Monthly Highlights: March 2016

Welcome to this month’s highlights from the Lexis®PSL Banking & Finance team which cover the key news updates from March 2016.

Lending

Roadmap published for ICE LIBOR

International Exchange (ICE) has announced that ICE Benchmark Administration (IBA) has published its roadmap for the evolution of ICE LIBOR. The LIBOR roadmap will be implemented later this year. The publication follows an extensive consultation with market participants, key stakeholders, central banks and regulators globally and sets out the regulatory reforms required to reduce the risk profile of LIBOR and create conditions that will allow more banks to participate in the process. In particular, these steps include:

  1. incorporating transaction data into the LIBOR methodology to the greatest extent possible
  2. publishing a single, clear and comprehensive LIBOR definition
  3. implementing a construct for ensuring that the rate can adapt to changing market conditions giving appropriate consideration to the interests of all stakeholders, and
  4. conducting a feasibility study on transitioning the calculation of LIBOR to IBA, using transaction data to deliver a more robust and sustainable rate for the long term

In addition, the IBA is conducting a feasibility study on the design and implementation of an appropriate algorithm to calculate LIBOR. The aim of this study is to reduce the risk profile of LIBOR and lead to increased market participation, as well as raising the number of transactions on which LIBOR is based.

For further information, see the ICE Press Release.

Security

Companies House issues guidance on rectification of the charges register

Companies House has issued an overview of the procedure for the rectification of the charges register. The guidance document is split into two parts, considering separately charges created before and after 6 April 2013, being the date on which the Companies Act 2006 (Amendment of Part 25) Regulations 2013, SI 2013/600 entered into force. These Regulations amended the CA 2006 to set out a single scheme for registration of charges that applies to any company registered in the UK.

Rectification of Charges: Part 1 (Charges created before 6 April 2013)

If the particulars of a charge are incorrect on a charge registered pursuant to Part 25 of the CA 2006, an application must be made to rectify them, pursuant to sections 873/888 of the CA 2006. The guidance also notes that there may be occasions where the notification of the satisfaction of a charge has been made in error and an application pursuant to sections 873/888 to delete the entries will be required.

This part of the Guidance also sets out the process for applying to court, attendance at hearings and orders from the court.

Rectification of Charges: Part 2 (Charges created on or after 6 April 2013)

Part 2 of the Guidance states that the provisions of section 859M of the CA 2006 apply to information in respect of charges created on or after the relevant date. The Guidance provides examples of rectification applications that Companies House expects to receive. It also provides information on the court application, which can be made either by the company creating the charge, or by a person interested in it. It is advised that the Registrar of Companies should be joined as a defendant to claims (under both parts of the Guidance) so that it can consider its position prior to the hearing.

Debt capital markets

ICMA publishes report on the implications for capital markets of a Brexit

A new report from the International Capital Markets Association (ICMA) identifies a number of potential impacts of a Brexit for international capital markets. ICMA has indicated that should the UK vote to leave the EU, there will be considerable uncertainty although it does not believe that leaving the EU would lead to less regulation of capital markets in the UK because:

  1. the UK is part of the G20 and would still be required to meet these global standards
  2. it would still need to comply with the terms of EU regulations if it wanted to benefit from the most favourable terms of access to the EU Single Market, and
  3. the UK national regulators (Prudential Regulation Authority and Financial Conduct Authority) have been consistent advocates of tighter regulation

The report identifies a number of potential implications for international capital markets of a Brexit, including:

  1. uncertainty over the terms of a UK withdrawal
  2. concern over direct foreign investment in the UK
  3. the need for financial institutions in the UK, as well as neighbouring states, to prepare fully for any potential Brexit implications, and
  4. financial contracts, especially between parties in the UK and the rest of the EU, will need to be reviewed and may require amendment

For further information on the potential implications for the capital markets in both the UK and wider EU, see the Report: Brexit: Practical implications for capital markets.

Derivatives

Confirmations under the ISDA Master Agreement

In the case of LSREF III Wight Limited v Millvalley Limited [2016] EWHC 466 (Comm), LSREF III Wight sought a declaration as to whether an interest rate swap confirmation incorporated the terms of a generic 1992 ISDA Master Agreement or an executed 2002 Master Agreement.

The case contains a particularly interesting discussion about the difference between construction and rectification. It also highlights the potential pitfalls of using long-form confirmations. For more on the facts of the case and the practical impact of the decision, see News Analysis: 1992 or 2002 Master Agreement and long form confirmations.

The ability of public sector companies to enter into ‘snowball’ swaps under the ISDA Master Agreement

Banco Santander Tutto S.A. v Companhia de Carrid de Ferro de Lisboa S.A. [2016] EWHC 465 (Comm), [2016] All ER (D) 61 (Mar) was the first case to be transferred into the Financial List and was transferred with the consent of both parties only 12 days after the Financial List came into operation in October 2015. The claimant was the bank and the defendants were four Portuguese public sector transport companies. Between 2005 and 2007 the bank and the transport companies entered into nine different long-term interest rate swaps. All of them were entered into under the International Swaps and Derivatives Association, Inc. (ISDA) 1992 Multi-Currency Master Agreement governed by English law and subject to the jurisdiction of the courts of England and Wales.

In 2013, the transport companies stopped making payments to the bank under the swaps. The bank said that the transactions were legal, valid and binding, and enforceable in accordance with their terms. The transport companies did not allege that the swaps had been mis-sold but asserted that:

  1. each of the companies lacked capacity to enter into the swaps under Portuguese law
  2. the swaps were speculative and therefore void under Portuguese law, and
  3. although English law governed the swaps, article 3(3) of Convention 80/934/EEC on the law applicable to contractual obligations (Rome Convention) provided that the choice of law did not prejudice 'mandatory laws' under Portuguese law. This meant that:
    • the swaps were void as they were unlawful 'games of chance', and
    • seven of the nine swaps should be terminated under rules on 'abnormal change of circumstances' because since 2009 (and still at the time of judgment) interest rates remained close to zero (this meant that they were outside a lower 'barrier' under the terms of the swaps and the fixed rate payable by the transport companies had a spread added to it)

On these grounds, the transport companies declared that the swaps were invalid and therefore unenforceable. The court however found that the transport companies did have capacity to enter into the swaps. Also, because of the right to assign to a bank outside Portugal, the use of standard international documentation, the practical necessity for the relationship with a bank outside Portugal, the international nature of the swaps market, and the fact that back-to-back contracts were concluded with a bank outside Portugal in circumstances in which such hedging arrangements are routine, the court held that Article 3(3) of the Rome Convention did not apply.

The issues considered in the case, the decision of the court and the impact for practitioners are considered in the News Analysis: Capacity of Portuguese public sector companies to enter into ‘snowball’ swaps.

Regulation

Government publishes guidance for people with significant control (PSCs)

The Department for Business Innovation and Skills (BIS) has provided non-statutory guidance for actual or potential PSCs, as opposed to the companies seeking to determine them. It provides information that PSCs will need to know to comply with the new requirements, where a failure to do so could amount to a criminal offence and a fine, or imprisonment.

Individuals and legal entities with significant control over UK companies, societates europaeae (SEs) and limited liability partnerships (LLPs) will need to be identified on the PSC register for their entity from 6 April 2016. The guidance is relevant to:

  1. an individual in a position of influence or control in relation to a company, SE or LLP who could be a PSC
  2. a director or employee of a legal entity who is in a position of influence or control in relation to a company, SE or LLP and who might need to be entered as a registrable entity on its PSC register
  3. anyone involved with an individual or legal entity who is in a position of influence or control, professionally or otherwise, and has information about their engagement
  4. a company, SE or LLP seeking to identify its PSCs, and
  5. people interested in how PSC information is defined and recorded

A copy of the BIS guidance can be viewed here.

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