Guarantee will apply from 28 November 2008. Until then, the current interim arrangements will continue to apply to deposits of less than $1 million and to eligible wholesale funding liabilities, which will continue to be guaranteed without charge during this period. The Guarantee will terminate at midnight on the date that falls 67 calendar months (five years and seven months) after the Final Application Date notified by the Government. The Government must give 20 business days notice in writing of the Final Application Date.

The Commonwealth may effect amendments to the Guarantee by publication on the Government Guarantee Scheme website.

Eligibility of liabilities for domestic ADIs

The liabilities of eligible ADIs (other than branches of foreign banks) that will qualify for the issue of an Eligibility Certificate are as follows:

Deposit liabilities in excess of $1 million

Existing and new deposit liabilities that are:

• in excess of $1 million;
• held with eligible ADIs (including those held in overseas branches of Australian owned ADIs); and
• at call or with maturities of up to 60 months.

The deposit liabilities may be denominated in any currency and there are no restrictions on the identity or nature of the depositor. Significantly no detailed rules have been published in relation to the calculation of the $1 million threshold. It is expressed as "$1 million per customer per ADI held in any currency".

Wholesale funding liabilities - short-term liabilities

Short-term wholesale funding liabilities that are:

• senior unsecured debt instruments
• in any currency
• with maturities of up to 15 months
• issued in bearer, registered or dematerialised form
• which are "not complex"; and
• are bank bills, certificates of deposit (CDs), transferable deposits (TDs), debentures (as defined in section 128F of the Income Tax Assessment Act 1936) or commercial paper.

Applications can also be made for issuance programs.

Wholesale funding liabilities - term funding liabilities

Term wholesale funding liabilities that meet the same eligibility criteria for short-term wholesale funding liabilities except that:

• the term of the liabilities covered must be 15 to 60 months; and
• the instruments must be bonds, notes or debentures (as defined in section 128F of the Income Tax Assessment Act 1936).

Eligibility criteria for liabilities of Branches of Foreign Banks

The Guarantee does not extend to term wholesale funding liabilities of foreign bank branches.

The eligibility criteria for deposits and short-term wholesale funding liabilities of foreign bank branches are the same as the corresponding eligibility criteria for domestic ADIs except that the liabilities must:

• be held by Australian Residents (for the purposes of Australian income taxation law); and
• mature prior to 31 December 2009.

Meaning of "not complex"

Under guidelines published by the Government, an instrument will only be regarded as "not complex" if it does not contain any of the following features:

• the principal amount of the liability is not fixed but varies by reference to, or is derived from, the asset value, index or commodity or is linked to the credit standing of any person
• the principal and interest payments are required to be made in different currencies
• the associated interest payable is neither fixed nor determined by reference to a market interest rate with a fixed margin
• amounts other than principal and interest are payable (other than additional amounts by way of a gross up for taxes, late fees, break fees and make-whole payments or similar amounts)
• may be converted to equity or may be subordinated (other than by operation of law)
• requires the eligible ADI to grant security, other than where such a requirement is triggered only in the event that the eligible ADI grants a security in respect of other liabilities
• includes any cross-default or cross-acceleration event of default; or
• includes any right to demand prepayment of principal or permits redemption prior to the maturity date, except in the following (or similar) circumstances:
  • interest withholding taxes or other taxes that have, or will become, payable due to a change in laws
  • the non-payment of principal or interest
  • the insolvency of the eligible ADI or the occurrence of specified insolvency events in respect of the eligible ADI
  • illegality
  • the eligible ADI ceasing to carry on a banking business or business generally
  • a breach of obligations that are not remedied.

How the guarantee works

The Guarantee is a unilateral obligation undertaken by the Commonwealth of Australia in favour of the "Beneficiaries", being the persons to whom the Guaranteed Liabilities are from time to time owed.

Under the Guarantee the Commonwealth guarantees to the Beneficiaries the payment of the Guaranteed Liabilities on their due date. Following a claim made in accordance with procedures set out in the Scheme Rules, and the expiry of "the applicable grace period", the Commonwealth must pay that liability in accordance with the procedures set out in the Scheme Rules.

The claim procedures set out in the Scheme Rules require the following:

• claims made by Beneficiaries must be in writing and in the particular form set out in Schedule 8 of the Rules and delivered to the Scheme Administrator (the RBA)
• the Commonwealth must pay the amount specified in a valid claim in the currency in which the Guarantee Liability is denominated
• the Beneficiary must have made a claim on the eligible 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 the expiration of the relevant Eligibility Certificate.

As for the Interim Guarantee, the Commonwealth may require the Beneficiary to assign to it the liability which is the subject of the claim.

Any notice or other communication under the Guarantee must be given in accordance with the Scheme Rules.

Guarantee fees

The Guarantee itself is silent on the fee obligations of eligible ADIs in respect of the Guarantee. Instead, the fee obligations are contained in Schedule 5 of the Rules.

Schedule 5 requires eligible ADIs to pay the relevant fee (referred to as an "Eligibility Certificate Fee") on a monthly basis, in arrears. The fee payable is calculated in accordance with the following formula:

Eligibility Certificate Fee Payable = Guaranteed arrangement (eg. deposit, short term wholesale liabilities or long term liabilities) x Relevant Fee x Number of calendar days in month / 365.

Fee Schedule

The Government has adopted a single relevant rate fee for all maturities for eligible securities up to 60 months, with a different rate applying to eligible ADIs based on their credit rating, as set out in the following fee schedule:

The ratings are based on those used by Standard & Poor's and Fitch, however, equivalent ratings by Moody's will also be applicable. Where an institution has different ratings from two or more agencies, the predominant rating is used and if this does not exist, the lowest rating will be used.

For deposit and short-term wholesale funding liabilities, the Eligibility Certificate Fee applying for each month will be determined by the credit rating as at the last business day of the month. For long-term wholesale funding liabilities the applicable fee will be determined by the credit rating as at the day of the issuance of the securities and will be fixed for the term of the securities.

Reporting and identification

The first monthly fee report will become due on 12 January 2009, covering the period from 28 November to 31 December 2008.

In the interim, until 21 January 2009, eligible ADIs will be required to report the value of all Guaranteed Liabilities on a weekly basis as at end Wednesday (except for the week ending 31 December 2008) and must be submitted within 5 business days until this arrangement is reviewed in January 2009.

Eligible ADIs must have in place systems to identify separately Guaranteed Liabilities and other liabilities. For wholesale liabilities, systems must be in place prior to the Guaranteed Liabilities being issued. For deposits, the necessary systems need to be established before the end of February 2009 yet until then, existing systems must be capable of providing soundly based estimates on the value of Guaranteed Liabilities on which an Eligibility Certificate Fee is payable.

Calculations

Eligible ADIs will be notified by the Scheme Administrator of any errors in the calculation of the Eligibility Certificate Fee. The notice, at the discretion of the Scheme Administrator, can require payment within seven business days or with the next monthly report, or remit overpayments or alternatively direct that the amount be deducted from future monthly payments.

Application process

Applications for the Guarantee must be made using the Government-approved form (referred to as the "ADI Application Form"). The application form and accompanying statements by the applicant must be signed by the applicant's Treasurer/Chief Financial Officer (or equivalent) or a senior officer of the applicant appointed by the applicant's Treasurer/Chief Financial Officer (or equivalent) for the express purpose of signing an application form.

In addition to detailed contact information the application must contain various pieces of information including:

• the long-term credit rating of the applicant by all major ratings agencies that rate the applicant
• an executed Counter-Indemnity substantially in the form set out in Schedule 7
• an external legal opinion in respect of the executed Counter-Indemnity addressed to the Commonwealth of Australia in respect of the valid, binding and enforceable nature of the executed Counter-Indemnity substantially in the form as set out in Schedule 9
• a fee letter signed on behalf of the Applicant by an authorised person substantially in the form set out in Schedule 6;
• a letter of prudential compliance taking the form of either a statement of compliance by the Applicant or alternatively a letter from APRA stating that it does not object to the granting of the Guarantee.
  
  For foreign bank branches a statement from the Chief Executive Officer of the parent bank verifying compliance or describing all material respects to which it does not meet the prudential requirements after which a letter is required from APRA stating it does not object to the granting of the Guarantee
• details of liabilities for which the guarantee is being sought
• for non-deposit liabilities, external legal opinions addressed to the Commonwealth of Australia in respect of the valid, binding and enforceable nature of the liabilities for which the guarantee is being sought and that those liabilities meet the eligibility criteria set out in the Rules. The opinions must be substantially in the forms set out in Parts A and B of Schedule 10; and
• foreign bank branches must provide a legal opinion from external legal advisers in their home jurisdiction in respect of the application of law in the jurisdiction of incorporation to the liabilities and in support of the opinion for non deposit liabilities. In addition a statement regarding the liabilities is required.