Ring fencing agreement definition
A ring fencing agreement, also referred to as an operational separation agreement, is an agreement between two or more parties that sets out the terms and conditions of a business`s operations that must be separated from the rest of the business. This type of agreement is often used in the context of financial institutions, where it is necessary to separate certain types of activities from others to manage risk.
In essence, a ring fencing agreement is a legal document that outlines how a company will operate and manage its business in a way that minimizes the risk of financial loss. The agreement typically defines exactly what activities will be separated, how they will be separated, and how the separated activities will be managed and monitored.
The ring fencing agreement is often used to separate a financial institution`s “retail” activities from its “investment banking” activities. Retail activities include traditional banking services such as deposit taking, lending, and payments. Investment banking activities, on the other hand, include activities such as underwriting, trading, and advisory services.
The separation of these activities is important because it helps to protect the retail side of the business in case the investment banking side experiences financial difficulties. By isolating these activities, the risk to the retail side of the business is reduced, which can help to maintain the trust of customers and investors.
Ring fencing agreements have become increasingly important in recent years as regulators have sought to reduce the risk of another financial crisis. In the UK, for example, the Financial Services (Banking Reform) Act 2013 introduced new rules that require banks to ring fence their retail activities from their investment banking activities.
In conclusion, a ring fencing agreement is a legal document that outlines how a business will operate and manage its activities in a way that minimizes risk. It is often used in the financial industry to separate retail activities from investment banking activities. By isolating these activities, the risk to the overall business is reduced, which helps to maintain the trust of customers and investors.