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Welcome to this month’s highlights from the Lexis®PSL Banking & Finance team which cover the key news updates from January 2020.
As of exit day (11 pm on 31 January 2020), the UK ceased to be an EU Member State and no longer participates in the political institutions and governance structures of the EU. However, in accordance with the transitional arrangements provided in Part 4 of the Withdrawal Agreement, exit day marks the commencement of an 11-month implementation period during which the UK will continue to be treated by the EU as a Member State for many purposes.
Under the current terms, the implementation period will run from exit day until IP Completion Day (11 pm on 31 December 2020). During this period, the UK must continue to adhere to its obligations under EU law (including EU treaties, legislation, principles and international agreements), and submit to the continuing jurisdiction of the Court of Justice of the European Union in accordance with the Withdrawal Agreement.
Exit day is still key in terms of being the date the UK ceases to be an EU Member State, but in terms of the legal impact, IP Completion Day is the date that the majority of key domestic legal changes associated with Brexit will take effect, including the full repeal of the European Communities Act 1972, incorporation of retained EU law into the domestic legal regime and commencement of associated Brexit legislation, including Brexit SIs.
European Union (Withdrawal Agreement) Act 2020 (EU(WA)A 2020) implements the Withdrawal Agreement into UK domestic law and includes a range of interpretation and consequential provisions in order to effect the implementation period and the associated changes in timing. IP Completion Day replaces exit day for many purposes throughout the
EU(WA)A 2020 and related Brexit legislation, including a specific provisions to defer the commencement of Brexit SIs and related enactments.
For Banking and Finance lawyers, it is largely business as usual during the implementation period—UK financial institutions are able to continue their operations in the EU and EU financial institutions will be able to continue their operations in the UK.
The financial services temporary permissions and transitional regimes have already commenced in order for the UK regulators and affected firms to begin preparing for those regimes before exit day. The Financial Services (Consequential Amendments) Regulations 2020,
SI 2020/56) amend the SIs that implemented these regimes such that the relevant temporary regimes have effect by reference to IP Completion Day rather than ‘exit day’. All other characteristics of the regimes, such as their scope and duration, remain unchanged.
It is worth noting that new EU legislation that takes effect before the end of the implementation period will also apply to the UK. UK firms should therefore continue to monitor the progress of EU initiatives such as the Capital Markets Union, the Banking Union and the EU Sustainable Finance Action Plan, which the new European Commission has identified as policy priorities for 2020, along with other developments such as proposed new legislation on stablecoins.
From a documentary perspective, there should be little impact on existing documentation during the implementation period, as incorporation of retained EU law into the domestic legal regime and commencement of associated Brexit legislation, including Brexit SIs, will not occur until IP Completion Day. However, it may be worth checking whether the UK ceasing officially to be a Member State could have any impact on the interpretation of relevant documents. For new deals you may wish to consider whether future-proofing language is required, or would be helpful.
The possible impact of Brexit for Banking and Finance in the long term will depend largely on the agreement reached in relation to financial services, if any, between the EU and UK before the conclusion of the implementation period.
Certain provisions of the EU(WA)A 2018 came into force in the UK at 11:00 pm on 31 January 2020. Amendments are made to the EU(W)A 2018 (Commencement and Transitional Provisions) Regulations 2018, relating to the repeal of the European Union Act 2011, to amend the transitional provision in the First Commencement Regulations to make it clear that following the repeal of the reference to EU obligations in section 30 of the Small Business, Enterprise and Employment Act 2015 the remaining reference to international obligations does not include EU obligations during the period from 4 July 2018 to IP completion day.
This enactment is made in exercise of legislative powers under
EU(WA)A 2020 in preparation for Brexit. This enactment amends 12 pieces of UK secondary EU legislation in relation to financial services and markets to delay the application of a number of financial services temporary permissions and transitional regimes in the retained EU legislation created by the UK leaving the EU. It came into force immediately before exit day.
The UK Islamic Finance Council has published an article saying Brexit presents various risks and opportunities for the sector, such as Islamic finance playing a role in bilateral trade negotiations and the UK’s second sovereign sukuk. Beyond these, however, the author suggests it is unlikely it will significantly transform the industry in the UK.
Source: Brexit brings risks and opportunities for UK Islamic finance but unlikely to revolutionise domestic industry, say experts.
An amendment to Regulation (EC) 1126/2008 as regards International Accounting Standard (IAS) 39 and International Financial Reporting Standards (IFRS) 7 and 9 has been published in the Official Journal. The changes are intended to address the financial reporting consequences of interest rate benchmark reforms so that companies can continue to meet hedge accounting requirements.
Sources: Brexit brings risks and opportunities for UK Islamic finance but unlikely to revolutionise domestic industry, say experts and ICMA responds to ESAs’ Joint Consultation Paper concerning amendments to the PRIIPs KID and ISDA publishes IBOR Fallback Rate Adjustments FAQs.
The International Swaps and Derivatives Association (ISDA) has published a set of IBOR Fallback Rate Adjustments FAQs, which address issues arising from key adjustments that will need to be made if fallbacks to RFRs are to take effect in contracts that were originally negotiated to reference the IBORs.
ISDA has published its Interest Rate Benchmarks Review. The review analyses trading volumes of interest rate derivatives transactions in the US, referring to Secured Overnight Financing Rate (SOFR) and other selected alternative RFRs. The report covers trades that need to be disclosed by US regulations, as it uses data from the Depository Trust & Clearing Corporation swap data repository. The report noted some substantial developments such as traded notional referencing alternative RFRs increasing from $8.1tn in 2018 to $8.7tn in 2019.
Source: ISDA Research Note—Interest Rate Benchmarks Review: Full Year 2019 and the Fourth Quarter of 2019.
ISDA has published letters from the Financial Conduct Authority (FCA) and ICE Benchmark Administration (IBA) on London Interbank Offered Rate (LIBOR) pre-cessation issues. The letters respond to ISDA’s request for clarity on the ‘reasonable period’ during which a non-representative LIBOR would continue to be published in accordance with Article 11(4) of the Benchmarks Regulation (EU) 2016/1011 (BMR).
Source: New letters on pre-cessation issues welcome.
The Financial Markets Law Committee (FMLC) has published its response to the European Commission’s consultation, launched on 11 October 2019, on its review of the Benchmarks Regulation (EU) 2016/1011 (the BMR). In the response, the FMLC highlights some key areas which it says have been the cause of legal uncertainty in relation to the BMR, including the interplay between Brexit and the transition from the London Interbank Offered Rate (LIBOR).
ICMA has published responses to the European Supervisory Authorities (ESA) joint consultation paper on amendments to Commission Delegated Regulation (EU) 2017/653 (PRIIPS) key information documents. ICMA’s Asset Management and Investors Council stated that ‘contrary to explicit costs, implicit transaction costs are not a charge to investors but reflect the cost of investing in markets which are deducted from reported fund performance and fully reflected in performance statements’. ICMA’s primary market constituency also responded, saying that ‘PRIIPs’ product scope has remained a major concern in the vanilla bond markets’.
A deed was not validly executed where pre-signed signature pages taken from a materially different document were affixed to it (Bioconstruct GmbH v Winspear
 EWHC 7 (QB)). Applying settled law to the facts, the judge found that there was nothing in the evidence to support the proposition that the parties had not regarded signature on the same physical document as being an essential element in the effectiveness of that document. They had to be taken to have regarded signature of the alleged deed as an essential element in its effectiveness. The analysis in R (on the application of mercury Tax Group) v Revenue and Customs Commissioners  EWHC 2721 (Admin) was not limited to its facts and could have a broader application. Further, the decision in Koenigsblatt v Sweet  2 Ch 314 was not authority for the execution of deeds. The decision is a reminder of the care that should be taken when executing deeds virtually, and the importance of parties being in agreement as to the final form of the document and the process to be followed for execution.
 EWHC 103 (Admlty)
The claimant bank’s claim to enforce a mortgage on a yacht succeeded. The issue was whether the recitals in the mortgage limited the claim. The Admiralty Court held that it was well-established that, in the case of an inconsistency between the recitals and the operative part of a contract, the operative part prevailed. Applying that principle, the deed of covenants had to prevail over the recital in the mortgage, insofar as they were inconsistent.
The House of Lords EU Financial Affairs Sub-Committee has published a letter following its report on ‘Brexit: the European Investment Bank’. The Sub-Committee has called on the government to either negotiate a future relationship with the European Investment Bank or consider establishing a UK infrastructure bank. Since 1973, the European Investment Bank has lent around £100bn to the UK infrastructure projects. Given the gap of investment which will be created after the UK’s departure from the EU, the sub-committee highly encourages the creation of a UK infrastructure bank to fill in this gap.
Source: UK infrastructure bank may be needed after Brexit.
The Islamic Financial Services Board (IFSB) has published a second set of FAQs on four of its standards on disclosure requirements for Islamic capital markets (ICM) products, ICM regulation, the supervision of Takāful and Retakāful undertakings, and transparency and market discipline for institutions offering Islamic financial services (IIFS). The FAQs aim to promote implementation of IFSB standards globally, through presenting clarifications and explanative directions on the issued standards.
Four climate trends for UK investors to watch in 2020 discusses the top trends finance firms should expect in green finance in 2020, beginning with action against firms suspected of fudging climate-friendly credentials.
The European Banking Authority’s Banking Stakeholder Group (EBA BSG) has published a policy paper on sustainable finance, saying banks, as intermediaries between savings and investment and major finance providers in the EU, have a key role to play in the mobilisation of the necessary resources to tackle climate change and mitigate its effects. The paper argues that in order to better identify financial risks and opportunities linked to climate change for the banking system, progress must be achieved in the collection of data, usable taxonomy and methodologies, including scenarios. Any regulatory or supervisory development should acknowledge this and contribute to this progress.
Source: Policy paper on sustainable finance.
The European Commission has published details of the investment pillar of the European Green Deal published in December 2019—the European Green Deal Investment Plan (EGDIP), also referred to as the Sustainable Europe Investment Plan (SEIP). The plan aims to mobilise at least €1trn in sustainable investments over the next decade to aid the transition to climate neutrality by 2050. Part of the plan, the Just Transition Mechanism, aims to mobilise at least €100bn in investments over the period 2021–2027 to support workers and citizens of the regions most impacted by the transition. A proposal for a regulation establishing the Just Transition Fund has also been published, along with an amended proposal for a regulation embedding the Just Transition Fund as a new fund under European cohesion policy funds. The European Investment Bank will have a key role in the plan, having already agreed to increase its climate financing to 50% of all its lending.
Source: Wind energy ready to help deliver Europe’s Green Deal Investment Plan
The House of Lords EU committee has published a letter from its chair, Lord Kinnoull, to John Glen MP, economic secretary to the Treasury, on the proposed Regulation on the establishment of a framework to facilitate sustainable investment (the Taxonomy Regulation).
Source: Letter from House of Lords EU Committee to John Glen MP on Taxonomy Regulation.
The executive committee of the Green Bond Principles, the Social Bond Principles and the Sustainability Bond Guidelines, supported by the International Capital Market Association (ICMA) have announced that they will establish a working group on emerging sustainability/key performance indicator (KPI)-linked bond products.
Sources: Green Bond Principles establishes a Working Group on sustainability/KPI-linked bonds and Green Bond Principles establishes a Working Group on sustainability/KPI-linked bonds—press release.
The European Securities and Markets Authority (ESMA) has published a report on a survey it conducted on membership arrangements and due diligence by central counterparties (CCPs) in relation to their clearing members. The report further clarifies existing rules under the European Market Infrastructure Regulation (EU) 648/2012 (EMIR) for clearing members in both areas.
Source: ESMA announces key priorities for 2020-22.
The Future Industry Association (FIA) has published a Response letter to the Commodity Futures Trading Commission’s (CFTC) proposals regarding the margin requirements for uncleared swaps for swap dealers and major swap participants. The CFTC proposes to include the European Stability Mechanism (ESM) in the list of entities which are excluded from the definition of ‘financial end user’, to correct the mistake of excluding the treasury securities and US government agency securities from the list of eligible collateral to which cash collateral held by a custodian of initial margin may be converted, and to extend the compliance schedule for the margin rule. FIA’s response supported the CFTC proposals and outlined operational challenges that need to be addressed further.
Future Industry Association (FIA) has formally petitioned the CFTC to amend its rules to clarify the margin treatment of separate customer accounts. In two petitions, the FIA seeks codification of no-action relief issued by the CFTC and requests the CFTC to clarify its position on allocated asset recourse for separate accounts. It is hoped clarification by the CFTC will provide legal certainty as to permissible market practice.
ISDA responds to consultation on derivatives and hedging standards update
The International Swaps and Derivatives Association (ISDA) has responded to the Financial Accounting Standard Board’s (FASB) ongoing consultation on the subject of a proposed accounting standard update to derivatives and hedging. In its response, ISDA declares that it is supportive of the FASB’s efforts ‘to clarify and improve the US generally accepted accounting principles… applicable to hedging activities’. In addition, ISDA also appreciates ‘the FASB’s efforts to provide clarification on certain matters in the proposed ASU’. However, it also ‘encourages the FASB to add a phase-two targeted hedge accounting improvements project to its agenda’. ISDA hopes that ‘such a project could address certain practice issues and other matters that remain unresolved or have arisen since the issuance of ASU 2017–12, which would be more than technical corrections’.
Source: ISDA response to FASB on Derivatives and Hedging.
ISDA analyses key trends for credit derivatives in 2019
ISDA has released a summary of its 2019 review on interest rate derivatives (IRD) and credit derivatives trading activity. The report covers trades requiring disclosure under US regulations. Key highlights include the increase of IRD traded notional from $US 236.6trn in 2018 to $US 255.3trn in 2019 and the decrease of credit derivatives traded notional from $US 9.5trn in 2018 to $US 8.4trn in 2019.
Source: SwapsInfo Full Year 2019 and the Fourth Quarter of 2019 Review: Summary.
ISDA comments on the Chinese lunar new year holiday extension and market closures
ISDA has published information about the extension of the Chinese lunar new year holiday and associated market closures. This holiday was originally scheduled to run from 24 January 2020 to 30 January 2020, but the Chinese government has announced its extension until 2 February 2020 (inclusive) in order to contain the coronavirus outbreak.
Sources: Market closure announcement—Chinese New Year and FIA Seeks Clarity from the CFTC on Permissible Market Practices for Margining Separate Accounts.
ISDA releases December 2019 review
ISDA has released ISDA In Review—December 2019, which includes a compilation of documents, research papers, press releases and letters. The December 2019 review includes a notification regarding potential non-publication of ICE swap rates, a letter to US prudential regulators on revised margin requirements and the launch of a consultation on Fallbacks for Euro London Interbank Offered Rate (LIBOR) and Euro Interbank Offered Rate (EURIBOR).
ISDA publishes paper on private international law aspects of smart derivatives contracts using DLT
ISDA has published a paper on private international law aspects of smart derivatives contracts utilising distributed ledger technology (DLT) and governed by the laws of Singapore and England & Wales. The paper identifies specific private international law issues with respect to contract law that may arise when trading derivatives in a DLT environment and, where appropriate, proposes recommendations on how these issues might be clarified or resolved.
Sources: Private international law aspects of smart derivatives contracts utilizing DLT and ISDA, Clifford Chance, R3 and the Singapore Academy of Law publish smart contracts paper.
The International Capital Market Association (ICMA) has published its Q1 2020 report assessing market practice and regulatory policy. There are feature articles on the global transition to risk free rates (RFRs), CMU challenges, MiFID II/MiFIR and the bond markets, the Central Securities Depositories Regulation’s impact study on mandatory buy-ins, and an overview of the European Bank for Reconstruction and Development’s green bond programme.
Source: ICMA Quarterly Report first quarter 2020.
The Association for Financial Markets in Europe (AFME) has published an article by its managing director, Jacqueline Mills, on ‘Squaring the circle of banking regulation and capital markets in Europe’. Mills argues that, as the EU prepares to reinvigorate its plans to develop the region’s capital markets via its Capital Markets Union (CMU) project, a closer look at how banks’ market intermediation and market-making functions are impacted by global regulatory initiatives will be key to ensuring the deepening of market-based financing in the EU.
Source: Squaring the circle of banking regulation and capital markets in Europe.
Ahead of the European Commission’s review of the recast Markets in Financial Instruments Directive (Directive 2014/65/EU) and Markets in Financial Instruments Regulation (Regulation (EU) 600/2014 (the MiFID II Review), the European Forum of Securities Associations (EFSA) has published a paper calling for certain areas of the regulation to be recalibrated in order to deliver its intended policy outcome of establishing a more transparent financial system that works to the benefit of the economy and society as a whole.
ESMA has published its Strategic Orientation for 2020–22. The Strategic Orientation sets out ESMA’s future focus and objectives, and reflects its expanded responsibilities and powers following the European Supervisory Authorities (ESAs) Review and EMIR 2.2, which increase its focus on supervisory convergence, strengthen its role in building the capital markets union (CMU) and give it more direct supervision responsibilities.
In this case, the court held that it would exercise its inherent jurisdiction to remove a trustee in circumstances where the beneficiaries were creditors facing very substantial losses following the collapse of London Capital & Finance, and it was clear to the court on the facts that there was a very grave concern that those creditors did not have confidence in the existing trustee appointed to represent their interests. The decision addresses both the court’s statutory power to remove a trustee under section 41 of the Trustee Act 1925 and its inherent jurisdiction to do so.
For more information, see News Analysis: When might the court replace a trustee? (London Capital & Finance plc (in administration) v Global Security Trustees Ltd).
The Chancellor of the High Court has published a guidance note on the appointment of administrators. The key guidance, released on 29 January 2020, clarifies the procedure to be used in Business and Property Courts when an application for the appointment of an administrator is made electronically outside of court hours.
Source: Chancellor of the High Court: guidance note on appointing an administrator.
News Analysis: Out-of-court appointment of Administrators—another e-filing decision, written by Carly Sandbach, barrister, at Exchange Chambers, looks at the case of Re Keyworker Homes (North West) Limited  EWHC 3499 (Ch).
In this case, the court held that a notice of appointment of administrators (NoA) could be filed at court by directors of a company by e-filing outside of court hours and that such filing took effect from the time at which it was filed by the directors (and not at the time at which the court office subsequently opened and processed the documents). Given the various different and inconsistent analyses applied in the earlier case law to this question, this decision goes further than any before in making an unequivocal finding as to an entitlement of directors to appoint administrators in this manner—a decision which puts directors in a superior position to qualifying floating charge holders making out-of-hours, out-of-court appointments.
Nektan (Gibraltar) Limited was incorporated in Gibraltar. Its primary business was providing online gambling platforms to customers to businesses and individual players. These business activities led to tax liabilities to HMRC for remote gaming duty, which had increased from 15% to 21% on 1 April 2019, and the tax burden gave rise to a proposed restructuring involving an administration of the company. Did a company incorporated in Gibraltar fall within the definition of ‘company’ in paragraph 111 of Schedule B1 to the Insolvency Act 1986 (IA 1986) such that the court has jurisdiction to make an administration order in England? Falk J concluded that it did, and that it was appropriate to make an administration order on the basis that the centre of main interests (COMI) was in the UK, to the extent that was relevant, and found jurisdiction on that basis. Falk J added as obiter that the English court would still have had jurisdiction even if the COMI had been in Gibraltar. Written by Robert Paterson, partner at Moon Beever LLP.
 EWHC 65 (Ch)
The court had jurisdiction to make an administration order in respect of a company incorporated in Gibraltar which had had its centre of main interest (COMI) in the United Kingdom. The Chancery Division so held finding that it was clear that the company had had its COMI in the UK and there was nothing that prevented the English courts exercising jurisdiction in the present case.
For more information, see News Analysis: English courts have jurisdiction to appoint administrators in respect of a company incorporated in Gibraltar which had its centre of main interests in the UK (Re Nektan (Gibraltar) Limited).
UK Financial Services cases to watch in 2020 looks at civil claims that are working their way through the UK courts that lawyers say pose an interesting intersection between competition and financial services law, including three class actions that have been filed against big banks over the alleged rigging of the foreign exchange market.
Influential organisations, such as Facebook and the People’s Bank of China, are considering launching digital cryptocurrencies. In News Analysis: Stablecoins—the potential of a global cryptocurrency Hannah Raphael, solicitor at BCL, discusses how stablecoins work, and the opportunities and risks which they raise.
News Analysis: To freeze or not to freeze—cryptocurrency as property?, written by Danielle Carr, partner at Rosenblatt Limited, looks at the case of Vorotyntseva v Money-4 Ltd  EWHC 2596 (Ch).
In granting freezing orders to prevent the disposal of Bitcoin and Ethereum, Mr Justice Birss: i) found a real risk of dissipation where responsive evidence appeared to have been altered or simply failed to prove the asset was still held, and ii) was prepared to proceed on the basis that cryptocurrency could be a form of property, and accordingly the proprietary order should prevent the disposal of it.
This 2018 judgment (only recently available, and reported by LexisNexis®) aptly demonstrates the court’s approach to technical evidence, application of legal principles in increasingly sophisticated contexts and willingness to treat cryptocurrency as property (albeit that this significant point of interest did not appear to have been in issue).
In granting an interim proprietary injunction further to a cyberattack and payment of ransom in Bitcoin, the High Court embraced the UK Jurisdictional Task Force (UKJT) Legal Statement on Cryptoassets and Smart Contracts and, importantly, confirmed that cryptoassets are property. The interim injunction was also supported by ancillary orders intended to better police and protect it, including orders: (i) for a private hearing; (ii) preservation of the applicant’s anonymity (given the risk of further cyberattacks); (iii) to identify those responsible and now holding the Bitcoin; and (iv) for alternative service given the urgency and to seek to preserve the Bitcoin. The case exemplifies the court’s responsiveness in granting urgent relief and ancillary orders in respect of sophisticated cyber incidents in an increasingly complex FinTech landscape. See News Analysis: High Court confirms cryptocurrency is property, grants proprietary injunction and protective orders (AA v Persons Unknown), written by Danielle Carr, partner, at Rosenblatt Limited.
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