Monthly Highlights: February 2017

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

Lending

Launch date announced for new Standards of Lending Practice for business customers

The date for the launch of the Standards of Lending Practice (Standards) for business customers will be 28 March 2017, the Lending Standards Board (LSB) has announced. These Standards will replace the micro-enterprise provisions of the Lending Code.

The new Standards will feature revisions to product scope, and will extend the protections from micro-enterprise customers to include businesses with a turnover of up to £6.5m per annum. They will be launched by Margot James, Minister for Small business, consumers and corporate responsibility, alongside other speakers talking about the change the standards will bring to businesses and consumers.

The Standards of Lending Practice for personal customers have been in effect since 1 October 2016 and can be viewed here.

Draft regulations published relating to the proposed corporate interest restriction

HMRC is consulting until 18 April 2017 on the draft Corporate Interest Restriction (Consequential Amendments) Regulations 2017, which make amendments necessary to ensure that collective investment vehicles and securitisation companies do not suffer unintended consequences from the new corporate interest restriction rules which come into effect in April 2017. The draft legislation relating to these new corporate interest restriction rules was published on 26 January 2017 and is available here.

In particular, the regulations specify that distributions by collective investment vehicles do not fall to be treated as ‘tax-interest expense amount’, while for securitisation companies, their ‘retained profit’ figure will be treated as the net ‘tax-interest income amount’, with adjustments made for certain management fees.

Details of the consultation are available here

New trade body to act as voice for UK finance sector

A new integrated trade body is to launch in summer 2017, the Consumer Credit Trade Association has announced. The new trade body will integrate the remits, skills and capabilities of six existing trade associations: The Asset Based Finance Association, British Bankers’ Association, Council of Mortgage Lenders, Financial Fraud Action UK, Payments UK and the UK Cards Association.

Bob Wigley has been appointed as Chair of the new financial services trade association, the name and brand of which will be announced ahead of its launch. Mr Wigley says that the new trade body is intended to become an authoritative voice for the finance sector all around the UK, building on the expertise of its diverse membership.

Benchmarks

BoE issues supplementary consultation on SONIA reform

The Bank of England (BoE) has published a supplementary consultation on reform of the SONIA benchmark. The supplementary consultation, which follows an earlier consultation in July 2015 and October 2016, revises the BoE’s proposed approach on one specific issue relating to the averaging methodology to be used for SONIA, and seeks further feedback on the new proposal.

The BoE will provide a summary of feedback from the October 2016 and February 2017 consultations and its final view on the methodology for and definition of SONIA, the transition arrangements, and publication and licensing arrangements in March 2017.

For more information on the proposals to reform SONIA, including the latest supplementary consultation, see the BoE website.

Security

UK Parliament responds to the Law Commission’s recommendations on reform of Bills of Sale legislation

The UK Parliament has published a statement from Simon Kirby, Economic Secretary to the Treasury, announcing that the UK government agreed with the Law Commission’s conclusions  in its report on the reform of the Bills of Sale Act 1878 and the Bills of Sale Act (1878) Amendment Act 1882. The report found that consumers and unincorporated businesses should continue to be able to use their existing goods as security while retaining possession of them, but that the Acts themselves no longer provide an appropriate legal framework and should be reformed. The government will support the Law Commission in drafting primary legislation to enact the necessary reforms and will seek to use the special parliamentary procedure which is available for Bills that implement the Law Commission's recommendations.

The Law Commission's report can be viewed here. For information on the City of London Law Society's response to the Law Commission's proposals, see News Analysis: Bills of Sale Consultation Paper—a response.

Land Registry updates execution of deeds guidance in relation to electronic signatures

The Land Registry has introduced a new section 11 to its guidance on the execution of deeds to explain when electronic documents with electronic signatures can be deemed to be deeds.

In summary, the Land Registry will not accept an e-document with an e-signature as a dispositionary deed for registration unless it complies with the provisions of the Land Registration Act 2002 and Land Registration (Electronic Conveyancing) Rules 2008. The electronic mortgage service for which the Land Registration (Electronic Conveyancing) Rules 2008 were made is not currently in use but the Land Registry is working on a new digital mortgage service that will initially rely on the Land Registration (Electronic Conveyancing) Rules 2008.

The Land Registry says that, in due course, it plans to make amendments to its rules to allow for more electronic conveyancing transactions and registration services.

The updated guidance can be viewed here.

Standby letters of credit and the fraud exception

Alan C Williams, senior associate, and Andy McGregor, partner, both at RPC, examine the Court of Appeal’s judgment in the Petrosaudi Oil Services case concerning whether a bank was obliged to pay the claimant the sums due under a contract pursuant to a letter of credit in News Analysis: Letters of credit and the fraud exception (Petrosaudi Oil Services (Venezuela) Ltd v Novo Banco SA and others).

Acquisition finance

LMA responds to ECB draft guidance on leveraged transactions

In November 2016, the European Central Bank (ECB) launched a public consultation on a draft guidance to develop clear and consistent definitions, measures and monitoring with regard to leveraged transactions.

In its response to the consultation, the Loan Market Association (LMA) has welcomed global regulatory consistency and supports the ECB’s efforts to strengthen the level playing field for financial institutions by aligning supervisory expectations and practices. The LMA believes, however, that the guidelines need to be more aligned to those in the US.  Members of the LMA can log in to the LMA website for more information.

The consultation period ended on 27 January 2017. Following the public consultation the ECB will publish the comments received on the consultation, together with a feedback statement.

Aviation finance

Aviation EU emissions trading system to remain intra-EEA

The European Commission has proposed keeping the aviation EU ETS in its current limited form, applying only to flights within the European Economic Area (EEA), for 2017 and beyond. This follows the agreement reached by the International Civil Aviation Organisation in October for a global offsetting scheme to begin in 2021.

Trade finance

OECD Arrangement on Officially Supported Export Credits updated

The 2017 Arrangement on Officially Supported Export Credits is now available. This version of the Arrangement on Officially Supported Export Credits replaces the February 2016 version. It includes all modifications agreed to the Arrangement, including its Annexes and is effective as from 1 February 2017.

The full text can be located here on the OECD website.

Islamic finance

IMF proposals look to strengthen Islamic banking

The International Monetary Fund (IMF) has adopted a set of proposals on Islamic banking and called for a more comprehensive set of policies to ensure financial stability in countries where it takes place, to support the sound development of the industry. The IMF is now calling for additional work and co-operation by its staff with other international agencies to improve the adoption of relevant standards for Islamic banking and to address remaining regulatory gaps. The proposals can be accessed here.

Derivatives

Variation margin implementation

The variation margin (VM) requirements came into force on 1 March  2017.

The International Swaps and Derivatives Association (ISDA) has written to regulators to request regulatory forbearance in respect of the 1 March 2017 compliance date for the exchange of VM under the regulations (the VM regulations), and/or pursuant to the oversight, of the authorities to which this letter has been addressed.

The letter asks that all jurisdictions with a 1 March 2017 effective date for their VM regulations provide a transitional period during which market participants can continue to execute new derivatives transactions while they complete the necessary steps towards regulatory compliance for the relevant transactions.

CFTC delays compliance with variation margin requirements

The US Commodity Futures Trading Association (CFTC) has published a no-action letter providing relief up to 8 May 2017 with respect to certain aspects of its margin rules.

The Banking & Finance team spoke with Edward Ivey, an associate in the New York office of Linklaters LLP, in News Analysis: CFTC issues grace period for Dodd-Frank variation margin compliance, in which he said the important point to remember is that the CFTC relief is not a blanket relief, it applies to swap dealers (SDs) only for not being in compliance with CFTC rules as of 1 March 2017 and they must act in good faith to progress with compliance.

P.R.I.M.E. Finance Conference 2017

Camilla Perera-De Wit, head of secretariat at P.R.I.M.E. Finance Foundation and legal counsel at the Permanent Court of Arbitration (PCA), discuss the main issues discussed at the 2017 P.R.I.M.E. Finance 2017 conference in News Analysis: P.R.I.M.E. Finance 2017 Conference.

P.R.I.M.E. Finance stands for the panel of Recognized International Market Experts in Finance, an innovative collaboration launched in January 2012. The project was established to help resolve, and to assist judicial systems in the resolution of, disputes concerning complex financial transactions. P.R.I.M.E. Finance has the support of key international regulatory bodies and is complementary to the on-going financial market reforms process.

Debt capital markets

ICMA European repo market guide approved

A guide setting out standards for the orderly trading and settlement of repos in the European repo market has been published by the International Capital Market Association (ICMA) and adopted with the approval of the ICMA International Repo and Collateral Council (IRCC) Committee.

The guide:

  • recommends practices which market experience suggests can help avoid uncertainties or disagreements about transactions, and consequent delays or disruption to repo trading and settlement, and
  • codifies market conventions, where this has been thought to be helpful, usually in response to queries from market participants

The guide will remain under review and will be amended as warranted by any evolution in the agreed understanding of best practice. The most up-to-date version will be available on the ICMA website for members to download and print. Repo market participants should ensure that they periodically check the ICMA website to ensure they have the most up-to-date version of the guide.

Regulation of derivatives and capital markets products

Council endorses EMIR delegated regulations

The General Secretariat of the Council of the European Union has recommended that the Council confirm that it has no objection to two delegated regulations adopted by the European Commission in connection with EMIR.

The first delegated regulation was adopted by the Commission on 20 December 2016 and extends the transitional periods related to pension scheme arrangements, which will now be exempt from the requirements for central clearing of over-the-counter (OTC) derivative transactions under EMIR until 16 August 2018.

The second delegated regulation was adopted by the Commission on 20 January 2017 and corrects Delegated Regulation (EU) 2016/2251, which sets out risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty under EMIR. The new delegated regulation adds a phase-in provision on variation margin requirements to intra-group transactions in a way analogous to initial margin requirements, which due to a technical error was omitted from the original delegated regulation.

ESMA announces details of 2017 CCP stress test

ESMA has published the framework for its 2017 pan-EU stress test exercise on central counterparties (CCPs). The exercise covers 17 EU CCPs including all products currently cleared by these CCPs, and will assess resilience and safety from a systemic risk viewpoint.

Structured Products and Securitisation

Interpreting ‘default’ interest rates relating to Class X notes (Credit Suisse Asset Management v Titan 2006–1 and others)

Chris Webber, partner at Squire Patton Boggs, who has considered the appeal case of Credit Suisse Asset Management v Titan 2006-1 and others which dealt with an interpretation of the correct ‘default’ interest pertaining to Class X notes in News Analysis: Interpreting ‘default’ interest rates relating to Class X notes (Credit Suisse Asset Management v Titan 2006-1 and others).

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