Monthly Highlights: July 2019

Monthly Highlights: July 2019  

Welcome to this month’s highlights from the Lexis®PSL Banking & Finance team which cover the key news updates from July 2019.

Brexit 

Financial Services (Miscellaneous) (Amendment) (EU Exit) (No 3) Regulations 2019

This draft enactment is laid in exercise of legislative powers under the European Communities Act 1972, the Financial Services and Markets Act 2000 and the European Union (Withdrawal) Act 2018 in preparation for Brexit. It proposes to amend UK primary and subordinate legislation and amend and revoke retained direct EU legislation in relation to financial services in order to ensure a coherent and functioning financial services regulatory regime once the UK leaves the EU. It comes into force partly on 11:59 pm on the day on which these Regulations are made, partly on the day after the day on which these Regulations are made, partly immediately before exit day, and fully on exit day.

Insolvency (Amendment) (EU Exit) (No 2) Regulations 2019

This draft enactment is laid in exercise of legislative powers under the European Union (Withdrawal) Act 2018 in preparation for Brexit. This draft enactment proposes to amend UK subordinate legislation in relation to insolvency, which is required as a result of the extension to the UK’s exit from the EU. It comes into force on exit day.

AFME paper looks at regulatory impacts of a no-deal Brexit for financial services firms

The Association for Financial Markets in Europe (AFME) has published a report setting out the remaining no-deal risks in the financial services sector and highlighting areas where further work is needed to mitigate risks and minimise disruption to markets and clients. AFME says that while a ‘very substantial’ amount of work has already been undertaken to mitigate risks by both firms and regulators, a no-deal Brexit is likely to have a significant impact on the financial services sector, and regulatory and operational challenges remain.

Exclusive English jurisdiction clauses—effective after a No deal Brexit?

(Gulf International Bank BSC v Aldwood) [2019] EWHC 1666 (QB)

An exclusive jurisdiction clause in favour of the courts of a third State does not require courts of EU Member States to stay proceedings if jurisdiction is founded on Article 4(1) of Regulation 1215/2012, Brussels I (recast). Furthermore, there can be no recourse to a discretion conferred by the domestic law of EU Member States to stay proceedings otherwise. This has potentially serious consequences for exclusive jurisdiction clauses in favour of England and Wales should the UK leave the EU without a deal, thereby becoming a third State under the regulation. The case also considers the test for dissipation of assets where an application is made to continue a worldwide freezing order.

HoC European Scrutiny Committee clears EMIR 2.2 from scrutiny, but highlights insight into likely uncompromising EU approach to Brexit

The House of Commons (HoC) European Scrutiny Committee has published a summary of its 17 July meeting, along with a list of the documents it considered at the meeting. The Committee cleared from scrutiny the amendments to the European Markets Infrastructure Regulation (EMIR 2.2) but highlighted the insight this gave into the EU’s ‘likely uncompromising approach’ to Brexit. The Committee also retained scrutiny over the proposed Whistleblowing Directive. 

LIBOR and Benchmark transition

June 2019 working group newsletter outlines key dates and roadmap

The Working Group on Sterling Risk-Free Reference Rates June 2019 newsletter has been published. It provides updates on the progress of the working group, key milestone dates, updates in relation to other currencies, as well as highlighting the 2019–2021 transition roadmap

One step closer to global benchmark reform

Arjun Muddu, capital markets counsel at Linklaters and advisor to Associated British Ports (ABP), discusses the challenges involved in the change in interest basis for ABP’s floating rate notes from the London Interbank Offered Rate (LIBOR) to the Sterling Overnight Interbank Average Rate (SONIA). 

ESMA’s Benchmarks Regulation Q&As clarify commodity benchmark definition and the contribution to €STR

The European Securities and Markets Authority (ESMA) has issued an update of its Q&As on the European Benchmarks Regulation (BMR). The new Q&As provide clarification on the commodity benchmark definition; and the contribution to euro short-term rate (€STR).

ECB summary of responses to third public consultation by the working group on euro RFRs on the EONIA to €STR legal action plan 

The European Central Bank (ECB) has published a summary of responses to the third public consultation by the working group on euro risk-free rates on the euro overnight index average (EONIA) to €STR legal action plan.

Private sector working group recommends legal action plan for EONIA to €STR transition

The private sector working group on euro risk-free rates, established in 2018 by the ECB, the Financial Services and Markets Authority (FSMA), ESMA and the European Commission, has published a set of recommendations on the legal action plan for the transition from EONIA to €STR. The working group’s recommendations include using the €STR plus a fixed spread of 8.5 basis points as the EONIA fallback rate, as well as no longer entering into new contracts referencing EONIA as from 2 October 2019.

ICMA publishes guidelines for transition from EONIA to €STR

The International Capital Markets Association (ICMA) European Repo and Collateral Committee (ERCC) has published a memorandum which contains ERCC’s recommendations for best practice to address the transition from EONIA to the €STR.

Lending 

Loan Market Association sets out guidance relating to syndicated loans

The Loan Market Association (LMA) has announced its recommendations on trading syndicated loans on a par/near par trade confirmation. When the facility agreement for the trade is governed by English or another European jurisdiction law, then LMA documentation is recommended to be used. However, when the facility agreement is governed by United States law, then Loans Syndications and Trading Association (LSTA) documentation is recommended to be used. This remains an informal requirement.

Lending Standards Board increases threshold level to protect more businesses

The Lending Standards Board (LSB) has announced that the Standards of Lending Practice for business customers threshold has been increased to protect businesses with a turnover over of up to £25m. The standards originally only covered businesses with a turnover of £6.5m but will now aim to bring consistency in the treatment of small and medium-sized enterprises. The existing section of financial difficulty has also been developed to include a set of standards that focus on treatment of customers in business support units, as well as including an enhanced level of LSB oversight. The new standards will come into effect on 1 November 2019 when the current set of standards will become obsolete.

Trade and commodity finance

Incoterms 2020 to be released in early September 2019

The International Chamber of Commerce (ICC) has announced that the Incoterms 2020 will be released early in September 2019. To ensure accessibility and convenience for users, the 2020 rules will be available in a wide range of digital and hard copy formats and translated into 27 languages. The Incoterms 2020 rules will come into force on 1 January 2020.

Electronic rules will keep pace with increasingly digital trade finance system

The ICC Banking Commission has published new electronic rules for banks operating in the increasingly digital trade finance system. The rules, which came into force on 1 July 2019, form an electronic supplement to the existing Uniform Rules for Collections (URC 522) and Uniform Customs and Practice for Documentary Credits (UCP 600) rules. The ICC made the decision to publish electronic rules so that they can be amended and updated to keep pace with the fast-moving digital world.

Islamic Finance

Development of Islamic finance industry has been ‘systematic and robust’

The Board of Directors of the International Islamic Financial Market (IIFM) has convened their 40th meeting in Dubai, discussing the current state of the Islamic finance industry. The Board highlighted how the IIFM issuing globally standardised Shari’ah-compliant financial documentation to unify and harmonise Islamic finance has contributed to developing the industry in a systematic and robust manner.

Sustainable finance 

Government launches Green Finance Strategy

The government has launched the Green Finance Strategy, its comprehensive approach to greening financial systems, creating new financial markets and capturing the resulting opportunities for UK firms. The two objectives of the Green Finance Strategy are:

  • to align private sector financial flows with clean, environmentally sustainable and resilient growth, supported by government action, and

  • to strengthen the competitiveness of the UK financial sector

The Prudential Regulation Authority (PRA), Financial Conduct Authority (FCA), Financial Reporting Council (FRC) and The Pensions Regulator (TPR) have issued a joint statement welcoming the publication of the strategy and setting out their shared understanding of the financial risks and opportunities of climate change. They say that financial risks will be minimised by achieving an orderly transition and via a collective response, and that they ‘look forward to further collaboration to advance progress in the near term on climate-related issues’.

Decarbonisation and green finance—Treasury Committee hears evidence from panel of experts

The House of Commons has published a text version of oral evidence provided to the Treasury Committee on 2 July 2019 on ‘Decarbonisation and green finance—the economic opportunity’. The oral evidence session was the first in the Treasury Committee’s inquiry on decarbonisation and its impact on the economy and green finance opportunities, and included evidence from Chris Stark, the chief executive of the Committee on Climate Change, Sagarika Chatterjee of the Principles for Responsible Investment, and Professor Nick Robins, a professor of sustainable finance at the London School of Economics.

Green financing and sukuk structures

Stuart Ure, partner at Clifford Chance Dubai, discusses the recent development of the Gulf Cooperation Council’s first green sukuk, and what this means for future environmental and social governance investments, as well as general trends in green financing.

Derivatives

Derivatives H1 2019 round-up

We have now published our Derivatives—H1 2019 round up, which highlights key developments in the first half of the year.

FIA, ISDA and GMFA comment on position limits in Europe

The Futures Industry Association (FIA) has issued a press release noting that it had, jointly with the International Swaps and Derivatives Association (ISDA) and the Global Financial Markets Association (GFMA), responded to the European Securities and Markets Authority (ESMA)’s call for evidence in May 2019 on position limits under MiFID II. ESMA sought stakeholders’ input as it launched this call for evidence in the context of the reviews it must perform under the recast Markets in Financial Instruments Directive (Directive 2014/65/EU) (MiFID II) together with the European Commission.

Credit derivatives definitions amended in 2019 supplement

ISDA has released its ‘2019 Narrowly Tailored Credit Event Supplement’. The supplement contains amendments made to the ‘2014 ISDA Credit Derivatives Definitions’. It originated from a statement from ISDA’s Board of Directors in April 2018, which expressed concerns in relation to the ‘impact of such events on the efficiency, reliability and fairness of the overall Credit Default Swap market’.

ESMA publishes responses to its call for evidence on position limits in commodity derivatives

ESMA has published the responses received to its call for evidence on position limits in commodity derivatives. The consultation was launched on 24 May 2019 and closed on 5 July 2019.

Regulation of derivatives and structured products

BCBS and IOSCO agree one-year extension of financial implementation of margin requirements for non-centrally cleared derivatives

The Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) have issued a joint statement acknowledging the progress made to implement the framework for margin requirements for non-centrally cleared derivatives and confirming that they have agreed to extend by one year, to 1 September 2021, the final implementation of the margin requirements.

CCP12 welcomes revision to leverage ratio treatment of cleared client derivatives

The Global Association of Central Counterparties (CCP12) has welcomed the Basel Committee on Banking Supervision’s (BCBS) publication on revising the leverage ratio treatment of client cleared derivatives with the standardised approach to measuring counterparty credit risk exposures (SA-CCR) used for risk-based capital requirements. CCP12 says implementation in 2020 is very important and national regulators must uniformly implement the revision.

Financial Conduct Authority Handbook aligned with Prospectus Regulation

The Financial Conduct Authority (FCA) has published an instrument (FCA 2019/82—Prospectus Regulation Rules Instrument 2019) which makes changes to the FCA Handbook to align it with the Prospectus Regulation. The instrument comes into force on 21 July 2019 and the amendments to the Handbook are identical to those set out in the FCA’s policy statement (PS19/12) published in May 2019.

The new prospectus regime and the debt capital markets

Matthew Tobin, partner, and Eric Phillips, professional support lawyer, at Slaughter and May, look at how Prospectus Regulation (EU) 2017/1129 (prospectus regime) will operate and discusses some of the key differences that market participants should consider.

ESMA updates 

ESMA consults on Prospectus Regulation disclosure guidelines

The European Securities and Markets Authority (ESMA) has launched a public consultation on its draft guidelines on disclosure requirements under the Prospectus Regulation. The consultation period closes on 4 October 2019.

ESMA updates Q&As

ESMA has updated its Q&A document on the Prospectus Regulation by adding 25 new or updated Q&As.

ESMA has updated its Q&As document on the Securitisation Regulation.

ESMA publishes XML schema and validation rules for Securitisation Regulation reporting

ESMA has published a set of XML schema and validation rules for securitisation reporting under the Securitisation Regulation. The documents, which were published alongside an updated version of ESMA’s Securitisation Regulation Q&As, are intended to assist market participants in implementing the draft technical standards on disclosure requirements for the Securitisation Regulation published by ESMA in January 2019.

ESMA publishes latest peer review report on CCP supervision

ESMA has published its annual peer review report on the overall supervision of EU central counterparties (CCPs) by national competent authorities (NCAs). The review focuses on the effectiveness of NCAs’ supervisory practices to assess CCPs’ compliance with the European Market Infrastructure Regulation (EMIR) requirements on collateral and funding arrangements. Overall, the review found NCAs’ supervisory activities satisfactory. However, the use by NCAs of quantitative metrics to assess the liquidity and low market risk of collateral was found to be quite limited.

Restructuring

Exploring bankruptcy statutory demands and specifying creditor security for debt (Promontoria (Chestnut) Ltd v Bell)

Simon Hill, barrister at 33 Bedford Row, considers the case of Promontoria (Chestnut) Ltd v Bell and the requirements imposed on creditors serving statutory demands by the Insolvency Rules 1986 (which applied to this case), to specify security held by the creditor in respect of, or for, the debt.

Commission discusses possible review of the FX Global Code

The Global Foreign Exchange Commission (GFXC) has released details of its 22–23 May 2019 Tokyo meeting, in which the committee discussed its mandate to consider the possibility of a comprehensive review of the FX Global Code at least every three years. The GFXC has declared that it would ‘seek feedback through multiple channels’. The GFXC has also announced that Neill Penney, managing director and co-head of trading at Refinitiv, has been chosen as GFXC’s co-vice chair for a two-year term.

Legislation changes to move HMRC up the insolvency creditor hierarchy

HMRC has released a policy paper on the subject of changes to protect tax in insolvency cases. This will introduce changes to legislation from 6 April 2020, which will see ‘more of the taxes paid…by its employees and customers—and temporarily held by the business—go to fund public services rather than being distributed to other creditors’. This will be achieved by moving ‘HMRC up the creditor hierarchy for the distribution of assets in the event of insolvency’.

Lease guarantors—landlord’s recovery options depend on how the covenant is framed

Davies v Revelan Estates (Wigston) Ltd [2019] EWHC 1766 (Ch)

The judgment in this case gives an interesting analysis of the types of obligations in a guarantor covenant and the implications for pursuing the guarantor in the context of a disputed statutory demand.

Exploring pension regulator's powers to impose financial support directions

Granada UK Rental & Retail Ltd and other companies v The Pensions Regulator [2019] EWCA Civ 1032

The case of Granada UK Rental & Retail Ltd and other companies v The Pensions Regulator (Box Clever case) illustrates the caution that employers must exercise when establishing defined benefit pension schemes and that the pensions regulator (TPR) will take a tough stance against such schemes when insufficiently funded.

Scottish insolvency procedure tweaked: The Insolvency (Scotland) Rules 2018 (Miscellaneous Amendments) Rules 2019

Steven Wood, Practice Support Specialist (Insolvency) at the Institute of Chartered Accountants of Scotland (ICAS), considers the changes to Scottish insolvency procedure brought in by two recent SIs: The Insolvency (Scotland) Rules 2018 (Miscellaneous Amendments) Rules 2019 and The Small Business, Enterprise and Employment Act 2015 (Consequential Amendments, Savings and Transitional Provisions) Regulations 2019.

Fintech

ICMA updates its fintech mapping directory

The International Capital Market Association (ICMA) has updated its fintech mapping directory, which compares the capabilities of different providers and aims to create greater transparency in the market. It focuses on solutions available in repo and cash bond markets, and ancillary categories such as know-your client (KYC) onboarding, as well as workflow and communication. The directory forms part of ICMA’s efforts to promote automation and efficiency in trade processing.

Regulation for banking lawyers 

Fifth Money Laundering Directive likely to have 'unnecessarily detrimental impact' on loan market

The Loan Market Association (LMA) has responded to a consultation by the HM Treasury seeking comment on the steps that the government should take to meet the UK’s obligation to transpose the Fifth Money Laundering Directive (EU) 2018/843 (MLD5) into UK law. In its response, the LMA stated that although it strongly supports the objectives of MLD5—especially the need to obtain greater transparency on issues such as beneficial ownership—it nevertheless believes that certain provisions in the directive ‘are likely to have an unnecessarily detrimental impact on the functioning of the primary and secondary syndicated loan market, as well as corporate loan market liquidity more generally, without resolving the issues they are purporting to address’.

FCA consultation paper 19/22 seeks to ban sale of crypto-derivatives to retail consumers

The Financial Conduct Authority (FCA) has published consultation paper 19/22 (CP19/22) which seeks to ban the sale, marketing and distribution of derivatives and exchange traded notes (ETNs) referencing cryptoassets to all retail consumers. The FCA considers these products are ill-suited to retail consumers who cannot reliably assess the value and risks of derivatives or ETNs that reference certain cryptoassets (crypto-derivatives). The consultation closes on 3 October 2019.

Real estate finance 

Government responds to recommendations for Draft Registration of Overseas Entities Bill from Joint Committee

The government has published a response to recommendations from the Joint Committee on the Draft Registration of Overseas Entities Bill. It welcomes the Joint Committee’s report and commits to acting on several areas as a result of the recommendations. It has also said it is considering changes to further aspects of the Bill but will undergo further work into the implications of the recommendations before committing to them.

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About the author:

Zahra started working as a paralegal at Lexis Nexis in Banking and Insolvency teams in April 2019. Zahra graduated with a 2.1 honours in a BA French and Spanish, completed the GDL at BPP University and is seeking some experience before commencing the LPC. She has undertaken voluntary work for law firms in London, Argentina and Colombia.