Restrictions on trading derivatives with Dutch healthcare institutions
On 1 January 2022, a new regulation on the use of derivatives by healthcare institutions will enter into effect.
On 1 January 2022, a new regulation on the use of derivatives by healthcare institutions will enter into effect. Similar to previous Dutch regulations regarding housing associations and educational institutions, the use of derivatives by healthcare institutions will also be significantly restricted.
What is it about?
The Regulation on the Use of Financial Derivatives by Healthcare Institutions (Regeling financiële derivaten WMG, the Regulation) aims to prevent healthcare institutions from using derivatives for speculative purposes. The background of the Regulation lies in the fact that healthcare institutions are funded with public funds. Healthcare institutions should, therefore, not engage in the use of complex and high-risk financial products. As discussed below, this results in certain restrictions being imposed regarding the permitted derivatives and dealers.
Which firms should care?
The Regulation is relevant for dealers that trade with Dutch healthcare institutions, apart from such institutions themselves of course.
What should they know?
Permitted derivatives
Healthcare institutions may only enter into interest rate caps, payer swaps and, if related to payer swaps, forward starting swaps and swaptions, and only insofar as these derivatives are used to hedge certain interest rate or FX risks resulting from related credit facilities or contracts denominated in a foreign currency. Moreover, the derivatives must be denominated in EUR and may not exceed the nominal value of the related contracts. Furthermore, the tenor of derivates used to hedge interest rate risks may not exceed the maturity date of the credit facility to which the derivative is linked, with a maximum of 15 years. For derivatives used to hedge FX risks, the maximum tenor is 12 months.
Contractual restrictions
Certain requirements apply to the contractual terms of the derivatives. This includes prohibitions to include unilateral termination rights for the dealer and to call margin from healthcare institutions.
Counterparty requirements
Healthcare institutions are only allowed to enter into derivatives transactions with dealers that are based in the EEA. Also, dealers must have a credit rating of at least single A (or equivalent) as rated by at least two of the following credit rating agencies: Moody’s, S&Ps, Fitch and DBRS.
Client classification
A healthcare institution may only trade derivatives with dealers where it is classified as a retail client by them. An exception to this rule applies when (i) an internal regulatory body has approved the healthcare institution’s decision to be classified as a professional client and this is stated in its treasury policy, and (ii) the healthcare institution’s total assets, net revenue, and equity meet certain thresholds.
When will this apply?
The Regulation will enter into effect on 1 January 2022 and will apply to derivatives transactions entered into by healthcare institutions on or after that date. Any legacy trades are not caught by the Regulation. This means that existing trades with UK dealers (not meeting the EEA requirement) are out of scope.
Any further thoughts?
The Regulation fits within the Ministry of Finance’s wider policy on the regulation of derivatives by (semi-)public institutions. It follows earlier similar sectoral regulations that imposed restrictions on housing associations and educational institutions (see our previous briefings below). We suspect that parties will look to amend their existing ISDA agreements. In addition, we would recommend dealers to refresh their legal opinions.
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