A new law governing Rwanda’s central securities depository (CSD) was recently passed to address the longstanding gaps and loopholes in the existing laws that previously restricted the enforceability of financial contracts and arrangements within Rwanda, such as derivatives, repos, buy/sell-backs, and title transfer collateral arrangements, concluded under the standardized contractual frameworks developed by the International Swaps and Derivatives Association (ISDA) and the International Capital Market Association (ICMA), writes law firm ENSAfrica.
Some of the main issues that were viewed as constituting hurdles to the enforceability of financial contracts and related arrangements included the lack of clear rules for close-out netting and the ability to enforce collateral without going through courts or other public authorities. Netting clauses (a standard feature in derivatives and repo agreements) were vulnerable to challenge through clawbacks under the existing insolvency law. Also, enforcing collateral normally requires intervention by courts or the Registrar General (of security interests) to appoint a receiver, which could cause delays during enforcement. These limitations made the previous legal framework ill-suited for these types of transactions and likely discouraged both domestic financial innovation and cross-border market participation.
The new law further introduces financial collateral arrangements. It recognizes a broad range of eligible collateral, including cash, securities, letters of credit, guarantees, and other Capital Market Authority (CMA)-approved assets, and allows their creation and enforceability outside the general legal regime for creation and realization of security interests. This entails that secured creditors under the new law can now realize collateral immediately upon default without first seeking judicial authorization or going through the Registrar General. The inclusion of title transfer collateral arrangements, where the legal ownership of collateral temporarily transfers to the secured party, is particularly significant. These arrangements are essential to the functioning of repurchase agreements and margin calls in derivative trading. By recognizing them under the new law, Rwanda opens the door to more sophisticated financial products and risk management options within its financial market sector.
Equally important, unlike the previous close-out netting regime, which applied only to banks, the new law applies to a wider range of qualified institutions, including insurers, pension funds, collective investment schemes, fund managers, clearing systems, and certain foreign entities.
Looking ahead, one may reasonably anticipate that the key challenge will likely not be in the text of the new law, but in its effective operationalization. Legal reform of this nature must be matched by adequate investment in capacity-building, clear regulatory guidance, and sustained market education. Regulatory authorities, the Rwanda Stock Exchange (“RSE”), judges, and market participants (including advisors) will need to develop technical proficiency in these financial transactions and related concepts and apply them consistently and in line with relevant international standards. Courts will play an important role in building market confidence through sound interpretation of the law and informed jurisprudence. Practical lessons may be drawn from the experience of mature jurisdictions like the UK, Singapore, and South Africa, where similar frameworks have long been tested.