ring fencing

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Ring Fencing

The practice of a company creating a legal entity separate from itself in order to protect certain assets. For example, ring fencing may protect assets from taxation, regulation, or allow the company to hide it from creditors. Ring fencing often makes use of offshore accounting. It is usually legal, but there are limitations, such as maximum amounts that may be protected.

ring fencing

The legal walling off of certain assets or liabilities within a corporation. For example, a firm may form a new subsidiary to protect, or ring-fence, specific assets from creditors.
Case Study California's electricity deregulation of the late 1990s resulted in the state's electric utilities hitting the financial wall by 2001. Unable by law to raise the rates it charged its customers, the utilities lost billions of dollars buying electricity at rising wholesale prices during an energy shortage in the western United States. To protect one part of the company, publicly traded PG&E, parent of Pacific Gas & Electric, in January 2001 ring-fenced its National Energy Group, which was then able to obtain its own credit rating and borrow money when the remainder of the company was shut out of the financial markets. In April 2001 Pacific Gas & Electric filed for bankruptcy while protected National Energy Group continued to borrow funds for trading power and purchasing turbines. The ring-fencing protected National Energy Group from Pacific Gas & Electric's creditors, which, in turn, allowed the company access to the capital markets. Critics claimed the financial maneuver was an abuse that unfairly shielded assets from creditors.
References in periodicals archive ?
The Excluded Activities and Prohibitions Order, which defines a range of activities that will not be permitted inside the ring-fence, including a prohibition on ring-fenced banks having exposures to certain financial institutions.
It is important to be clear what problem the ring-fence is intended to solve.
There was a mixed reaction from investors and experts amid concerns over the implications of potential plans to ring-fence high street deposit-taking operations from the riskier investment banking business.
Plaid Cymru says it will ring-fence PS590m for health services if it wins the Assembly election
And Business Secretary Vince Cable warned continuing the ring-fence risks distorting public spending.
Summary: Chancellor George Osborne has said new powers will allow banks to be broken up if they do not follow rules to ring-fence risky operations.
Christmas savings firms will ring-fence families' money so it is untouched if the companies go bust, the government has said.
Ofwat has now confirmed its intention to further ring-fence the regulated water-business of South Staffordshire from other activities carried out by its new owners, and bring it into line with other water companies in England and Wales.
The government has mandated that all banks with more than GBP25bn of UK deposits should ring-fence their retail operations from their riskier investment banks by 2019.
The ring-fence was expanded in 2010-11 to include specialist services and primary care spending.
BANKING AND CREDIT NEWS-January 5, 2015-Investment bank ring-fence plans see response from lenders
M2 EQUITYBITES-January 5, 2015-Investment bank ring-fence plans see response from lenders