Monthly Highlights: April 2017

Welcome to this month’s highlights from the Lexis®PSL Banking & Finance team which cover the key news updates from April 2017.

Brexit

PRA publishes ‘Dear CEO’ letter on firm contingency planning for Brexit​

The Prudential Regulation Authority (PRA) has sent a ‘Dear CEO’ letter, from deputy governor and PRA CEO Sam Woods, to firms on contingency planning for the UK’s withdrawal from the EU. The letter is relevant to banks, insurers and designated investment firms undertaking cross-border activities between the UK and the rest of the EU. This includes, for example, subsidiaries of US investment banks based in the UK doing business in the EU under passporting arrangements, as well as UK banks doing the same, and branches of institutions from other EU Member States operating in London.

Lending

LMA publishes recommended form of designated entity clause

The Loan Market Association (LMA) has published a recommended form of designated entity clause for use in its senior facilities agreement for leveraged acquisition finance transactions (senior/mezzanine) and the recommended form of syndicated facility agreements.

The LMA's recommended form of designated entity clause was developed in response to demand from the syndicated lending market to provide a recommended form of clause allowing a lender to nominate affiliates to participate in loans in place of the lender. These types of mechanics have often been labelled 'designated entity clauses' and were originally developed to address potential difficulties connected with lending into individual jurisdictions on a case-by-case basis.

The clause which has now been published by the LMA has been produced in response to concerns that lenders may lose their passporting rights as a result of Brexit. It is intended to provide additional flexibility in allowing Lenders to comply with current or future licensing requirements without a Lender having to either: (i) consider at the outset of a transaction the extent to which its lending commitment should be divided between locally licensed affiliates; or (ii) arrange a transfer of its relevant lending commitment to a locally licensed affiliate at short notice following a requested drawdown.

The recommended clause is available to LMA members on the LMA website, along with a users’ guide, and has been put together and agreed by an experienced working party consisting of representatives from major banks and a number of City law firms.

Hedging interest rates in loan transactions

Recovering break costs

Barnett-Waddington Trustees (1980) Ltd and others v Royal Bank of Scotland plc [2017] EWHC 834 (Ch)

These proceedings are the second set of proceedings about a secured loan given to the claimants by the defendant bank ('RBS'). The disputes were and are about the entitlement of RBS to add the costs of unwinding an interest rate swap to the amounts required to redeem the loan early. In the first set of proceedings ([2015] EWHC 2435 (Ch)) Warren J held that the unwinding costs of the swap transaction then before him (which was an internal bank swap) could not be added to the redemption cost. For more information on the first set of proceedings, see News Analysis: Bank lenders and internal swaps.

The second set of proceedings ([2017] EWHC 834 (Ch)) concerns a procedural issue—RBS, having discovered what it says is an external back-to-back swap (ie with an external counterparty), asserted that it would be entitled to add the costs of unwinding that swap to the redemption charges. In these proceedings, the claimants argued that the bank could no longer make that claim because it is res judicata (as they describe the point) in the sense that it ought to have been raised and dealt with in the first proceedings but was not.

The court held that the claimants were entitled to resist a claim that the bank is entitled to add the break costs from the produced external swap to the redemption charges were they to redeem the loan, because to advance such a claim would be an abuse of process. Summary judgment was given on the point.

Tax issues for banking lawyers

Government withdraws majority of the Finance Bill 2017

In the run-up to the snap general election, the government has tabled amendments to the Finance Bill 2017 that withdraw a large number of measures, including some of the most substantial measures for corporate taxpayers. If the Conservative government is re-elected, it intends to re-introduce the withdrawn provisions in a new Finance Bill as soon as possible after the election.

The main points to note are:

  1. proposed new rules relating to the corporate interest deduction-these have been withdrawn from the Finance Bill 2017
  2. proposed reforms to the DTTP (Double Taxation Treaty Passport) scheme-these are administrative rather than legislative and have already taken effect
  3. withholding tax exemption for interest on debt traded on a multilateral trading facility (MTF)—this proposal is still at the consultation stage and was not included in the Finance Bill 2017 legislation, and
  4. new rules to tax profits from trading in and developing UK land-the commencement date for these rules, which had been set at 8 March 2017, has been withdrawn from the Finance Bill 2017

Islamic finance

BoE Shari’ah compliant liquidity facilities consultation

On 6 April 2017, the Bank of England (BoE) published a consultation paper Shari’ah compliant liquidity facilities: establishing a fund-based deposit facility.

Islamic banks are not currently able to use existing BoE central bank liquidity facilities because they involve interest, which is not deemed Shari’ah compliant. As part of its strategy to broaden liquidity provision to the market, the BoE therefore began work in the second half of 2015 to assess the feasibility of establishing a Shari’ah compliant facility. This will provide greater flexibility to Islamic banks in the UK in meeting their liquidity requirements under Basel III.

Consultation responses, from UK Islamic banks and other interested parties, must be submitted by 23 May 2017.

Real Estate Finance

Examining the LMA’s recent changes to real estate finance and intercreditor agreements

The Loan Market Association (LMA) updated its real estate finance facility agreements and intercreditor agreements in February of this year. In News Analysis: Examining the LMAs recent changes to real estate finance and intercreditor agreements, Amelia Slocombe, legal director of LMA, outlines the main changes in the agreements.

Trade Finance

Pre-export finance facility agreement updated by LMA

The LMA has updated its pre-export finance facility agreement to account for the changes made to its leveraged documentation in November 2016. A PDF version of the facility agreement highlighting the changes is available on the LMA’s website.

Restructuring & Insolvency

E-filing becomes mandatory for insolvency proceedings issued in the Rolls Court Building

From 25 April 2017, electronic working (or E-filing) is mandatory for most insolvency proceedings issued in the Rolls Building jurisdictions (ie in the Chancery Division of the High Court, the Commercial Court, the Technology and Construction Court, the Mercantile Court, and the Admiralty Court, at the Royal Courts of Justice, Rolls Building, London (together, ‘the Rolls Building Jurisdictions’))—they will be stored by the court as an electronic case file (the CE-File).

The Insolvency (England and Wales) Rules 2016

From 6 April 2017, the Insolvency (England and Wales) Rules 2016 came into force replacing the Insolvency Rules 1986 (IR 1986), SI 1986/1925. We provide details of some of the steps Lexis®PSL Restructuring & Insolvency, together with our external partners and LexisNexis Smartforms, have taken to ensure that you are ready for the changes. For more information see News Analysis: The Insolvency (England and Wales) Rules 2016 come into force.

Regulation for banking lawyers

Companies House announces changes to PSC Register regime to come into effect on 26 June 2017

Changes to the UK anti-money laundering measures have been announced, which are intended to help prevent money laundering and terrorist financing and increase the transparency of who owns and controls companies in the UK.

Companies House has announced that, from 26 June 2017, a company's PSC Register will not be updated on the confirmation statement (CS01) submitted to Companies House. Instead, whenever there is a change to the PSC Register, Companies House will need to be informed using forms PSC01 to PSC09. Companies will have 14 days to update their register and another 14 days to send the information to Companies House.

For more information, see the Companies House press release.

Derivatives

ISDA launches second bail-in Article 55 BRRD Protocol

The International Swaps and Derivatives Association (ISDA) has launched the second bail-in Article 55 BRRD Protocol, designed to allow Austrian, Belgian, Danish and Swedish in-scope entities to meet the requirements of Article 55 of the Bank Recovery and Resolution Directive 2014/59/EU (BRRD).

The first Protocol was launched in July 2016 for Dutch, French, German, Irish, Italian, Luxembourg, Spanish and UK entities. This latest launch extends coverage to 12 countries.

Article 55 of the BRRD requires in-scope entities to include a contractual term in agreements creating any relevant liability governed by the law of a third country to ensure their creditors recognise that the liability may be subject to bail-in under the BRRD, and agree to be bound by it. The Protocol provides an efficient means for markets participants to amend the terms of certain ISDA Master Agreements and other documentation to reflect those requirements.

Debt Capital Markets

New prospectus rules aim to protect investors

The European Parliament has approved new uniform rules on the information given in investor prospectuses, aiming to protect investors, create a more efficient single capital market and ease small firms’ access to finance.

Under the new rules, the information that a prospectus provides must enable investors to make an informed assessment of assets, liabilities, profits, loses and rights attached to investment products.

Prospectuses should include an accurate, clear seven-page summary (with an extra one, two or three pages where a given type of a security requires further explanations), providing:

  1. key information that investors need to understand the risks and make an informed decision
  2. information on the issuer, on the securities, on the offer to the public and on admission to trading, and
  3. a clear warning of the risks involved, such as the risk of losing part or all of the investment

Once approved, these prospectuses would be eligible for the EU passporting regime, enabling them to be offered to the investors across the EU.

Regulation of derivatives and capital markets products

PRIIPS

Commission Delegated Regulation (EU) 2017/653 of 8 March 2017 supplementing Regulation (EU) 1286/2014 of the European Parliament and of the Council on key information documents for packaged retail and insurance-based investment products (PRIIPs) by laying down regulatory technical standards with regard to the presentation, content, review and revision of key information documents and the conditions for fulfilling the requirement to provide such documents has been published in the Official Journal.

It shall enter into force on 2 May 2017 and shall apply from 1 January 2018. Article 14(2), which relates to specific information on each underlying investment option, shall apply until 31 December 2019.

ESMA updates list of recognised CCPs based in third countries

ESMA has updated its list of recognised central counterparties (CCPs) based in third countries. The list concerns the recognition of six non-EU CCPs. The European Markets Infrastructure Regulation (EU) 648/2012 (EMIR) requires third-country CCPs to be recognised by ESMA in order to operate in the EU.

The six additional CCPs are:

  1. Dubai Commodities Clearing Corporation (DCCC)
  2. Clearing Corporation of India Ltd (CCIL)
  3. Nasdaq Dubai Ltd
  4. Japan Commodity Clearing House Co Ltd (JCCH)
  5. BM&FBovespa S.A., Brazil, and
  6. Nodal Clearing LLC, USA

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