Ringfencing

Last updated

In business and finance, ringfencing or ring-fencing occurs when a portion of a company's assets or profits are financially separated without necessarily being operated as a separate entity. This might be for:

Contents

Asset protection

In asset protection arrangements, ring-fencing can be employed through segregating specific assets and liabilities into separate companies of a corporate group. [1] [2] It can also be used as a method for mitigating liquidation risk or to improve a corporate credit rating.

Separation for tax purposes

In the United Kingdom, ring fence profits arise from income and gains from oil extraction activities or oil rights in the UK and UK continental shelf, and are subject to a higher rate of corporation tax. [3] This petroleum fiscal regime can be seen in other countries as well. [4]

Regulatory separation

In the case of loans or bonds, ringfencing generally allows an investor to have both a link to a specific asset they possess (such as wind farms owned by a utility), while also enjoying the full credit support of a utility's balance sheet.

One common form of ringfencing is when a regulated public utility business financially separates itself from a parent company that engages in non-regulated business. This is done mainly to protect consumers of essential services such as power, water and basic telecommunications from financial instability or bankruptcy in the parent company resulting from losses in their open market activities. Ringfencing also keeps customer information within the public utility business private from the for-profit efforts of the parent company's other business.

A high-profile success story with utility ringfencing occurred during the Enron meltdown of 2001–2002; Enron acquired Oregon-based Portland General Electric in 1997, but the local power generator was ringfenced by the state of Oregon prior to the acquisition being completed. This protected Portland General Electric's assets, and its consumers, when Enron declared bankruptcy amid massive accounting scandals. There were examples of this in other US states as well. [5]

Arising from the 2008 financial crisis, the largest banks in the United Kingdom are required by the Financial Services (Banking Reform) Act 2013 to ring-fence their retail operations in order to increase depositor protection. [6] The Ring-fencing requirements came into effect on 1 January 2019. [7] The UK bank ring-fencing requirements require such retail operations to be operated through separate entities and sub-groups, within each wider bank group. [8] The Prudential Regulation Authority is the lead regulator for ring-fencing, with responsibility for identifying which banks are within the scope of the ring-fencing legislation and for supervising banks’ implementation of the rules. [9]

See also

Related Research Articles

Chapter 11 of the United States Bankruptcy Code permits reorganization under the bankruptcy laws of the United States. Such reorganization, known as Chapter 11 bankruptcy, is available to every business, whether organized as a corporation, partnership or sole proprietorship, and to individuals, although it is most prominently used by corporate entities. In contrast, Chapter 7 governs the process of a liquidation bankruptcy, though liquidation may also occur under Chapter 11; while Chapter 13 provides a reorganization process for the majority of private individuals.

<span class="mw-page-title-main">Enron</span> American energy company

Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. It was founded by Kenneth Lay in 1985 as a merger between Lay's Houston Natural Gas and InterNorth, both relatively small regional companies. Before its bankruptcy on December 2, 2001, Enron employed approximately 20,600 staff and was a major electricity, natural gas, communications, and pulp and paper company, with claimed revenues of nearly $101 billion during 2000. Fortune named Enron "America's Most Innovative Company" for six consecutive years.

Business is the practice of making one's living or making money by producing or buying and selling products. It is also "any activity or enterprise entered into for profit."

<span class="mw-page-title-main">Security (finance)</span> Tradable financial asset

A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any form of financial instrument, even though the underlying legal and regulatory regime may not have such a broad definition. In some jurisdictions the term specifically excludes financial instruments other than equity and fixed income instruments. In some jurisdictions it includes some instruments that are close to equities and fixed income, e.g., equity warrants.

<span class="mw-page-title-main">Citigroup</span> American multinational investment bank and financial services corporation

Citigroup Inc. or Citi is an American multinational investment bank and financial services company in New York City. The company was formed by the merger of Citicorp, the bank holding company for Citibank, and Travelers in 1998; Travelers was spun off from the company in 2002.

<span class="mw-page-title-main">Mark-to-market accounting</span> Accounting practice

Mark-to-market or fair value accounting is accounting for the "fair value" of an asset or liability based on the current market price, or the price for similar assets and liabilities, or based on another objectively assessed "fair" value. Fair value accounting has been a part of Generally Accepted Accounting Principles (GAAP) in the United States since the early 1990s. Failure to use it is viewed as the cause of the Orange County Bankruptcy, even though its use is considered to be one of the reasons for the Enron scandal and the eventual bankruptcy of the company, as well as the closure of the accounting firm Arthur Andersen.

Energy Future Holdings Corporation is an electric utility company headquartered in Energy Plaza in Downtown Dallas, Texas, United States. The majority of the company's power generation is through coal and nuclear power plants. From 1998 to 2007, the company was known as TXU Corporation until its $45 billion leveraged buyout by Kohlberg Kravis Roberts, TPG Capital and Goldman Sachs Capital Partners. That purchase was the largest leveraged buyout in history. As of 2019, TXU Energy is a subsidiary of publicly traded Vistra Energy.

<span class="mw-page-title-main">Dynegy</span> Electricity company based in Houston, Texas

Dynegy Inc. is an electric company based in Houston, Texas. It owns and operates a number of power stations in the U.S., all of which are powered by fossil fuels. Dynegy was acquired by Vistra Corp on April 9, 2018. The company is located at 601 Travis Street in Downtown Houston. The company was founded in 1984 as Natural Gas Clearinghouse. It was originally an energy brokerage, buying and selling natural gas supplies. It changed its name to NGC Corporation in 1995 after entering the electrical power generation business.

A special-purpose entity is a legal entity created to fulfill narrow, specific or temporary objectives. SPEs are typically used by companies to isolate the firm from financial risk. A formal definition is "The Special Purpose Entity is a fenced organization having limited predefined purposes and a legal personality".

Petroleum Revenue Tax (PRT) is a direct tax collected in the United Kingdom. It was introduced under the Oil Taxation Act 1975, soon after Harold Wilson's Labour government returned to power and in the immediate aftermath of the 1973 energy crisis, and was intended to ensure "fairer share of profits for the nation" from the exploitation of the UK's continental shelf, while ensuring a "suitable return" on the capital investment by oil companies.

Prisma Energy International Inc., was a former subsidiary of Enron Corporation, formed in 2003 to own and manage the majority of Enron's overseas assets, formerly known as "Enron International". Prior to its official organization, Prisma was referred to within Enron as "InternationalCo". Enron's original bankruptcy reorganization plan, presented in early 2002, would have created a company broadly similar to Prisma, but including Portland General Electric and the energy trading business, both later divested separately. As one of the final steps in Enron's liquidation, following their 2001 bankruptcy, Prisma was sold to Ashmore Energy International Ltd., a unit of Ashmore Group Plc., in 2006. Prisma was structured as an 'offshore' United States corporation incorporated in the British Overseas Territory of the Cayman Islands, but with its headquarters in Houston, Texas. It served as a holding company for 15 gas and electricity businesses. Its subsidiary, Prisma Energy International Services LLC, employed approximately 125 individuals, most at its headquarters in Houston, Texas. Assets in which Prisma Energy managed an interest employed an additional 6,500 employees worldwide. Following its 2006 sale to Ashmore Energy International Limited, Prisma Energy International Inc. was merged/amalgamated with Ashmore Energy International Limited with Prisma Energy being the survivor company. In December 2006, Prisma Energy International Inc. changed its name to Ashmore Energy International and, subsequently, in May 2007 to AEI.

<span class="mw-page-title-main">Northern Trust</span> American financial services company

Northern Trust Corporation is an American financial services company headquartered in Chicago, Illinois, that caters to corporations, institutional investors, and ultra high net worth individuals. Northern Trust is one of the largest banking institutions in the United States and one of the oldest banks in continuous operation. As of June 30, 2022, it had $1.7 trillion in assets under management and $17 trillion in assets under custody. Northern Trust Corporation is incorporated in Delaware.

A segregated portfolio company, sometimes referred to as a protected cell company, is a company which segregates the assets and liabilities of different classes of shares from each other and from the general assets of the SPC.

The tax system of the Russian Federation is a complex of relationships between fiscal authorities and taxpayers in the field of all existing taxes and fees. It implies continuous communication of all its members and related objects: payers; legislative framework; oversight authorities; types of mandatory payments. The Russian Tax Code is the primary tax law for the Russian Federation. The Code was created, adopted and implemented in three stages.

Rebecca P. Mark-Jusbasche, known during her international business career as Rebecca Mark, is the former head of Enron International, a subsidiary of Enron. She was also CEO of Azurix Corp., a publicly traded water services company originally developed by Enron International. Mark was promoted to Vice Chairman of Enron in 1998 and was a member of its board of directors. She resigned from Enron in August 2000.

<span class="mw-page-title-main">RBS International</span> International banking arm of NatWest Group headquartered in Jersey, Channel Islands.

The Royal Bank of Scotland International Limited, trading under the NatWest International (retail), RBS International (institutional), Coutts Crown Dependencies and Isle of Man Bank brands, is the offshore banking arm of NatWest Group. It provides a range of services to personal, business, commercial, corporate and financial intermediary customers from its base in St. Helier, Jersey.

<span class="mw-page-title-main">Enron scandal</span> 2001 accounting scandal

The Enron scandal was an accounting scandal involving Enron Corporation, an American energy company based in Houston, Texas. When news of widespread fraud within the company became public in October 2001, the company filed for bankruptcy and its accounting firm, Arthur Andersen—then one of the five largest audit and accountancy partnerships in the world—was effectively dissolved. In addition to being the largest bankruptcy reorganization in U.S. history at that time, Enron was cited as the biggest audit failure.

Mahindra & Mahindra Financial Services Limited (MMFSL) is an Indian rural non-banking financial company headquartered in Mumbai. It is amongst the top tractor financers in India, with 1000+ offices across the country.

'Google tax' is a popular term used to refer to anti-avoidance provisions that have been passed in several jurisdictions dealing with profits or royalties that have been diverted to other jurisdictions with lower or nil rates.

<span class="mw-page-title-main">NatWest Markets</span> Investment banking arm of NatWest Group

NatWest Markets plc is the investment banking arm of NatWest Group based in the United Kingdom.

References

  1. ↑ Estelle Clarke. "Feeling the squeeze, Part 3: Ring-fencing for the protection of care sector borrowers in finance arrangements" (PDF). Retrieved 2012-01-29.
  2. ↑ "ADOPTING A GROUP STRUCTURE - RING-FENCING YOUR ASSETS" (PDF). Retrieved 2012-01-30.
  3. ↑ "Corporation Tax rates" . Retrieved 2012-01-29.
  4. ↑ "Types of International Petroleum Fiscal Regimes: Ring Fencing, Reserve Treatment" . Retrieved 2012-01-29.
  5. ↑ "Ring Fencing Mechanisms for Insulating a Utility in a Holding Company System" (PDF). Retrieved 2012-01-29.
  6. ↑ Alloway, Tracy (6 June 2011). "Whoops! Ring-fencing retail banks could backfire". Financial Times. Retrieved 2012-01-29.
  7. ↑ Santander Bank, Ring-fencing overview, accessed 2 December 2017
  8. ↑ Morris, CHR (2019). The Law of Financial Services Groups. Oxford University Press. pp. 345, 352–356. ISBN   978-0-19-884465-5.
  9. ↑ Financial Conduct Authority, Ring-fencing, 14 September 2016, updated 6 November 2017, accessed 2 December 2017
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.