Monthly Highlights: May 2018

Welcome to this month’s highlights from the Lexis®PSL Banking & Finance team which cover the key news updates from May 2018.


LMA publishes revised replacement of screen rate clause to provide further flexibility in light of uncertainty over the future of LIBOR

The Loan Market Association (LMA) has published a revised version of the optional ‘replacement of screen rate’ clause that has been included in the primary documents and the leveraged documents since November 2014. The revised version permits amendments to be made to documents with a lower consent threshold than may otherwise be required in a wider range of circumstances than the existing clause.

Members can log into the LMA website with their username and password to view the revised replacement of screen rate clause.


Government shelves Goods Mortgages Bill

On 14 May 2018, HM Treasury (HMT) published its findings after considering the responses it received to its consultation of 22 September 2017 on the proposal to reform the Bills of Sale Acts. HMT has announced that, given the concerns that were raised in the consultation, the small and reducing market and wider work on high-cost credit, the government is not intending to introduce new legislation at this point in time.

Acquisition finance

LMA launches a new form of leveraged intercreditor agreement for a super senior revolving facility and senior term facility structure

LMA has launched a new recommended form of intercreditor agreement (ICA) for leveraged finance transactions that includes a super senior revolving facility structure.

The super senior/senior ICA is based upon the LMA forms of intercreditor agreement for leveraged acquisition finance transactions for: (i) senior/mezzanine structures; and (ii) super senior revolving facility and senior secured note structures. The agreement states that a senior term loan facility allows the acquisition of a target and a super senior revolving facility for working capital purposes, which falls under a single facilities agreement, but is provided by different lending groups.

The revolving facility will be equal to the term facility regarding right of payment, but will supersede the term facility in terms of all recoveries of enforcement.

Members can log into the LMA website with their username and password to access the super senior/senior ICA and User Guide.

Islamic finance

Malaysia sits atop the Islamic finance industry with $612bn in domestic and international issuances

The International Islamic Financial Market (IIFM) has published its Annual Sukuk Report 2018 during its seminar in Kuala Lumpur, which states that Malaysia has remained the leader in the Sukuk market with domestic and international issuances of US$612bn.

Project finance

Green financing at lowest point in a decade

The Environmental Audit Committee has delivered its report on mobilising investment in clean energy and sustainable development, finding among other things that annual green investment is at its lowest since 2008, having fallen by 56% in 2017. The committee also found that the government’s Clean Growth Strategy does not do enough to meet legally binding climate change targets, even if all its policies are delivered in full. Jonathan Thompson, senior associate at Hunters Solicitors, said that the potential ramifications of this report were wide-ranging, and that the committee's proposals were useful in terms of formulating ideas and plans for future development of both urban and rural sites.

Real estate finance

LMA publishes survey on the challenges and opportunities in European real estate finance market

The LMA has published its real estate finance survey in time for its sixth real estate finance conference. The survey sought the opinions of LMA members concerning the opportunities and challenges facing real estate finance markets. The survey also pinpoints where in Europe those opportunities and challenges are located, including which sectors and asset classes will potentially drive future growth and where future lending will most likely come from.

Amendments made to practice guidance on making an official search

HM Land Registry has updated its Practice Guidance (PG) relating to the purpose and effect of the various types of official search applications which may be made with HM Land Registry. PG12 is updated to clarify what interests may or may not be protected by an official search.

Trade finance

Majority of banks digitalising trade finance operations

The International Chamber of Commerce (ICC) 10th annual global survey has found that 60% of banks have implemented, or are in the process of implementing, technology solutions to digitalise their trade finance operations. Only 9% of banks, however, reported that the solutions implemented have so far led to a reduction of time and costs in trade finance transactions.

Debt capital markets

ICMA developments

ICMA welcomes proposals for sustainable finance action plan

The International Capital Market Association (ICMA) has welcomed the first of the European Commission’s proposals for implementing its action plan on sustainable finance. The proposals aim to deliver concrete actions enabling the EU financial sector to lead the way to a greener and cleaner economy.

ICMA publishes briefing note on the RTS for CSDR settlement discipline related to the mandatory buy-in regime

ICMA has published a briefing note on the regulatory technical standards (RTS) for the Central Securities Depositories Regulation (CSDR) settlement discipline related to the mandatory buy-in regime. The note outlines the key characteristics of the mandatory buy-in framework, and discusses the expected impacts this is likely to have with respect to bond market liquidity, repo and lending markets, increased risks to buy-sides, market stability, potential extraterritorial implications, and conflicts with the aims of the capital markets union.

ICMA publishes overview of ESMA’s liquidity assessment for bonds (May-August 2018)

ICMA has published an overview of the first liquidity assessment for bonds subject to the pre- and post-trade requirements of MiFID II/MiFIR which the European Securities and Markets Authority (ESMA) published on 2 May 2018. The liquidity assessment became applicable on 16 May 2018 and will be valid until 15 August 2018. The overview includes the list of liquid bonds.


ECON developments

ECON supports revised rules for OTC derivatives: proportional treatment of small and non-financial firms

The Economic and Monetary Affairs Committee (ECON) of the European Parliament voted on 16 May 2018 to support the Commission's proposals to simplify clearing rules for small and non-financial counterparties and to temporarily exempt pension funds from clearing.

ECON supports stricter EU supervision of clearing houses

ECON of the European Parliament voted on 16 May 2018 to approve plans to set up an ESMA supervisory committee for EU central counterparties (CCPs) and impose stricter rules on third-country ones, depending on systemic risk.

ISDA updates

ISDA publishes research note on derivatives regulation

The International Swaps and Derivatives Association (ISDA) has published a research note highlighting a number of examples where notional amount outstanding is used in derivatives regulations in different jurisdictions. The paper concludes that notional amount may be the most appropriate metric to use in some instances, such as those related to trade size, but that a risk-based measure would be more appropriate in others, such as clearing and margin.

ISDA CEO sets out progress on margin rules and the ISDA SIMM

ISDA has published comments by its CEO, Scott O'Malia, on margin rules and the ISDA standard initial margin model (SIMM) in the latest issue of derivatiViews. Mr O’Malia said the phase-in of the non-cleared margin rules is roughly half-way complete, with phases three, four and five coming into scope in 2018-2020.

ISDA issues feedback on Commission’s proposal for a regulation on assignment of claims

ISDA has written to the European Commission in response to the Commission’s request for feedback on its proposal for a Regulation on the law applicable to the third-party effects of assignments of claims.

ISDA has focused in the letter on issues of relevance to the derivatives market. ISDA supports the Commission’s objective of providing legal certainty in relation to the cross-border assignment of claims by promoting uniform conflict of laws rules throughout the EU. ISDA supports the approach taken by the Commission in the Proposal, which is intended to apply the law of the assigned claim to: (a) cash credited to an account in a credit institution and (b) claims arising out of financial market transactions. However, ISDA is concerned that the intended scope and drafting of Article 4(2) of the proposed Regulation are not sufficiently clear and need to be amended accordingly.

ISDA has some further concerns in relation to the securities communication and has invited the Commission to discuss these further.

ISDA guide to navigating derivative trading on US/EU trading venues

ISDA has published a guide to navigating derivatives trading on US/EU trading venues. It analyses the implications of trading venue recognition between the US and EU, and flags areas where further alignment of rules is necessary. It also sets out the steps US and EU persons would have to take when trading on a US or EU trading venue, and highlights complexities due to a lack of equivalence for clearing, reporting and registration requirements.

Structured products and securitisation

PRA consults on the securitisation framework and significant risk transfer

The Prudential Regulation Authority (PRA) is consulting on its proposed approach to the EU Securitisation Regulation and certain aspects of the revised Capital Requirements Regulation (CRR)’s banking securitisation capital framework. Consultation paper (CP) 12/18 also proposes to update firms on the PRA’s expectations with regard to significant risk transfer (SRT) securitisation. Feedback is sought by 22 August 2018.

Insurance Europe backs Commission proposals on STS securitisations

Insurance Europe (IE) has responded to the European Commission's consultation on revised calibrations for simple, transparent and standardised (STS) securitisations in the Solvency II regulatory framework that governs insurers. While it supports the Commission's proposals, IE notes that the proposed capital requirements remain significantly high compared to the historical default experience of these assets, and says that this issue should be examined more broadly as part of the 2020 review of Solvency II.

BCBS and IOSCO publish criteria for identifying STC securitisations

The Basel Committee on Banking Supervision (BCBS) and IOSCO have issued criteria for identifying simple, transparent and comparable (STC) short-term securitisations. The criteria maintain and build on the principles in the criteria for identifying STC securitisations issued by BCBS-IOSCO in July 2015.

The criteria take account of the characteristics of asset-backed commercial paper (ABCP) conduits, such as:

  1. the short maturity of the commercial paper issued
  2. the different forms of programme structure, and
  3. the existence of multiple forms of liquidity and credit support facilities

Regulation of derivatives & structured products

CCP supervision

ECON report on proposed regulation on CCP supervision

The European Parliament has published a report by ECON on the European Commission's June 2017 proposal for a regulation amending the European Securities and Markets Authority Regulation (EU) 1095/2010 and the European Market Infrastructure Regulation (EU) 648/2012 as regards the procedures and authorities involved for the authorisation of central counterparties (CCPs) and requirements for the recognition of third-country CCPs. ECON's report sets out a draft legislative resolution which makes a number of amendments to the Commission's proposal.

ESMA publishes guidelines on anti-procyclicality margin measures for CCPs

The European Securities and Markets Authority (ESMA) has issued final guidelines on anti-procyclicality margin measures for central counterparties (CCPs) under the European Market Infrastructure Regulation (EMIR). The guidelines seek to establish consistent, efficient and effective supervisory practices and to ensure a common, uniform and consistent application of EMIR, in order to limit procyclicality of CCP margins.


The European Supervisory Authorities (ESAs) have launched two joint consultations on proposed regulatory technical standards (RTS) regarding the clearing obligation and risk mitigation techniques for over-the-counter (OTC) derivatives not cleared by CCPs. The RTS are intended to implement provisions of Regulation (EU) 2017/2402 (the Securitisation Regulation), which amended Regulation (EU) 648/2012 (EMIR). Feedback is sought by 15 June 2018.

The ESAs have proposed the RTS in order to provide a specific treatment for simple, transparent and standardised (STS) securitisation and to ensure a level playing field with covered bonds, as contemplated by the Securitisation Regulation and the amended EMIR.

The consultation on the draft RTS on the clearing obligation clarifies which arrangements under covered bonds or securitisations adequately mitigate counterparty risk and thus may benefit from an exemption from the clearing obligation.

The consultation on the draft RTS on risk mitigation techniques aims at extending the type of special treatment currently associated with covered bonds to STS securitisations. The proposed treatment—no exchange of initial margins and collection only of variation margins—is applicable only where an STS securitisation structure meets a specific set of conditions equivalent to the ones required for covered bonds issuers to be able to benefit from that same treatment.


ESMA updates Q&As on investor protection topics under MiFID II and MiFIR

The European Securities and Markets Authority (ESMA) has added or updated nine Q&As on  Markets in Financial Instruments Directive and Regulation (MiFID II/MiFIR) investor protection topics. The new or updated Q&As cover the topics of best execution, client categorisation, provision of investment services and activities by third country firms, and other issues.

ESMA updates its MiFIR Q&As on data reporting

ESMA has updated its Q&As on data reporting under MiFIR. The Q&As clarify the requirements for the submission of transaction reports and reference data under MiFIR, and have been updated to include new guidance on complex trades and national client identifiers for natural persons.

ESMA says quarterly liquidity assessment now applies for bonds

ESMA has updated its transparency calculations webpage and FAQs to reflect the fact that the MiFID II and MiFIR transitional transparency calculations (TTCs) with respect to the liquidity assessment for bond instruments—other than exchange-traded commodities (ETCs) and exchange-traded notes (ETNs) —will no longer be applicable and the quarterly liquidity assessment will now apply.

IOSCO conference focuses on key challenges facing securities regulators

IOSCO held its 43rd annual conference in Budapest, focusing on protecting investors, ensuring fair, efficient and transparent markets, and mitigating systemic risk.

Discussion at the IOSCO conference focused on four key issues:

  1. the sale of unsuitable products to retail investors
  2. the challenges of FinTech and digitalisation
  3. the shift from active to passively managed collective investment schemes, and
  4. SME access to funding through capital markets

European Scrutiny Council reports on covered bond and crowdfunding proposals

The items considered by the European Scrutiny Committee at its meeting on 25 April 2018 included the proposed Covered Bonds Directive and related amendment to the Capital Requirements Regulation (CRR), and the proposed European Crowdfunding Service Providers (ECSP) Regulation and related amendment to the Markets in Financial Instruments Directive (MiFID II).

Given the continued uncertainty about the future of regulatory co-operation and alignment with the EU on financial services after the UK leaves the Single Market, the Committee retained the proposed Covered Bonds Directive and amendment to the CRR under scrutiny and asked the minister to keep the Committee informed of developments in the legislative process (particularly with respect to the inclusion of an 'equivalence' regime by either the Council or the European Parliament). The Committee also asked for the minister's next update to the Committee to include information, if available, on the volume of UK-issued covered bonds held by investors elsewhere in the EU.

Regulation for banking lawyers

Guidance on money laundering in financial services revised

The Joint Money Laundering Steering Group has approved and published revisions to its guidance on the prevention of money laundering and the financing of terrorism in the UK financial services industry. The revisions to Parts 2 and 3 of Chapter 17 of the guidance relate specifically to syndicated lending and have been re-written by the LMA.

ECB publishes responses to its euro unsecured overnight interest rate consultation

The ECB has published a summary of the responses it received to its second consultation on developing a euro unsecured overnight interest rate, which closed on 20 April 2018. The ECB received 48 responses, with broadly positive feedback. Concerns were raised about the proposed trimming level, and about confidentiality and market manipulation related, in particular, to the publication of the ‘percentage of volumes reported by the five largest banks’.

LMA highlights importance of different credit protection products

The LMA has responded to a consultation by the PRA on the eligibility of guarantees used as unfunded credit mitigation under the Capital Requirements Regulation. The LMA highlights the importance of different credit protection products, including risk participations, export credit agency guarantees and credit risk insurance policies, which would potentially be severely impacted by the proposals in the event that they are published in their current form.

To view the submission, members can log into the LMA website.

ICE Benchmark Administration Limited issues statements on governance and calculation of benchmarks

ICE Benchmark Administration Limited (IBA) has published statements on three benchmarks it administrates, covering LIBOR, the London Bullion Market Association gold and silver prices, and the ICE swap rate. The statements set out management, governance and calculation details for the three benchmarks.

AFME publishes article on potential conflicts between GDPR and banking regulations

The Association for Financial Markets in Europe (AFME) has published an article by Richard Middleton, AFME managing director and co-head of policy division, highlighting potential conflicts between the requirements of the General Data Protection (GDPR), which applies from 25 May 2018, and other regulations applicable to banks.

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