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Welcome to this month’s highlights from the Lexis®PSL Banking & Finance team which cover the key news updates from June 2019.
The House of Commons Library has released a report called ‘EU preparations for a no deal Brexit’, which looks at both EU-level preparations for a no deal Brexit and those preparations put in place by some EU Member States. According to the authors of the report, the European Commission’s programme ‘is one of damage limitation in areas that would be most seriously affected and could create problems for the EU27’. The Irish border issue and the EU Member States’ respective positions on citizen’s rights are also outlined in the report.
The Financial Conduct Authority (FCA) has published policy statement 19/15 (PS19/15) which outlines the near final rules applying the FCA’s existing supervisory and enforcement processes to securitisation repositories when the UK leaves the EU. It also sets out the final rules in respect of additional enforcement powers under the Securitisation Regulations 2018 (SI 2018/1288) (2018 Regulations). The Policy Statement follows on from the FCA’s consultation paper 19/11 (CP19/11) and its earlier CP18/30 and PS18/25.
The European Commission has announced that a no-deal scenario remains a possible outcome of the Brexit process, especially in light of the continued uncertainty regarding the ratification of the Withdrawal Agreement by the UK Parliament, and appropriate measures are being taken to prepare for it. The Commission reports that, in the process, it has so far tabled 19 legislative proposals, almost all of which have been adopted by the European Parliament and Council of the EU. It has also adopted 63 non-legislative acts and published 93 preparedness notices. There are no plans for any further measures before 31 October 2019.
The Association for Financial Markets in Europe (AFME) has published its response to the International Accounting Standards Board’s (IASB) Exposure Draft, titled Interest Rate Benchmark Reform—Proposed amendments to IFRS 9 and IAS 39. In its response, AFME expressed full support for IASB’s proposal to provide relief in relation to reporting issues arising from the reform of the Interbank Offered Rates, stating their belief that said reliefs are crucial to ensure a smooth and efficient transition to the new risk-free rates.
The International Swaps and Derivatives Association (ISDA) has also published its response to the IASB’s exposure draft. ISDA welcomes the IASB’s first phase of work on reforming International Financial Reporting Standards (IFRS). However, it calls for IASB to accelerate the work on the next phase of issues around LIBOR reform—with work on ‘phase-two’ being done in parallel with completing ‘phase-one’ amendments.
The European Central Bank (ECB) has calculated the spread between euro short-term rate (€STR) and euro overnight index average (EONIA) at 0.085% (8.5 basis points). The spread is based on the methodology recommended by the working group on euro risk-free rates and adopted by the European Money Market Institute (EMMI) for the recalibration of the EONIA methodology as of 2 October 2019 and until its discontinuation by EMMI.
The Bank of England’s (BoE) Working group on sterling risk-free reference rates (RFRs) has published its newsletter for May 2019, with updates on RFR transition in sterling markets and others. The newsletter sets out milestone dates, market developments, official sector updates, key liquidity indicators and non-sterling RFR updates.
The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) have published a statement in which they set out some observations from their work to date on firms’ preparations for the transition from the London interbank offered rate (LIBOR) to RFRs, including key themes, good practice and next steps.
EMMI has adopted changes to the methodology for calculating EONIA, to ensure a smooth transition to €STR.
Associated British Ports has become the first debt issuer to persuade holders of its existing listed floating rate notes (FRNs) to amend the reference rate from LIBOR to sterling overnight index average (SONIA). The agreement from the noteholders on 11 June 2019 followed the issue of a consent solicitation on 20 May 2019. The FRNs will now pay interest by reference to compounded daily SONIA plus a margin, the resulting pricing being effectively the same as prior to the switch. Of key interest to the market is the fact that the noteholders consented despite no fee being payable by Associated British Ports to noteholders, possibly setting an unwelcome precedent for investors.
[2019] EWHC 1503 (Comm)
The claimant was entitled to summary judgment in its claims for a declaration that there have been events of default under a mezzanine facility agreement (MFA) and a supplemental loan agreement (SLA) under which the claimant lent certain sums to the defendant, for the defendant to pay outstanding interest under the MFA, and for the defendant pay the principal and interest outstanding under the SLA. The standard Loan Market Association ‘No set-off by obligors’ clause was held to be effective in preventing the defendant borrower from relying on a defence of equitable set-off or legal set-off against claims made by lenders under loan agreements. The Commercial Court further refused the defendant's applications for a stay of the proceedings or enforcement of summary judgment in the claimant's favour pending the outcome of an ICC arbitration.
The European Banking Authority (EBA) has published a consultation paper on its draft guidelines on loan origination and monitoring. The draft guidelines aim to tackle the high level of non-performing exposures (NPEs) across the EU in recent years by ensuring that institutions have robust and prudent standards for credit risk taking, management and monitoring, and that newly originated loans are of high credit quality. They also seek to ensure that the institutions’ practices are aligned with consumer protection rules and anti-money laundering (AML) requirements. The consultation closes on 30 September 2019.
[2019] EWHC 1573 (Comm)
The claimant company succeeded in its claim for unpaid sums under a written guarantee. The Commercial Court held that the claimant had established its entitlement to the amount of US $2,300,170 for unpaid invoices. However, the claimant was not entitled to claim procurement fees, as no sufficient demand had been made for them.
The secretary of state for international trade, has announced a new financial support package for small to medium sized enterprises. The package includes UK Export Finance guaranteeing loans of potential oversea buys of British goods (the Small Deal Initiative), covering general costs for exporters (the General Export Facility), and providing financial support for exporters and firms in exporters’ supply chains.
UK Export Finance (UKEF) and the Department for International Trade (DIT) have announced that the government will support the export of climate resilience infrastructure. In a speech by Liam Fox, international trade secretary, it was announced that UKEF and the Environment Agency will work together to aid UK suppliers, who have expertise in climate change adaption, in delivering infrastructure projects and services worldwide. The DIT also announced an agreement between UKEF and AECOM Limited (AECOM) that will aim to promote the UK’s expertise in climate resilience, as well as a commitment from AECOM to boost procurement from the UK for its overseas projects.
The Growth and Emerging Market Committee of the International Organization of Securities Commissions (IOSCO) has published a report: Sustainable finance in emerging markets and the role of securities regulators. It provides ten recommendations for emerging market member jurisdictions to consider when issuing regulations or guidance regarding sustainable financial instruments. Among other things, the recommendations include requirements for reporting and disclosure of material environmental, social and governance specific risks, aimed at enhancing transparency.
The International Capital Market Association (ICMA) has published guidance to complement the Green Bond Principles, the Social Bond Principles and the Sustainability Bond Guidelines. It has also announced a new advisory council and the results of the elections to the Principles’ executive committee.
Éamon Ó Cuív and Roy Parker, both partners at McCann FitzGerald, discuss the significance of the landmark issuance of Ireland’s first sovereign green bond—the proceeds of which will be used to finance green projects in Ireland.
The European Commission has published new guidelines on corporate climate-related information reporting, as part of its Sustainable Finance Action Plan. The guidelines aim to provide companies with practical recommendations on how to better report the impact that their activities are having on the climate as well as the impact of climate change on their business. The Commission has also welcomed the publication of three new reports by the Technical Expert Group on sustainable finance, including key recommendations on the types of economic activities that can contribute to climate change mitigation or adaptation.
As part of its work on sustainable finance and the Commission’s Action Plan on Financing Sustainable Growth, the European Securities and Markets Authority (ESMA) has published a questionnaire which aims to gather evidence on potential short-term pressures on corporations stemming from the financial sector. The questionnaire will be open for five weeks, closing on 29 July 2019.
The Council of the EU has published a progress report on the proposal for a Regulation on the establishment of a framework to facilitate sustainable investment. The proposal was adopted by the European Parliament at first reading on 28 March 2019 and is currently under consideration by the Council of the EU.
The Financial Conduct Authority (FCA) has published a policy statement (PS19/12) setting out the near-final rules on the changes the FCA plans to make to the Handbook to align it with the Prospectus Regulation. It also summarises the feedback received to the consultation paper (CP19/6) and the FCA's response. The consultation closed on 28 March 2019.
The International Capital Markets Association (ICMA) has published a joint report with the Russian National Finance Association containing a comparative review of practices and procedures in the Russian and international primary debt capital markets. The bilingual report is focused on processes and practices in the Russian and international debt primary market, ie the market in which bonds are initially offered to investors before they begin to trade freely among investors and dealers in the secondary market.
Scott O'Malia, chief executive at the International Swaps and Derivatives Association (ISDA), has given advice on submitting aggregate average notional amount (AANA) calculations in accordance with US initial margin (IM) requirements. Less is known about the requirements of AANA calculations under US legislation, which certain firms will be obligated to submit either directly or through their US counterparties from September 2020, and this is why O’Malia has published his informal comments. He recommends that firms ‘spring into action now’ to be prepared and organised in time for when they come into the scope of the US regulations in September 2020.
ISDA has published a Trade life cycle events guide for non-cleared margin for May 2019. Initially developed in June 2016, this version makes no substantive changes. The intention is to provide an agreed market guide for firms to utilise in order to comply with certain aspects of the non-cleared margin rules within their respective jurisdictions.
The Financial Stability Board (FSB) has published a discussion paper on solvent wind-down of derivatives and trading portfolios by global systemically important banks. The discussion paper sets out considerations that may be relevant for authorities and firms for both recovery and resolution planning.
The Bank of England (BoE) has released Staff Working Paper No 800, which discusses the topic of clearing fragmentation. The paper contends that fragmenting clearing across multiple central counterparties (CCPs) is costly, as dealers providing liquidity on a global scale cannot net trades cleared in different CCPs, increasing their financial costs, which in turn are passed on to their clients through price distortions. Using proprietary data, the authors of the paper provide an economically significant CCP basis for dollar swap contracts cleared at both the Chicago Mercantile Exchange and the London Clearing House. They provide empirical evidence consistent with a collateral cost explanation of this basis.
The Basel Committee on Banking Supervision (BCBS) has published a document setting out a revised treatment of client cleared derivatives for the purposes of the leverage ratio. The BCBS has also published a revision to the leverage ratio disclosure requirements with the aim of reducing excessive volatility in banks' exposures around key reference dates.
Commission Delegated Regulation (EU) 2019/885 of 5 February 2019 supplementing the Securitisation Regulation (EU) 2017/2402 with regard to regulatory technical standards (RTS) specifying information to be provided to a competent authority in an application for authorisation of a third party assessing simple, transparent and standardised (STS) compliance has been published in the Official Journal of the EU.
ESMA has updated its Q&As on the Central Securities Depositary Regulation (Regulation (EU) 909/2014) (CSDR). The new Q&As clarify aspects of the process applicable to the provision of notary or central maintenance services in other Member States and passporting procedures.
The European Securities and Markets Authority (ESMA) has published a supervisory briefing to ensure compliance with the MiFIR pre-trade transparency requirements in commodity derivatives. The briefing was developed after ESMA became aware that the provisions were not implemented in a consistent manner across the EU. It aims to increase supervisory convergence among national competent authorities (NCAs) in their implementation of the requirements, and to provide a common timetable for the enforcement of the commodity derivatives pre-trade transparency regime, with the objective of ensuring a level playing field across EU trading venues.
ESMA has updated its Q&As on transparency issues under MiFID II and MiFIR. The updated Q&As are on the mandatory systematic internaliser (SI) regime, the voluntary SI regime, and the quoting obligation for SIs in non-trading on a trading venue (non-TOTV) instruments.
ESMA has published a compliance table setting out which competent authorities comply with its guidelines on MiFID II suitability requirements. All Member States have indicated that they comply or intend to comply, as have Gibraltar and the EEA EFTA states of Norway, Liechtenstein and Iceland.
ESMA has updated the public register of derivative contracts that are subject to the trading obligation under the Markets in Financial Instruments Regulation (EU) No 600/2014 (MiFIR). The update consists of adding to the list several UK venues where some of the classes of derivatives subject to the trading obligation are available for trading.
Commission Delegated Regulation (EU) 2019/1011 amending Commission Delegated Regulation (EU) 2017/565 as regards certain registration conditions to promote the use of SME growth markets for the purposes of MiFID II (Directive 2014/65/EU) has been published in the Official Journal of the EU.
Commission Delegated Regulation (EU) 2018/815 of 17 December 2018 supplementing the Transparency Directive 2004/109/EC with regard to regulatory technical standards (RTS) on the specification of a single electronic reporting format has been published in the Official Journal of the EU.
Two delegated regulations supplementing the Prospectus Regulation (Regulation (EU) 2017/1129) have been published in the Official Journal of the EU. The delegated regulations relate to the key financial information in the summary of a prospectus, the publication and classification of prospectuses, advertisements for securities, supplements to a prospectus, and the notification portal, as well as the format, content, scrutiny and approval of the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market.
Amendments are made to pieces of financial services primary and subordinate legislation in order to implement the provisions of Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 in the UK. Transitional provisions are also made. The Regulations will come into force on 21 July 2019.
ESMA has published a letter dated 7 June 2019 to the European Commission in which ESMA queries the application of the hedging exemption to the calculation of the month-end average positions of financial counterparties (FC) in non-financial groups. This calculation is used to determine whether these FCs are subject to the clearing obligation.
ESMA has updated its Q&As on the European Market Infrastructure Regulation (EU) 648/2012 (EMIR) to reflect amendments made to EMIR by Regulation (EU) 2019/83 (EMIR REFIT).
The Financial Conduct Authority (FCA) has updated its EMIR notifications and exemptions webpage for EMIR (the Regulation on OTC derivatives, central counterparties and trade repositories) (648/2012) to reflect the changes to EMIR notifications under the EMIR REFIT Regulation ((EU) 2019/834).
ISDA has published its master regulatory disclosure letter, which is a form of letter that is intended to allow market participants to exchange information regarding counterparty status as required under relevant regulatory regimes.
International Swaps and Derivatives Association (ISDA) has published a paper on the implementation of margin requirements and market fragmentation, which looks at the main areas of difference in the implementation of margin requirements for non-cleared derivatives across jurisdictions and makes recommendations on how to resolve them.
Can recognition be granted as a ‘foreign proceeding’ where the company subject to the foreign proceeding is demonstrably solvent? Joseph Curl, barrister at 9 Stone Buildings, discusses the court’s decision in Re Sturgeon Central Asia Balanced Fund Ltd (in liquidation) [2019] EWHC 1215 (Ch), [2019] All ER (D) 96 (May) in News Analysis: Examining important cross-border decision on the UNCITRAL Model Law (Re Sturgeon Central Asia Balanced Fund Ltd (in liquidation)).
In its fourth progress report on the reduction of EU non-performing loans (NPLs), the European Commission has released figures showing the number of NPLs continues to fall towards pre-crisis levels, down to 3.3% in the third quarter of 2018 and down by 1.2 percentage points year-on-year. The Commission says the figures will inform discussions on the completion of the banking union at the next meeting of EU finance ministers, on 14 June 2019.
[2019] EWHC 1581 (Ch)
The respondents had provided a guarantee and separate third party charges in respect of the indebtedness of a company (of which they were shareholders and directors). The creditor company enforced the third party security, demanded under the guarantee, and then presented statutory demands against the respondents in respect of the unpaid guarantee debt. It was held that the deputy judge had correctly concluded at first instance that the third-party charges provided by the respondents were security in respect of the debt upon which the statutory demands had been based, within the meaning of r 6.5(4)(c) of the Insolvency Rules 1986, SI 1986/1925, interpreted in accordance with its underlying rationale and purpose. Accordingly, the statutory demands could be set aside for failure to take into account the security and the Chancery Division dismissed the creditor's appeal against the deputy judge's decision to set aside the statutory demands.
[2019] EWCA Civ 1032
On 20 June 2019, the Court of Appeal handed down its decision in Granada UK Rental & Retail Ltd v The Pensions Regulator, finding that the Upper Tribunal was entitled to reach the conclusion that it was reasonable to impose financial support directions (FSDs) on five companies in the ITV group (the Targets) requiring them to put in place financial support for the Box Clever Group Pension Scheme. The Court of Appeal also agreed that the Pensions Regulator could consider matters and events that occurred before the Pensions Act 2004 came into force in reaching its conclusion. In addition to the moral hazard issues, the case raised a more general question of whether share security or the appointment of administrative receivers can have the effect of severing connections between companies under the Insolvency Act 1986 (IA 1986). IA 1986 test for connection is referred to in the Pensions Act 2004 (PA 2004) to determine whether a company may be the target of certain of TPR’s moral hazard powers.
The FSB has published a report on crypto-assets, which considers work under way, regulatory approaches and potential gaps. The report is being delivered to G20 Finance Ministers and Central Bank Governors for their meeting in Fukuoka, Japan on 8–9 June 2019. It recommends that the G20 keep the topic of regulatory approaches and potential gaps, including the question of whether more coordination is needed, under review.
Final legislation intended to reduce risks in the EU banking sector has been published in the Official Journal of the EU. Known as the ‘banking package’, the two regulations and two directives amend existing legislation related to bank capital requirements and the recovery and resolution of banks in difficulty. They were formally adopted by the European Parliament and Council on 20 May 2019.
The Financial Conduct Authority (FCA) has published a thematic review on the money-laundering risks and vulnerabilities in the capital markets. It advises firms to consider their approaches to identifying and assessing the money-laundering risks they are exposed to in light of this report and the related annex. The FCA is also considering its supervisory approach in response to this work.
The FCA has published a speech by its executive director for international, Nausicaa Delfas, on regulatory co-operation and coherence between the UK and the US. She argued that while the two regimes may not be identical, strong regulatory co-operation, coupled with rules seeking to achieve common outcomes, were ‘essential ingredients for supporting open markets’.
The governments of Jersey, Guernsey and the Isle of Man have jointly announced that they will move towards developing international standards of accessibility and transparency in the coming years in relation to each jurisdiction’s central register of beneficial ownership information of companies. The commitment between the jurisdictions involves three stages consistent with the EU’s approach to transparency of beneficial ownership data of companies under the EU’s Fifth Money Laundering Directive (EU) 2018/843 (5ML). David Dorgan, partner at Appleby, argues that the announcement represents ‘an evolution of the current position’ and highlights the privacy concerns surrounding the issue of public access to registers. Daniel Walker, solicitor at Voisin Law, contends that the announcement is an attempt of the Crown Dependencies to remain compliant with EU principles.
The government has published a letter from the economic secretary to the Treasury, John Glen, to the chair of the Treasury Select Committee, Nicky Morgan, in which Mr Glen provides an update on HM Treasury’s response to the failure of London Capital and Finance. The letter explains the two strands of work HMT plans to undertake—collaborating with the FCA and HM Revenue and Customs as appropriate—which consist of a review of policy on non-transferable debt securities and an assessment of the Innovative Finance ISA rules.
The European Central Bank has published a speech by a member of its executive board, Benoît Cœuré, in which he said dismantling regulatory standards would add to market fragmentation, and called instead for renewed effort to complete the banking and capital markets unions. Mr Cœuré also examined the role of the ESMA, central counterparties (CCPs) and the euro interbank offered rate (EURIBOR).
No contract, no quantum meruit—risktakers beware! considers the recent High Court decision of Moorgate Capital v H.I.G. European Capital Partners LLP, which will be of interest not just to those in the corporate finance sector, but also to contract lawyers more generally. The court made clear that there is no automatic right to payment for services (even requested services) in the absence of a contract. A quantum meruit claim will not be automatically granted. If a party is found to have run the risk of not being paid, for the purposes of seeking its own advantage, then it is unlikely to succeed on a quantum meruit claim. Written by Angharad Parry, barrister at 20 Essex Street.
HM Land Registry has updated its guidance aimed specifically for conveyancers to advise on the execution of deeds that are to be submitted to the department. The latest update outlines that from 20 September 2019, ‘signed as deed’ will no longer be an acceptable form of wording in prescribed form deeds executed by companies and limited liability partnerships.
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