Banking & Finance—H1 2018 round-up: key legal and market developments

Aviation finance

The key developments in aviation finance in H1 are:

• EU Regulation (EU) 2017/2392 was implemented so as to continue current limitations of the geographical scope for aviation activities and to prepare to implement a global market based measure from 2021. These changes came into effect on 31 March 2018

• results from two consultations on the EU emissions trading system 2018 showed broad support for compliance with the EU Emissions Trading System (ETS) 2018; and the consultation on proposed amendments to the aviation EU ETS legislation found that all respondents either agreed with the government approach or said they welcomed the EU agreement to continue the current scope of the aviation EU ETS, which is being implemented through the UK regulations

Benchmarks

Discussions, consultations and analysis on benchmarks and, in particular, the move away from LIBOR have continued in H1 2018:

• in News Analysis: Replacing LIBOR: current position and implications for loan agreements, we summarise the current work being carried out by a variety of bodies related to the possible replacement of the London Interbank Offered Rate (LIBOR) as a benchmark rate in finance documents across a range of markets and some implications for loan agreements

• the Financial Conduct Authority (FCA) issued a policy statement (PS18/5) setting out the approach, criteria and methodology that it proposes to apply if it needs to use powers to compel banks to contribute to LIBOR. The policy statement is primarily relevant to banks that are current or potential submitters to LIBOR, and the administrator of LIBOR, ICE Benchmark Administration Limited (ICE)

• ICE launched a consultation (now ended) on a draft revised code of conduct for LIBOR, setting out the framework within which LIBOR contributor banks are expected to operate. In accordance with Article 15 of the new EU Benchmarks Regulation, administrators of a benchmark based on input data from contributors must develop a code of conduct clearly specifying contributors' responsibilities with respect to the contribution of input data

• the Bank of England implemented reforms to the sterling overnight interbank average rate (SONIA). Previously, the benchmark was based on a market for brokered deposits which has limited transaction volumes. It will now use a methodology that captures a broader scope of overnight unsecured deposits by including bilaterally negotiated transactions alongside brokered transactions.

• the European Central Bank (ECB) published a summary of the responses it received to its public consultation on developing a euro unsecured overnight interest rate. The ECB received responses from 54 market participants, with ‘the vast majority’ agreeing with the definition suggested in the public consultation document and expecting the rate to be generally accepted by the public as a reference rate.

• the European Money Markets Institute (EMMI) launched a consultation on a hybrid methodology for Euribor which leverages on market transactions whenever available, in line with regulatory requirements such as the EU Benchmarks Regulation (Regulation (EU) 2016/1011). The methodology is composed of a three-level waterfall, and provides further details on the determination of each level respectively. The consultation ended on 15 May 2018 but a second consultation providing further details on some of these parameters is scheduled for Q3 2018. EMMI anticipates launching the hybrid methodology by Q4 2019 in accordance with the transitional period provided by the EU Benchmarks Regulation

• ICE published statements on three benchmarks it administrates covering LIBOR, the London Bullion Market Association gold and silver prices and the ICE swap rate. The statements set out management, governance and calculation details for the three benchmarks

• the Loan Market Association (LMA) published a revised version of the optional “replacement of screen rate clause. The revised version permits amendments to be made to documents with a lower consent threshold than may otherwise be required in a wider range of circumstances than the existing clause

Brexit

• the Association for Financial Markets in Europe (AFME), together with Clifford Chance, published FAQs on the potential operational and documentation impacts of Brexit on banking customers’ contractual activities

• the AFME also published a paper highlighting potential cliff-edge risks that Brexit could create for market efficiency and financial stability in wholesale financial services. The paper focuses on issues which may require intervention from policy makers and regulators in the UK and EU27

• Borja García-Alamán and Juan Verdugo, of J&A Garrigues SLP, and Ivan Heredia, Professor of International Law at Universidad Autónoma de Madrid, consider the draft Withdrawal Agreement and its potential impact on the restructuring and insolvency market following Britain’s exit from the EU in News Analysis: Brexit and the end of the transition period—insolvency and pre-insolvency impacts from 31 December 2020 onwards

• the Bank of England (BoE) and the Financial Conduct Authority (FCA) each provided updates on their respective approaches to preparations for EU withdrawal. The AFME followed up with a press release welcoming these updates

• the FCA issued a survey following the government's announcement in December 2017 that, if necessary, it will legislate to provide a temporary permission scheme for European Economic Area firms and funds passporting into the UK prior to the UK exiting the EU. The FCA asked firms which passport into the UK (either via a branch or on a cross-border services basis) or market funds in the UK to complete the short online survey by 29 June 2018

• the Parliamentary Committee has been warned by top lawyers that UK banks and insurers face a massive task as they prepare contracts with their European Union counterparts after Brexit and need confirmation that cross-border deals will remain legal

Islamic finance

The key developments in Islamic finance in H1 are:

• the Islamic Financial Services Board (IFSB) has published a working paper on recovery, resolution and insolvency issues for institutions offering Islamic financial services. The paper sets out legal, structural and operational issues, and aims to make policy makers, regulators, deposit insurance providers and individual institutions aware of the challenges. The IFSB says the paper shows the need to harmonise Shari'ah law principles of recovery and resolution plans as well as bankruptcy and insolvency frameworks that are currently embodied in existing legal systems

• the IFSB also published three exposure drafts for a 2-month public consultation covering standards in Islamic banking, Islamic capital markets and Islamic insurance. The IFSB invited comments from regulatory and supervisory authorities, international organisations, institutions offering Islamic financial services, academics, and interested members of the public and asked for feedback by 28 May 2018

LMA

In H1 2018, the LMA has issued the following important new documents, updates, revisions and guidance:

• a series of documents from its secondary debt trading suite, including terms and conditions, trade confirmations and a users’ guide to account for the discontinuance of LIBOR

• a timeline for settlement of primary syndication incorporating delayed settlement compensation, as a part of efforts to reduce settlement times for primary syndications

• an agent’s guide to handling ancillary facilities, which seeks to provide an introduction to ancillary facilities and their treatment in LMA facility documentation together with guidance on common operational scenarios

• a new LIBOR microsite, which contains content related to the discussions around the potential discontinuation of LIBOR

• a guide, jointly prepared with the Association of Corporate Treasurers on ‘The future of LIBOR: what you need to know’, which is intended to provide an overview of developments and key issues with respect to the proposed transition away from LIBOR benchmarks

• a set of Green Loan Principles aimed at creating a high-level framework of market standards and guidelines to provide a consistent green loan methodology for use across the wholesale green loan market

• a new recommended form of facility agreement for use in export finance buyer credit transactions supported by an export credit agency (ECA). The ECA buyer credit facility seeks to provide for a typical ECA supported buyer credit structure

• a new recommended form of leveraged intercreditor agreement for a super senior revolving facility and senior term facility structure. For more information, see News Analysis: Loan Market Association’s ‘super senior/senior ICA’—a new standard?

• a revised replacement of screen rate clause to provide further flexibility in light of uncertainty over the future of LIBOR

Members can log into the LMA website with their username and password to access the documents.

Non-performing loans

The market for non-performing loans (NPLs) remains active. The key developments in H1 are:

• the European Commission published its first progress report on the reduction of NPLs in Europe. The report notes that the EU banking sector is ‘in a much better shape than in previous years’ and that high stocks of NPLs in certain banks and Member States are being reduced, but says NPLs continue to pose risks to economic growth and financial stability

• the Directorate-General for Internal Policies of the European Parliament published a briefing note: Non-performing loans in the banking union—stocktaking and challenges, which gives a short introduction to the topic of NPLs, takes stock of the current situation in the euro area, touches on the impact of NPLs on credit supply and summarises the activities taken at the European level to address the problem

• the Association for Financial Markets in Europe welcomed the European Commission’s proposals for the development of a secondary market for NPLs, saying it is an important initiative which should enable banks to accelerate the reduction of NPLs on their balance sheets

• the European Central Bank (ECB) published an addendum to its March 2017 guidance to banks on NPL’s. The addendum supplements the qualitative guidance, and specifies the ECB’s supervisory expectations for prudent levels of provisions for new NPLs. It is non-binding and will serve as the basis for the supervisory dialogue between the significant banks and ECB Banking Supervision

• on 2 May 2018, the EU scrutiny committee considered the proposal for a Directive on credit servicers, credit purchasers and the recovery of collateral, a proposal for a Regulation on amending Regulation (EU) 575/2013, the Capital Requirements Regulation as regards minimum loss coverage for non-performing exposures and the second progress report on the reduction of NPLs in Europe

Real estate finance

The key developments in real estate finance in H1 are:

• the government confirmed in a written ministerial statement its intention to introduce a draft Bill before the 2018 summer recess to establish a public register of beneficial ownership for foreign companies owning property in the UK. Formal introduction of the Bill is planned for summer 2019, with the register expected to become operational by early 2021

• HM Land Registry (HMLR) released updated guidance on the registration requirements for overseas companies

• HMLR released updated guidance on registration of legal charges and deeds of variation of charge with a new section (section 14) on digital mortgages.

Secondary trading

The key development in secondary trading in H1 is:

• the European Commission proposal for a Regulation on the law applicable to the third-party effects of assignments (the proposal) was published on 12 March 2018 and could have a dramatic impact on the market for trading participations in syndicated and bilateral loans. The objective of the Proposal is to facilitate the factoring or invoice discounting of receivables in the EU by imposing a uniform conflict of law rule in transactions involving the assignment of debt claims. The scope of the Proposal is limited.

Sustainable financing

There have been significant developments and news during H1 2018 in this area of the finance and bond markets:

• the European Parliament has published a draft report on sustainable finance by the Committee on Economic and Monetary Affairs (ECON). The draft report notes that the urgent need to respond to the threat from climate change has led to innovation in the field of sustainable finance in different EU Member States and proposes that the aim of the European Parliament should be to take the best from this innovation across the EU and combine it into minimum standards for all, guiding investment to ensure a just and rapid transition towards a sustainable economy and society

• the European Commission published plans for a financial system that compliments the EU’s climate and sustainable development priorities, derived from the High-Level Expert Group on sustainable finance

• the independent Green Taskforce, established by the government and chaired by Sir Roger Glifford, set out its recommendations for how the government and the private sector can work together to make green finance an integral part of the UK’s financial services

• the European Investment Bank (EIB) announced a $US 100m investment into the Amundi Planet—Emerging Green One fund. It intends for the investment to help strengthen sustainable investment in emerging markets through green bonds

• the EIB announced plans for a new Sustainability Awareness Bond created to support the achievement of the UN Sustainable Development Goals by further unlocking investment in social, green and sustainable projects. The new bond will initially focus on activities in the water sector, and then encompass activities in other areas with positive social impacts, such as health and education

• the LMA issued a set of Green Loan Principles aimed at creating a high-level framework of market standards and guidelines to provide a consistent green loan methodology for use across the wholesale green loan market, and

• following a consultation led by the European Commission, the World Wide Fund for Nature, the Prince of Wales International Sustainability Unit and the European Investment Bank Sustainable Blue Economy Finance Principles have been announced if adopted they could improve the management of ocean resources and show how profitability can work alongside environmental and social stewardship