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We spoke with Clare Dawson, chief executive of the Loan Market Association (LMA), David Cliffe of the European Securities and Markets Authority (ESMA) and Martin O'Donovan, deputy policy and technical director at the Association of Corporate Treasurers (ACT) about current trends in the banking and finance world and asked them to give us some insights into how their organisations are set to develop over the next year.
Clare Dawson (CD): From a commercial perspective, national and European discussions regarding the use of benchmarks in financial instruments and financial contracts is an on-going hot topic for banking and finance lawyers, and will continue to feature as a 'hot topic' for the foreseeable future. In addition, deleveraging will continue as a hot topic for 2014 as banks restructure in order to comply with new capital requirements under Basel III and CRD IV. From an insurance perspective, plans are underway for the implementation of Solvency II, with the European Insurance and Occupational Pensions Authority having recently released draft 'Implementing Technical Standards' for consultation. Banking and finance lawyers are, therefore, likely to be called upon in upcoming months to advise clients on the impact Solvency II will have on their capital portfolios.
David Cliffe (DC): I cannot answer for banking and finance lawyers, but I would imagine that the same topics concern them as their client base, which this year includes the implementation of the European Market Infrastructure Regulation (EMIR) regime for over the counter (OTC) derivatives. At present key issues in this space include the reporting requirement which firms are having to meet, the approval of central counterparties (CCPs), the ongoing supervision of trade repositories and also the preparation for the introduction of the clearing obligations.
Martin O'Donovan (MO): Banking and finance lawyers working with their treasury colleagues in non-financial companies now have a new angle to think about, namely becoming regulated by a financial regulator on account of EMIR, the new derivative legislation. This introduces the need to interpret how regulators in the different member states will react to any non-compliance or late compliance. We know that there has been a fair degree of forebearance in operation because of the shambles over the state of readiness for EMIR across the whole financial system, but at some stage the regulators will want to tighten up, and what then for minor shortcomings in compliance? For example if a certain number of derivative transactions fail to match on reporting from both sides to the trade will that be serious or not, and in any case how critical is the non-financial side to achieving the objective of minimising systemic risk?
Although not relevant to every company, compliance with sanctions rules may well need to be monitored more closely too. Certainly unreasonable clauses from lenders that seek representations from the borrower about indirect compliance with sanctions by parties further down the sales or procurement chains need to be avoided.
CD: While continuing to track developments across a host of regulatory initiatives, including the Foreign Account Tax Compliance Act (FATCA), Basel III and CRD IV, the LMA is currently focusing on a number of issues. These include the ILOC-BBA joint proposal on the introduction of intraday re-fixing for LIBOR and the upcoming EU restrictions on contractual auditor controls, both of which may impact LMA documentation in its current form. The LMA is particularly concerned with the impact these could have on legacy loan documentation.
DC: A key issue for ESMA and industry this year will be the work on MiFID II, with the consultation process due to begin in late May/early June. MiFID II is the largest overhaul of capital markets regulation in the last ten years aimed at increasing market transparency and strengthening investor protection. Additionally, a continuing focus for ESMA is the creation of the single rulebook, but allied to that the drive for supervisory convergence across the 28 EU member states. ESMA will also continue to focus on systemic and stability risks monitoring based on the data securities regulators are now receiving from the market following a number of reforms, for instance, OTC derivatives reporting to trade repositories.
MO: Countless European directives and regulations have been recently enacted, so we will now have a stream of Regulatory Technical Standards being drafted and implemented. The ACT will endeavour to ensure that in regulating the financial sector the authorities do not unduly impact the ability of commercial and industrial companies to operate with business as normal.
Basel III, bank structural reform, resolution and bail-in will all be changing the ability of banks to service their customers and the riskiness of banks to their customers. The watchword for treasurers as this new banking world emerges is KYB, or 'Know Your Bank', both as regards credit risk and as regards the products the banks can, or want to, offer.
Treasurers will need to be keeping even closer up to date with regulatory and market developments. Of course, the business environment is crucial. Economic conditions are improving but companies should be preparing for the inevitable rise in interest rates.
CD: Historically, the LMA's principal focus has been on corporate investment grade and leveraged loans, as well as secondary debt trading. However, in recent years, and in response to member demand, the LMA has expanded its coverage to include real estate, commodity finance and developing markets. The LMA will continue to cement its expertise in these areas, through the provision of sector specific documentation and through its geographically expanded events calendar.
In addition, the LMA is becoming increasingly involved with the provision of alternative methods of finance. The LMA has recently published a guide to the German Schuldschein product and is currently working on the production of a document for use in European private placement transactions. As with other LMA projects, these initiatives are very much aimed at improving liquidity and efficiency in the market.
DC: Staff numbers are projected to reach 180 by year end, there will be more of a focus, as indicated above, on risk identification but also supervision of trade repositories and continuing work on MiFID II and EMIR. I also attach a link to our Trends, Risks and Vulnerabilities Report which sets out our risk focus.
MO: The ACT is a professional body and not a trade association so our emphasis, as ever, will be on education and promoting professional knowledge and expertise. Later this year we will be launching the ACT Competency Framework for those working in treasury. It will cover seventeen different competencies in three key areas--people skills, technical skills and strategic skills. It will provide benchmarks for organisations to review their treasury department against, and online assessment tools will highlight areas for treasury team development and training to ensure the highest standards are being met.
Behavioural and professional standards in UK banking are very much at the forefront following the Lambert review so it is timely for companies to consider if their treasury operations are equally up to standard. After all, if your treasury team has advanced finance skills it makes business sense to keep them up to date, and the ACT will be helping on this.
Remember Red Adair, the famous oil well firefighter that once said: 'If it is expensive to hire a professional think how expensive it is to hire an amateur'.
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Neil specialises in banking and asset finance transactions with a particular emphasis on shipping finance, aviation finance, renewable energy finance and in providing corporate finance transactional support. Neil qualified as a solicitor with TLT in 2004 and worked as a finance solicitor in both the Bristol and London offices before joining the asset finance team at DLA Piper.
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