BNZ – Waiver from NZX Participant Rule 3.5 and Section 19

NZX Regulation Decision Bank of New Zealand Waiver from NZX Participant Rule 3.5 and Section 19 and restriction of application of Rules 30 April 2018 Waiver from NZX Participant Rule 3.5 and Section 19 and restriction of application of Rules Decision 1. On the basis that the information provided to NZX Regulation (NZXR) is full and accurate in all material aspects, and subject to the conditions in paragraph two below, NZXR grants Bank of New Zealand (BNZ) a waiver of NZX Participant Rule (the Rules) 3.5, Section 19 and to restrict the application of the Rules that apply to each class of Market Participant BNZ is designated as to the BNZ Markets division (BNZ Markets) only. 2. The waiver in paragraph one above is provided on the conditions that: a. BNZ continues to be a Registered Bank, as defined in the Reserve Bank of New Zealand Act 1989 (RBNZ Act); b. BNZ continues to comply with the regulatory requirements of the Financial Markets Authority (FMA) and the Reserve Bank of New Zealand (RBNZ); and c. BNZ continues to meet its obligations under the NZX Main Board/Debt Market Listing Rules (the Listing Rules) 10.3, 10.4 and 10.6 and/or any waivers held with respect to these rules. 3. This waiver replaces the waiver and ruling granted to BNZ on 26 September 2011. 4. This waiver is effective until withdrawn by BNZ or revoked by NZXR. NZXR reserves the right to revoke or vary this waiver at any time. 5. The information on which this decision is based is set out in Appendix One to this decision. This decision will not apply if that information is not, or ceases to be, full and accurate in all material respects. 6. The Rules to which this decision relates are set out in Appendix Two to this decision. Reasons 7. In reaching the decision to grant a waiver of Rule 3.5, NZXR has considered that: a. As a Listed Issuer on the NZX Debt Market the disclosure obligations contained in Rule 3.5 are already being substantially met by the requirements of Listing Rule 10.6; b. BNZ's core business is that of providing banking services (Business & Consumer Banking, Retail & Commercial Banking) and BNZ Markets is a very small division of the bank's overall business. As such, BNZ's Directors are far removed from the day to day NZX related activity undertaken by BNZ Markets. In addition, the Responsible Executive, who has direct oversight of the day to day operation of BNZ Markets, provides an undertaking that contains all of the points from the Directors undertaking in addition to points placing responsibility on the Responsible Executive for ensuring the Market Participant complies with the Rules; and c. When BNZ was designated as a Market Participant, Directors of an applicant were not required to complete an undertaking. Given the structure of BNZ's business and the disclosure obligations contained in the Listing Rules NZXR considers that the undertaking from the Responsible Executive is more relevant than any such undertaking from any new Director, who would be far removed from NZX activity. 8. In reaching the decision to grant a waiver of Section 19, NZXR has considered that: a. BNZ is a Registered Bank and is captured under regulations enacted under the RBNZ Act; b. BNZ is an Listed Issuer on the NZX Debt Market and is subject to the Listing Rules, including disclosure obligations; and c. NZXR is satisfied that by complying with the RBNZ capital adequacy requirements, BNZ is meeting the objectives of the Rules in respect of Capital Adequacy. 9. In reaching the decision to grant a waiver to restrict the obligations of the Rules that apply to each class of Market Participant BNZ is designated as to BNZ Markets only, NZXR has considered that: a. NZXR acknowledges that BNZ's core business is that of providing banking services (Business & Consumer Banking, Retail & Commercial Banking) and the limited NZX activity undertaken by BNZ and considers it appropriate that the application of the Rules be limited to BNZ Markets. Publication 10. This decision will be published. ENDS Appendix One 1. BNZ is an NZX Sponsor and Distributing and Underwriting Sponsor under the Rules. 2. BNZ is a Registered Bank and is required to meet capital obligations under regulations enacted under the RBNZ Act. 3. BNZ is an Issuer on the NZX Debt Market and is required to notify NZX of certain information including changes of Directors and provide to NZX by way of the market announcement platform copies of its disclosure reports containing financial statements in accordance with the Registered Bank Disclosure Statement (New Zealand Incorporated Registered Banks) Order 2014. 4. BNZ was granted on 26 September 2011 a ruling that the NZX Participant Rules (September 2010) applicable to BNZ's NZX Activity apply only to business conducted by BNZ Wholesale Banking division (BNZWB), a waiver from NZX Participant Rules (September 2010) 3.26, 8.15.1, 8.15.2, 10.5 and section 19. Due to changes made in the December 2017 revision of the Rules, this ruling and waiver no longer accurately reflects the obligations under the current Rules or the division of BNZ undertaking the NZX activity. 5. In support of its application for a ruling that the Rules applicable to BNZ's NZX activity apply only to business conducted by BNZ Markets, BNZ has made the following submissions: a. Most NZX Market Participants are single purpose firms carrying out the business of broking. In BNZ's case, the NZX Activity is a small part of its overall business and, in most cases, only those employees in the BNZ Markets division and employees in the legal and compliance divisions are involved in the NZX Activity. BNZ considers it appropriate, therefore, for the Rules, in the case of BNZ, to apply only to employees of BNZ Markets, whose activities are analogous to that of a broking firm, and not to the remaining BNZ staff that are not involved in the NZX Activity to any extent; b. BNZ is a locally incorporated Registered Bank (under the RBNZ Act) and is subject to the regulation of RBNZ; and c. NZX activity carried out by BNZ in relation to any issue of securities is a small part of BNZ's overall business activity. No employees of BNZ, other than those in BNZ Markets or legal and/or compliance services, will ever be materially involved in conducting the NZX activity in respect of any issue of Securities in which BNZ is involved, other than in relation to issues of Securities by BNZ, or any related body corporate of BNZ. 6. In support of its application for a waiver from section 19 of the Rules, BNZ has made the following submissions: a. BNZ is a locally incorporated Registered Bank under the RBNZ Act and is subject to the regulation of RBNZ; b. The minimum capital adequacy requirements, under BNZ's conditions of registration as a Registered Bank, include that the Banking Group (being BNZ's financial reporting group, which consists of BNZ, all of its controlled entities and entities consolidated for financial reporting purposes) complies with the following requirements: i. the capital of the Banking Group calculated in accordance with RBNZ document Capital adequacy framework (internal models based approach) dated June 2011; ii. the Tier One capital ratio of the Banking Group calculated in accordance with the RBNZ Capital Adequacy Document is not less than 4%; and iii. the total capital ratio of the Banking Group calculated in accordance with RBNZ Capital Adequacy Document is not less than 8% c. By complying with the RBNZ capital adequacy requirements, BNZ is meeting the objectives of the Rules in respect of Capital Adequacy. Appendix Two NZX Participant Rules Section 3 Market Participants 3.5 COMPANIES 3.5.1 Whenever a new Director of a Market Participant, which is a company, is appointed, the Market Participant must deliver to NZX an undertaking, in the form provided in Appendix 4, signed by that Director. Market Participants must notify NZX in writing of (and provide the executed undertaking in the form provided in Appendix 4) a new Director as soon as practicable but no later than 5 Business Days after such appointment being made. 3.5.2 Whenever a Market Participant is required to file an annual return, financial statements, or a notice of a change in its share capital or its constitution with the Registrar of Companies, it shall, at the same time, send a copy of such return or notice to NZX. 3.5.3 Where a Director of a Market Participant, which is a company, resigns, the Market Participant must notify NZX in writing of such resignation as soon as practicable but no later than 5 Business Days after such resignation. Section 19 Capital Adequacy 19.1 CAPITAL ADEQUACY 19.1.1 Minimum Capital Required: Subject to Rule 19.1.2, a Market Participant Requiring Capital must at all times maintain its Net Tangible Current Assets at a level equal to, or greater than, its Prescribed Minimum Capital Adequacy, which shall be the higher of: (a) the Minimum NTCA of the Market Participant Requiring Capital, as prescribed for its category of Market Participant Requiring Capital by Rule 19.2; and (b) the Total Risk Requirement of the Market Participant Requiring Capital, as calculated in accordance with Rule 19.5. 19.1.2 Other Prudential Supervision Regime: A Market Participant Requiring Capital may be exempted from the requirements of Rule 19.1.1, if NZX is satisfied that the Market Participant Requiring Capital is subject to, and is complying with, an equivalent level of prudential supervision by an Alternative Regulator, in accordance with the laws of the applicable jurisdiction. 19.1.3 A Market Participant Requiring Capital holding an exemption under Rule 19.1.2 must: (a) comply with all obligations to, or requirements of, the Alternative Regulator; (b) provide NZX with copies of any filings or communication with the Alternative Regulator at the same time this information is provided to the Alternative Regulator; (c) provide NZX with copies of any reports from the Alternative Regulator relating to the compliance or non-compliance with the requirements of the Alternative Regulator's prudential supervision regime; (d) ensure that a Reciprocal Arrangement is in place with the Alternative Regulator to provide information to NZX in respect of the Market Participant Requiring Capital at the request of NZX and without notification to the Market Participant Requiring Capital; and (e) notify NZX if the Market Participant Requiring Capital ceases to be subject to regulation by the Alternative Regulator as soon as reasonably practicable after becoming aware of the same. 19.1.4 An exemption under Rule 19.1.2 may be revoked at any time by NZX and will be deemed to be revoked immediately if: (a) the Market Participant Requiring Capital ceases to be subject to regulation by the Alternative Regulator; or (b) the Market Participant Requiring Capital's standing, authorisation or approval conferred by the Alterative Regulator is suspended or terminated or otherwise materially adversely impaired. 19.2 Capital Adequacy Requirements 19.2.1 The Minimum Net Tangible Current Asset levels are: (a) $500,000 for a NZX Trading and Advising Firm; (b) $500,000 for a NZX Advising Firm accepting Client Funds; (c) $250,000 for a NZX Advising Firm not accepting Client Funds; (d) $500,000 for a Bank Only Participant; (e) $500,000 for a Principal Book Only Dealer; and (f) $250,000 for a Distribution and Underwriting Sponsor. 19.3 Capital Adequacy Reporting 19.3.1 A Market Participant Requiring Capital must calculate: (a) the Market Participant Requiring Capital's Net Tangible Current Assets; (b) the Market Participant Requiring Capital's Total Risk Requirement; and (c) the percentage that the Market Participant Requiring Capital's Net Tangible Current Assets and Total Risk Requirement amounts form of its Prescribed Minimum Capital Adequacy, as at the end of each Business Day (together, the "Capital Adequacy Calculations") with such calculation to be completed and recorded by the end of the next Business Day. 19.3.2 A Market Participant Requiring Capital must provide to NZX a monthly report of its daily Capital Adequacy Calculations during that month at the time and in the manner prescribed by Rule 20.14. 19.3.3 NZX may by Notice require a Market Participant Requiring Capital to provide to NZX a report of its daily Capital Adequacy Calculations on a more regular basis as and when NZX considers this necessary or desirable. 19.3.4 A Market Participant Requiring Capital must notify NZX as soon as reasonably practicable after becoming aware that, between two consecutive Business Days, the Market Participant Requiring Capital's Net Tangible Current Assets as a percentage of its Prescribed Minimum Capital Adequacy:. (a) having been above any of the percentage thresholds specified below, changes so that it is below that threshold; or (b) having been below any of the percentage thresholds specified below, changes so that it is above that threshold; and such notice must include the figures calculated under Rules 19.3.1(a), (b) and (c) and such further information as NZX requires. The percentage thresholds referred to above are: 100%, 120%, 150%, 200%, 300%, 500% and 1000%. 19.3.5 Following notification under Rule 19.3.4, in relation to a Market Participant Requiring Capital's Net Tangible Current Assets being less than 120% of its Prescribed Minimum Capital Adequacy, the Market Participant Requiring Capital must provide to NZX a daily report of its Capital Adequacy Calculations (as soon as such calculations are available), including such further information as NZX requires, until its Net Tangible Current Assets exceed 120% of its Prescribed Minimum Capital Adequacy. 19.4 NTCA Calculation 19.4.1 A Market Participant Requiring Capital's Net Tangible Current Assets are calculated as the sum of its tangible assets less the sum of its liabilities, as calculated in accordance with Generally Accepted Accounting Practice, this Rule 19.4 and Rule 19.13. In the event of any inconsistency between these Rules and Generally Accepted Accounting Practice, these Rules will prevail. 19.4.2 The following items must be excluded from the calculation of Net Tangible Current Assets: (a) all Intangible Assets (but liabilities including Contingent Liabilities associated with Intangible Assets must be included in the calculation); (b) guarantees, except guarantees approved by NZX where and to the extent to which the Market Participant Requiring Capital has a Net Underwriting Commitment for the purposes of the calculation of the Primary Market Risk Requirement; (c) any Subordinated Debt approved by NZX in accordance with Rule 19.4.5 (d) Property, Plant and Equipment; (e) any asset which, in the normal course of business is not capable of being realised within 12 months (having regard to any relevant Guidance Note or Procedure); and (f) any item excluded under Rule 19.4.3. 19.4.3 NZX may, from time to time, notify a Market Participant Requiring Capital that it must exclude any item that otherwise would be included in its NTCA calculation on such conditions and for such period notified by NZX. Where NZX has made a determination under this Rule, it will advise the Market Participant Requiring Capital in writing, specifying the reasons for its determination. 19.4.4 The following items must be included in the calculation of Net Tangible Current Assets: (a) all Contingent Liabilities; and (b) assets and liabilities in respect of segregated client monies held on the Market Participant Requiring Capital's balance sheet. 19.4.5 A Market Participant Requiring Capital may only exclude a Subordinated Debt from calculation of its liabilities, for the purposes of these Rules, with the prior approval of NZX. 19.4.6 NZX will not approve the exclusion of Subordinated Debt from calculation of the Market Participant Requiring Capital's liabilities unless the Subordinated Debt is issued on terms that include that: (a) the terms of issue of the Subordinated Debt are subject to these Rules; (b) the terms of issue of the Subordinated Debt cannot be amended without the prior approval of NZX; (c) any repayment of the Subordinated Debt is subject to the Market Participant Requiring Capital holding Net Tangible Current Assets above 120% of its Minimum NTCA after repayment; (d) no repayments of the Subordinated Debt can be made without the prior approval of NZX; (e) the obligation to pay any amount owing in respect of the Subordinated Debt, including interest or distributions, is suspended during any period in which the Market Participant Requiring Capital fails to comply with its obligations under Rule 19.1.1; or (f) any other provision NZX considers necessary to protect the viability of the Market Participant Requiring Capital's business and ensure Subordinated Debt is validly and effectively subordinated to the general unsecured creditors of the Market Participant Requiring Capital. 19.4.7 NZX will not withhold approval to repayment of any Subordinated Debt if in the opinion of NZX, the Market Participant Requiring Capital's Net Tangible Current Assets will continue, immediately following repayment, to be greater than 120% of its Prescribed Minimum Capital Adequacy. 19.5 Total Risk Requirement Calculation 19.5.1 A Market Participant Requiring Capital's Total Risk Requirement is calculated as being the aggregate of its: (a) Operational Risk Requirement; (b) Counterparty Risk Requirement; (c) Large Position Risk Requirement; (d) Position Risk Requirement; (e) Currency Risk Requirement; (f) Primary Market Risk Requirement; and (g) Market Risk Requirement (if any), calculated in the manner determined by Rules 19.6 to Rule 19.13. 19.6 Operational Risk Requirement Calculation 19.6.1 A Market Participant Requiring Capital's Operational Risk Requirement is equal to 1% of the higher of: (a) the Market Participant Requiring Capital's budgeted total revenue for the month in which the calculation is made; and (b) the Market Participant Requiring Capital's average actual monthly total revenue of the three complete consecutive calendar months preceding the date on which the calculation is made. 19.7 Counterparty Risk Requirement 19.7.1 A Market Participant Requiring Capital may calculate the Positive Credit Exposure under Rule 19.7.3 and Rule 19.7.4 for an individual Counterparty on a net basis across all currencies only where and to the extent that netting is permissible on a "first in first out" basis under Generally Accepted Accounting Practice. 19.7.2 Liability of a Counterparty to a Market Participant Requiring Capital may be netted against: (a) assets held by that Market Participant Requiring Capital pending settlement of that liability; and/or (b) assets of that Counterparty under the control of that Market Participant Requiring Capital in respect of which that Market Participant Requiring Capital has a right or lien that may be exercised in order to satisfy that liability. 19.7.3 A Market Participant Requiring Capital's Counterparty Risk Requirement shall be calculated in respect of each of its Positive Credit Exposures for each Counterparty. In calculating Positive Credit Exposures, the Market Participant Requiring Capital shall, having regard to any relevant Guidance Note or Procedure: (a) include all trade and intragroup debtors; (b) include all transactions in Financial Instruments; and (c) exclude all transactions with CHO and all Net Underwriting Commitments. 19.7.4 The Positive Credit Exposure for an individual Counterparty shall be calculated as the sum of: (a) 4% of the value of all transactions with that Counterparty remaining unsettled, but that are not Overdue; (b) 10% of the Initial Margin Capital Requirement for all clients in respect of margined transactions with that Counterparty; (c) 50% of the value of all transactions with that Counterparty that are Overdue if the Counterparty is an AFSL holder, a financial market participant that is regulated in the United States of America, the United Kingdom, or other OECD country, a Bank or a Market Participant Requiring Capital, a Clearing Participant or a Participant Requiring Capital (as defined in the applicable rules of the NZX Market in which they participate); and (d) 100% of all other transactions with that Counterparty. 19.7.5 Where a right of set-off exists and a single Counterparty has outstanding balances in more than one category specified in Rule 19.7.4, the debit or credit balance is first applied to the Positive Credit Exposure with the greatest Counterparty Risk Requirement. 19.8 Large Position Risk Requirement 19.8.1 The Large Position Risk Requirement is calculated as being the aggregate of the: (a) Large Position Counterparty Risk Requirement; and (b) Large Position Issuer Risk Requirement, but must exclude any Net Underwriting Commitment. 19.8.2 The Large Position Counterparty Risk Requirement applies when a Market Participant Requiring Capital's Positive Credit Exposure to an individual Counterparty exceeds 19% of that Market Participant Requiring Capital's total liabilities and will be the sum of: (a) 2% of the value of transactions with that Counterparty that are not Overdue; and (b) 10% of the value of transactions with that Counterparty that are Overdue. 19.8.3 The Large Position Issuer Risk Requirement applies when a Market Participant Requiring Capital has a principal position in a class of an individual Issuer's Securities that is more than 10% of all the Securities in that class or that has a value that exceeds 19% of that Market Participant Requiring Capital's total liabilities and will be an additional 5% of the total of the value of the relevant Securities. 19.9 Position Risk Requirement Calculation 19.9.1 The Position Risk Requirement represents the aggregate of a Market Participant Requiring Capital's individual absolute net position risk amounts in particular Financial Instruments or transactions. The Position Risk Requirement for a Market Participant Requiring Capital's net position in a particular Financial Instrument or transaction is: (a) For debt and equity Securities: i. 3% of the value of Securities issued by central government Issuers, senior ranking Unsubordinated Debt Securities issued by Bank Issuers and Investment Grade Securities issued by local government Issuers; ii. 6% of the value of fully paid Quoted Equity Securities within the NZX50 index or any Recognised Market Index and fully paid senior ranking Investment Grade Debt Securities; iii. 8% of the value of other fully paid New Zealand or Australian Quoted Securities (excluding Structured Finance Products), unrated Securities issued by local government Issuers and Subordinated Debt Securities issued by Bank Issuers (excluding Structured Finance Products); iv. 15% of the value of all other Securities (including Structured Finance Products) Quoted on a Recognised Market or issued by Bank Issuers; v. 50% of the value of all other Securities issued by New Zealand and Australian Issuers; and vi. 100% of the value of all other Securities. (b) For derivative products: i. in respect of margined transactions that are bought Options, the amount of any unpaid premium; ii. in respect of margined transactions that are sold Options, the aggregate of twice the Initial Margin Capital Requirement and all unrealised losses (including any unpaid margins); iii. in respect of all other margined transactions, twice the Initial Margin Capital Requirement; and iv. in respect of non-margined transactions, an amount calculated on a basis from time to time approved by NZX. 19.9.2 In calculating the absolute net position in a particular Financial Instrument or transaction under Rule 19.9.1: (a) the value of each debt or equity Security position under Rule 19.9.1(a) may be off-set by a derivative product over the same underlying debt or equity Security, to the extent that the exposure to that debt or equity Security is reduced by that derivative product; (b) a derivative product over an underlying debt or equity Security need not be taken into account in the calculation under Rule 19.9.1(b) to the extent that the exposure to that debt or equity Security from the derivative product has been off-set as permitted under Rule 19.9.2(a); and (c) if Rule 19.9.2(a) does not apply, but a particular debt or equity Security position is off-set in full or part by a derivative product where there is a demonstrable correlation between the exposure to that debt or equity Security position and the derivative product, the value of the debt or equity Security position under Rule 19.9.1(a) may be reduced to the extent expressly permitted and approved in writing by NZX. 19.9.3 NZX may determine the Position Risk Requirement for a particular Financial Instrument or transaction or class of Financial Instrument or transaction or a particular Issuer or class of Issuer in the Procedures or in a Guidance Note. 19.10 Currency Risk Requirement 19.10.1 The Currency Risk Requirement is calculated as the sum of the following adjustment factors: (a) 3% of the net of that Market Participant Requiring Capital's unhedged Financial Assets and Financial Liabilities denominated in AUD; and (b) 6% of the net of the Market Participant Requiring Capital's unhedged Financial Assets and Financial Liabilities denominated in a currency other than the Base Currency or AUD. 19.11 Primary Market Risk Requirement 19.11.1 The Primary Market Risk Requirement is calculated in respect of all Net Underwriting Commitments and in relation to each Net Underwriting Commitment is the particular percentage applicable to the Securities the subject of the commitment under Rule 19.9.1(a) 19.12 Market Risk Requirement 19.12.1 From time to time NZX may by written Notice, require any Market Participant Requiring Capital or all Market Participants Requiring Capital to include a Market Risk Requirement in its or their Total Risk Requirement. In determining whether a Market Risk Requirement is necessary and in determining the amount or method of calculating a Market Risk Requirement, NZX will have regard to: (a) the risk profile of the Market Participant Requiring Capital; (b) domestic and global market volatility; and (c) any other factor that NZX considers to be relevant. 19.12.2 A Market Participant Requiring Capital will be required to calculate and include the Market Risk Requirement in its Total Risk Requirement in accordance with any Notice given by NZX from time to time. 19.13 Valuation and Foreign Currencies 19.13.1 In calculating its NTCA or Total Risk Requirement, a Market Participant Requiring Capital must mark to market each of its principal positions in Financial Instruments on each Business Day. Except where provided for in the Rules, all assets and liabilities are to be valued in accordance with Generally Accepted Accounting Practice. 19.13.2 An Option or right may be valued using an option pricing model approved by NZX from time to time. The model used must be specified in all relevant reporting to NZX. 19.13.3 In arriving at a mark to market value for an Option or rights position with no published market price, or that cannot otherwise be valued under Rule 19.13.2, the position must be valued as follows: (a) for a purchased Option or right that is In the Money, the In the Money Amount multiplied by the quantity underlying the Option or right; and (b) for a written Option, the sum of: i. the In the Money Amount multiplied by the quantity underlying the Option; and ii. the initial premium received for the Option. 19.13.4 In arriving at a mark to market value for a Swap or Forward Rate Agreement, the position must be valued as follows: (a) having regard to the net present value of the future cash flows of the contracts; and (b) using current interest rates relevant to the period in which the cash flows will arise. 19.13.5 In calculating its NTCA, a Market Participant Requiring Capital must apply such discount or haircut to any item that may be included in the calculation as notified to that Market Participant Requiring Capital by NZX on such conditions and for such periods notified by NZX. 19.13.6 Where NZX has made a determination under Rule 19.13.5, it will advise the Market Participant Requiring Capital in writing, specifying the reasons for its determination. 19.13.7 In calculating NTCA or any component of the Total Risk Requirement, in respect of a Business Day, a Market Participant Requiring Capital must convert any amounts in foreign currency other than the Base Currency to the Base Currency at the prevailing spot rate on or about the close of business on that Business Day from a readily available market source and the Market Participant Requiring Capital must specify the rate and source in all relevant reporting to NZX. 19.13.8 For the purpose of Rule 19.13.7 NZX may, from time to time, stipulate that a specific source cannot be used as a source for currency conversion or may stipulate the source that must be used by the Market Participant Requiring Capital. End CA:00318097 For:NZXR Type:WAV/RULE Time:2018-05-17 10:58:41