Mauritius: Bank Of Mauritius Consults On The Establishment Of An Asset Management Company

Last Updated: 6 September 2016
Article by Iqbal Rajahbalee, Valerie Bisasur and Shane Mungur

The Bank of Mauritius (the BoM) launched a consultation paper on 8 January 2016 on the setting up of an asset management company (an AMC) in Mauritius. The consultation closed on 16 February 2016.

The BoM established an working group in August 2015 with the purpose of examining the possibility of setting up an AMC in Mauritius to (i) address concerns of the weakening effect of non-performing loans (NPLs) on the balance sheet of local banks, (ii) to remedy the lack of effectiveness of the Borrower Protection Act 2007 (the BPA)1 and (iii) to address the deficiencies of the sale by levy procedure2.

The BPA and the sale by levy procedure, which are supposed to facilitate enforcement and recovery of debt liabilities, have proved to be more cumbersome and ineffective. The sale by levy procedure has been criticised by two successive commissions of inquiries which have noted that the process is lengthy and costly. In addition to the process providing hardship to debtors, lenders have also criticised the sale by levy procedure by highlighting that sale of assets fetched at most 20 to 25 % of their market value.

In light of the inadequacies of the current regime in place for consumer credit, the BoM working group has recommended the setting up of an AMC to achieve the following objectives:

  1. To protect the vulnerable class of society which the BPA was intended to protect.
  2. To eliminate recourse to the sale by levy procedure.
  3. To set up a recovery system relieving banks from the problems encountered under the BPA regime.
  4. To stabilise the level of NPLs.
  5. To enable both lenders and borrowers to have a fair deal upon realisation of assets held as security.

The BoM working group considered both a centralised AMC model with one agency responsible for the restructuring of debts and a decentralised model where each bank would take responsibility of the debt workout. In recommending the centralised model, the working group recognised the efficiency of a central AMC to recover the maximum possible value from NPLs allowing banks to focus on their core day-today lending activities.

The centralised AMC would acquire NPLs from banks following completion of a due diligence process to ensure that there are no deficiencies in the credit facility documentation and to determine the current market valuation and long-term economic value of underlying secured assets. The AMC would apply a valuation methodology under which the NPL being transferred would be discounted.

The BoM working group recommended that the AMC be formed by way of a joint-venture between the BoM and banks with the BoM holding 60% of the capital in the AMC with the remainder being subscribed for by banks and other financial institutions.

The outcome of the consultations is being awaited.

IBA publishes roadmap for ICE LIBOR

A critical step in the evolution of the London Interbank Offered Rate (also known as ICE LIBOR) (LIBOR) was reached with the publication of the roadmap on LIBOR by its administrator, ICE Benchmark Administration Ltd (the IBA) on 18 April 2016. The roadmap is the outcome of IBA's consultation after publication of a second position paper in July 2015 setting out its proposals for the evolution of LIBOR. The measures set out in the roadmap will be implemented progressively during 2016.

Objective of the roadmap

The roadmap covered submission criteria, the implementation of a transaction based approach over a period of time, expert judgement determination as well as other enhancements to the benchmark.

To ensure the continuity of LIBOR in all market circumstances, the roadmap adopts the following waterfall of methodologies to be followed by benchmark submitters when making their LIBOR submissions:

  1. Level 1: transactions, using a range of eligible counterparties (Level 1).
  2. Level 2: data derived from transactions (including adjusted and historical transactions, interpolation and extrapolation/ parallel shift) (Level 2).
  3. Level 3: Expert judgement, appropriately framed.

Centralised determination

An important theme discussed in the consultation was the submission of raw data by benchmark submitters to IBA, who would then calculate and publish rates. IBA would collect trade data from benchmark submitters as set out in the waterfall of methodologies detailed above. Doing so would require IBA to build systems and algorithms and the roadmap sets out an indicative timetable for to implement the centralised determination model with IBA set to announce the outcome of its feasibility study by the end the second quarter of 2016. IBA would then seek regulatory approvals for its determination processes from its regulator, the Financial Conduct Authority, during the second half of 2016 with the view that IBA would take over centralised responsibility for the formulation of LIBOR in 2017.

Use of transactions

Benchmark submitters already use a range of transactions within their waterfall of methodologies to anchor their LIBOR submissions. These methodologies have been developed by each benchmark submitter resulting in a variation of approaches amongst benchmark submitters.

Through the roadmap, IBA is standardising acceptable Level 1 methodology. Acceptable Level 1 transactions will be the volume-weighted average price of unsecured deposits, commercial paper and certificates of deposits.

Respondents to the consultation noted that the use of historical transactions as anchor points would be particularly useful in the absence of new trades providing Level 1 transactions to IBA. The use of historical transactions involves a bank taking its transactions from previous day(s) and adjusting them by the day-on-day change of a correlated rate such as short-dated government bonds or central bank rates.

By allowing the use of Level 2 historical transactions, the roadmap ensures that rates can be submitted even where there is a lack of Level 1 transactions submitted to IBA. This approach is particularly useful for longer tenors where there are generally fewer transactions. Level 2 historical transactions will be weighted depending on their currency, tenor and proximity to the time of submission and the maximum number of LIBOR submission days for which historical transactions could be used has been set by the LIBOR Oversight Committee.

Expert judgement

In the consultation, IBA considered whether any adjustments should be permitted in determining LIBOR submissions based on Level 1 and/or Level 2 inputs. For example, if a market event result in Level 1 or Level 2 input being clearly unrepresentative of the market or the benchmark submitter considers that the transaction-based submission rate is clearly unrepresentative of the bank's funding cost, the benchmark submitter's use of expert adjustments could change the input by removing unrepresentative trades or adjust the rates through the application of expert judgement.

The third level of the waterfall methodology allows for the use of expert judgement, framed in the following manner:

  1. Expert judgment should be based on the benchmark submitter's internally approved procedure and agreed by IBA.
  2. It should be formulated using inputs allows by IBA.
  3. It should be accompanied by full documentation of the rationale and with the supporting evidence provided to IBA.

Other proposals

The roadmap also proposes other amendments to LIBOR, including allowing benchmark submitters to use transactions where they receive funding from non-financial corporations to inform LIBOR. This is a result of the decrease in interbank activity and the increasing importance of wholesale deposits from other counterparties to bank funding. This shift has led IBA to conclude that unsecured loans from non-financial corporations to banks should be eligible for submission by benchmark submitters. The roadmap sets out a list of eligible counterparties, including sovereign wealth funds and supranational non-financial corporations, whose trades with benchmark submitters should inform LIBOR. Moreover, as set out in the roadmap, IBA intends to move away from the administrator's question3 which will be replaced with an output statement setting out inter alia the waterfall of methodologies and the list of eligible counterparties.

The roadmap can be found on the ICE website: theice.com/iba

Basel publishes revised framework on minimum capital requirements for market risk

The Basel Committee on Banking Supervision (BCBS) has published a revised market framework on minimum capital requirements for market risk (the Revised Framework) in January 2016. The Revised Framework takes into account two consultations carried out by BCBS in October 2013 and December 2014 as well as several quantitative impact studies. The Revised Framework will come into effect on 01 January 2019.

Following the deficiencies regarding the capitalisation of trading book exposures during the financial crisis, BCBS identified a number of structural flaws in the existing market risk framework and revised the market risk framework as part of the Basel 2.5 reforms. There remained areas of concern with the Basel 2.5 market risk framework which have led to the Revised Framework being published.

The key highlights of the Revised Framework are:

  1. Revising the boundary between the banking book and the trading book to disincentive regulatory arbitrage between the two books.
  2. Enhancing the internal models approach by (i) providing for more coherent and comprehensive risk capture, (ii) providing an enhanced model approval process and (iii) constraining the capital-reducing effects of hedging and portfolio diversification.
  3. Revising the standardised approach for market risk to allow for greater reliance on risk sensitivities into capital charge calculations.

Providing coherent and comprehensive risk capture

A noteworthy change in evaluating market risk in the trading book is the replacement of value at risk (VaR) as the risk measure with expected shortfall (ES). It is understood that the VaR model faces significant difficulties under market stress by assuming that asset returns follow normal distributions. Consequently, VaR does not take tail risk into account. By measuring the risk of a position through a consideration of both the size and the likelihood of losses above a certain confidence level, ES is seen as being better equipped to evaluate tail risk and consequently, a better judge of market risk.

The Revised Framework can be found on: https://www.bis.org/bcbs/publ/d352.pdf

Basel publishes Guidance on credit risk and accounting for expected credit losses

The Basel Committee on Banking Supervision (BCBS) has issued its Guidance on credit risk and accounting for expected credit losses (the Guidance) on 18 December 2015. The consultation process was undertaken in early 2015 and the Guidance replaces the Committee's Sound credit risk assessment and valuation for loans published in 2006.

The Guidance sets out supervisory expectations for banks relating to sound credit risk practices associated with the implementation and ongoing application of expected credit loss (ECL) accounting framework.

The Guidance is structured around 11 principles and its impact will largely depend on each national supervisor's interpretation and application of these principles.

The Guidance recognises that there exists differences between ECL accounting frameworks across jurisdictions and aims to drive consistent interpretations and practices where there are similarities across these frameworks.

In addition, the Guidance includes provisions specific to banks applying IFRS.

The Guidance can be found on: https://www.bis.org/bcbs/publ/d350.htm

UBS AG v MCB4, Supreme Court refers dispute to arbitration

MCB brought proceedings to the Commercial Division of the Supreme Court in respect of an undertaking evidenced in a side letter with UBS AG5.

The Commercial Division of the Supreme Court previously held that the issue as to the applicability of the arbitration clause under a facility agreement should be transferred to the Supreme Court of Mauritius for determination under section 5 of the International Arbitration Act 2008.

The Supreme Court considered the test under section 5 (2) of the International Arbitration Act 2008 which provided that the court transfer the dispute to the competent arbitral tribunal unless a party shows, on prima facie basis, that there is a very strong probability that the arbitration agreement may be null and void, inoperative or incapable of being performed. In applying section 5 (2), the Supreme Court noted the heavy burden placed on a party to satisfy the prima facie test and that the court would have to finally decide whether the arbitration agreement is null and void, inoperative or incapable of being performed in very rare cases. The Supreme Court held that such threshold had not been met by MCB and referred the matter to the competent arbitral tribunal.

Footnotes

1. The BPA was introduced to safeguard the interest of borrowers in respect of credit facilities not exceeding MUR 2 million.

2. The sale by levy procedure is a mechanism under the Sale of Immovable Property Act 1864 by means of which a creditor can realise the immovable assets of a debtor and apply the proceeds towards discharging the debts of that debtor.

3. The question asked of submitters, referred to as the "Administrator's Question", which is currently "At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am?"

4. UBS AG v The Mauritius Commercial Bank Ltd, 2016 SCJ 43

5. The Mauritius Commercial Bank Ltd v UBS AG. Singapore Branch & Anor, 2015 SCJ 307

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions