Monthly Highlights: May 2021

Monthly Highlights: May 2021

Welcome to this month’s highlights from the Lexis®PSL Banking & Finance team which cover the key news updates from May 2021.

LIBOR and benchmarks

Financial Services Bill receives Royal Assent

The Financial Services Bill has received Royal Assent and is now law. Among other things, the Financial Services Act gives the Financial Conduct Authority (FCA) additional powers to oversee an orderly transition away from LIBOR.

Source: Milestone for UK financial services as Bill receives Royal Assent.

FCA launches consultation on its new powers to support orderly wind down of critical benchmarks

The FCA has published a consultation paper (CP 21/15) on how it proposes to exercise its powers over the use of critical benchmarks under the UK Benchmarks Regulation (Retained Regulation (EU) 2016/1011)  (UK BMR), which will be introduced by the Financial Services Act 2021. These powers relate to the use of critical benchmarks that are being wound down. Responses are due 17 June 2021.

Source: FCA consults on use of new powers to support orderly wind down of critical benchmarks.

RFRWG recommends overnight SONIA as successor rate for fallbacks in bond documentation referencing GBP LIBOR

The Working Group on Sterling Risk-Free Reference Rates (RFRWG) has published a statement recommending the use of overnight SONIA, compounded in arrears, as the successor rate recommended to replace GBP LIBOR for the purposes of the operation of fallbacks in bond documentation that envisage the selection of a recommended successor rate.

Source: Statement on behalf of the Working Group on Sterling Risk-Free Reference Rates—Recommendation of Successor Rate for fallbacks in bond documentation referencing GBP LIBOR.

ICE Benchmark Administration launches spread-adjusted GBP SONIA ‘beta’ settings

The Intercontinental Exchange (ICE) has announced that ICE Benchmark Administration Ltd (IBA) has launched GBP SONIA spread-adjusted ICE Swap Rate ‘beta’ settings. These ‘beta’ settings are being published daily by IBA during an initial testing period and are designed to support the market in transitioning non-linear derivatives, structured products and cash market instruments that currently reference GBP LIBOR ICE Swap Rate.

Source: ICE Benchmark Administration Launches GBP SONIA Spread-Adjusted ICE Swap Rate® ‘Beta’ Settings.

IBA launches consultation on ending GBP LIBOR ICE Swap Rate

The IBA has launched a consultation on its plans to stop the publication of GBP LIBOR ICE Swap Rate for all tenors immediately after publication on December 31 2021. This follows IBA’s announcement on 5 March 2021 that it intended to stop the publication of three- and six-month GBP LIBOR settings because it did not have access to the input data required to calculate them. The deadline for submitting views to the consultation is 5pm on 4 June 2021.

Source: ICE Swap Rate based on GBP LIBOR - Consultation on Potential Cessation.

ARRC selects CME Group as administrator for SOFR term rates

The Alternative Reference Rates Committee (ARRC) has announced that it has decided to recommend CME Group to administer forward-looking Secured Overnight Financing Rate (SOFR) term rates. The ARRC selected CME Group after assessing four criteria groups: calculation methodology, technical, firm and public policy. The next and final stage in the process is for the ARRC to decide market indicators that will allow it to formally recommend a SOFR term rate.

Source: ARRC Releases Update on its RFP Process for Selecting a Forward-Looking SOFR Term Rate Administrator.


National Security & Investment Bill becomes law

The Department for Business, Energy & Industrial Strategy has announced that the National Security & Investment Bill received royal assent on 29 April 2021. The new National Security & Investment Act introduces a mandatory foreign direct investment (FDI) screening regime in the UK, which will require notification to and approval from the government for proposed transactions involving the acquisition of a 25% stake in a business involved in specified sensitive industry sectors. The government will have the power to call other transactions in for review too if there are public national security concerns, even if those transactions have already closed. The regime needs to be considered when funding acquisitions of assets or shares that could be affected, and in the context of taking security, exercising security rights and enforcing security. The new regime is expected to take effect  later in 2021.

Source: National security bolstered as Bill to protect against malicious investment granted Royal Assent.


The Law Commission’s recommendations for updating for the Land Registration Act 2002—thoughts on the government response

In News Analysis: The Law Commission’s recommendations for updating for the Land Registration Act 2002—thoughts on the government response, Max Thorowgood, barrister at Field Court Chambers, comments on the government response to the Law Commission’s recommendations for updating the Land Registration Act 2002 and highlights key recommendations as well as criticisms of the report.

FMLC, AFME, ISLA respond to the European Commission consultation on its review of the Financial Collateral Directive

The Financial Markets Law Committee (FMLC), The Association for Financial Markets in Europe (AFME) and The International Securities and Lending Association (ISLA)  have published responses to the European Commission’s consultation on its review of the Financial Collateral Directive (Directive 2002/47/EC) (FCD).

Source: Response to consultation: European Commission review of the Financial Collateral Arrangements Directive.

Source: Targeted consultation on the review of the Directive on financial collateral arrangements.

Source: ISLA Responds to the Consultation on Financial Collateral Directive.

Law Commission seeks views on market use of digital assets

The Law Commission has launched a call for evidence on digital assets. The Law Commission is asking stakeholders to provide their views on how market participants use, treat and deal with digital assets, as well as the potential consequences of such assets being ‘possessable’. The evidence will be used to inform the Law Commission’s consultation paper on digital assets, which will make proposals to reform the law in order to provide certainty on the status of digital assets. The call for evidence closes on 30 July 2021.

Source: Digital assets.


Brown-Forman Beverages Europe Ltd v Bacardi UK Ltd

[2021] EWHC 1259 (Comm) 

It was held that payment under a parent company guarantee did not have to be made because the subsidiary had lodged ongoing counterclaims. The right to indemnity could not arise whilst the parent company is entitled to assert a defence of equitable set-off. The guarantee would only be activated once sums determined to be due were unrecoverable from the subsidiary.


The importance of contractual certainty in security documents (Re Arboretum Devon)

[2021] EWHC 1047 (Ch)

In this case, the court upheld a clause in an intercreditor agreement under which the creditors agreed not to challenge ‘the validity or enforceability of any Security constituted by a Security Document’. The junior creditor was seeking to challenge the senior creditor’s right to priority on the basis the senior debt did not fall within the definition of secured liabilities. The judge commented that the intercreditor provision was ‘unlikely to be intended to refer only to matters of formal validity as a legal security interest, but more generally to include the effectiveness of the security as a security for the acknowledged secured obligations on both sides.’

Leveraged finance

AFME publishes report on Q1 trends in European leveraged finance market

The Association for Financial Markets in Europe (AFME) has published a report detailing the trends in the European leveraged finance market for the first quarter (Q1) of 2021. Among the statistics are a 73.8% increase from Q4 2020 in European leveraged loans and high yield bonds issuance and a 42.5% increase from Q1 2020 in primary high yield bond issuance.

Source: AFME: Robust European leveraged finance issuance in 1Q’21.

Aviation finance

Aviation—dry leases, Supply of Goods and Services Act 1982, Unfair Contract Terms Act 1977 and frustration (Wilmington Trust SP Services v SpiceJet)

[2021] EWHC 1117 (Comm)

The court granted partial summary judgment on an application brought by three lessees in a claim relating to sums due to them under the terms of the lease agreements. The judgment contains a helpful analysis of the law relating to the exclusion of the provisions of the Supply of Goods and Services Act 1982 (SGSA 1982), the application of the Unfair Contract Terms Act 1977 (UCTA 1977) to international supply contracts in the context of aircraft leases and the court’s ability to stay execution of a judgment despite a set-off clause. For more information, Aviation—dry leases, Supply of Goods and Services Act 1982, Unfair Contract Terms Act 1977 and frustration (Wilmington Trust SP Services v SpiceJet), written by Christopher Snell, barrister at New Square Chambers.

Shipping finance

MCA publishes new guidance on UK ship register during coronavirus (COVID-19)

The Maritime and Coastguard Agency (MCA) has published statutory guidance with updated information on registration services by the UK ship register due to the coronavirus (COVID-19) pandemic. The guidance withdraws the Marine Information Note (MIN) 614 (M+F) Amendment 2, as of 4 May 2021, and replaces it with MIN 614 (M+F) Amendment 3 to update section 4 of the Civil Liability Certificate and the expiry date. The guidance provides further information on the contingency measures that the UK ship register put in place to help mitigate the disruption to essential ship registration activities during the coronavirus pandemic. MIN Amendment 2 expired on 24 March 2021, and MIN Amendment 3 is due to expire on 30 September 2021.

Source: New guidance: how the UK ship register is undertaking registration services due to the ongoing Coronavirus (COVID-19) outbreak.

Real estate finance

Tenants’ contractual liability to pay rent during the coronavirus (COVID-19) pandemic (Bank of New York Mellon v Cine-UK)

[2021] EWHC 1013 (QB)

This case involved three applications for summary judgment which were heard together, as all three cases raised the same legal issue: was the tenant liable to pay rent despite not being permitted to enjoy occupation of the premises as a result of coronavirus (COVID-19) regulations; and also where the landlord had insured the premises which extended in principle to loss arising from the circumstances of the pandemic? The court considered and applied the principles of construction and interpretation of the leases and insurance policies, as well as considering whether implied terms should be inserted into the leases. The tenants also raised arguments involving frustration. The tenants’ claims were all rejected by the court, which found in favour of the landlords.

Trade and commodity finance

Law Commission announces consultation on electronic trade documents

The Law Commission has opened a consultation on the proposals to allow ‘for legal recognition of trade documents’, such as the bills of lading and bills of exchange. The consultation paper sets out proposals for law reforms to allow for electronic documents to be ‘possessed’ and to have the same legal impacts as its paper counterparts. The Commission proposes that electronic trade documents should be possessable provided that:

  •               the document is a trade document of the kind listed in the draft legislation
  •               the electronic document is capable of exclusive control, and
  •               the electronic document must be fully divested on transfer

The Commission is seeking comments on the proposals and draft Bill. The consultation is open until 30 July 2021.

Sources: Electronic trade documents and Technology Will Help The UK Boost SMEs’ Overseas Trade Thanks To Digital Negotiable Instruments.

ICC launch ICC Trade Now solutions to support SME’s

The International Chamber of Commerce (ICC) has reported the launch of ICC Trade Now, which is a suite of digital products and services to assist in tackling the global trade finance gap. This solution has been created through tailored partnerships to help small and medium sized enterprises (SMEs) and by providing new investment opportunities.

Source: ICC Trade Now to connect SMEs to innovative trade finance solutions.

ICC launches transport handbook, Incoterms rules and best practices for banking rules

The International Chamber of Commerce (ICC) has launched the latest edition of the ICC Handbook on Transport and the Incoterms® 2020 Rules, a publication designed to provide practical support and clarification for those employed by the transport sector who deal with transactions involving the Incoterms rules. The handbook is designed to clear up issues involving the ‘interrelation of contracts of carriage and contracts for the B2B sale of goods’ and to aid readers with comprehending the ‘complex steps of today’s logistics chains’. Additionally, the ICC has collated best practices from bankers to launch the International Standard Demand Guarantee Practice (IDSGP). The publication includes 215 international standard practices which instruct relevant parties on how rules and principles in the Uniform Rules for Demand Guarantees (URDG 758) should be applied.

Source: ICC publishes new set of tools to bring clarity to business amid the COVID-19 pandemic.

Sustainable finance 

ICMA publishes overview of taxonomies for sustainable finance and recommends criteria for success

The International Capital Market Association (ICMA) has published an overview of and recommendations for sustainable finance taxonomies, which compares the main features and methodologies of official ‘taxonomies’ (classification systems) from the EU, China and other national authorities, as well as influential market-based systems including the Green Bond Principles’ project categories.

Source: ICMA publishes overview of ‘taxonomies’ for sustainable finance and recommends success criteria.

CLLS responds to BEIS climate-related financial disclosures consultation

The City of London Law Society (CLLS) and the Law Society have published a joint response to the consultation announced by the Department for Business, Energy & Industrial Strategy (BEIS) to require quoted companies, large private companies and LLPs to make mandatory climate-related disclosures. The joint response includes overarching comments that consider consistency with existing legislation and standards, adequate director protections and timing. The CLLS and the Law Society conclude that there needs to be a proper roadmap for companies to follow and that there needs to be consistency between the reporting regimes as well as consideration to the impact on groups of having numerous overlapping and inconsistent standards.

Source: Law Society and City of London Law Society joint response to BEIS Consultation on requiring mandatory climate-related financial disclosures by publicly quoted companies, large private companies and Limited Liability Partnerships (LLPs).

EU green bond, consumer credit, money laundering plans to be published in summer 2021

EU legal proposals on sustainable finance, consumer credit and money laundering will be formally published in late June 2021 and early July 2021, the European Commission said on 11 May 2021. For more information, see News Analysis: EU green bond, consumer credit, money laundering plans to be published in summer 2021.

AFME publishes Q1 2021 ESG Finance data report

The Association for Financial Markets in Europe (AFME) has published its quarterly data report for the first quarter of 2021. Its aim is to provide detailed data and analysis on the growing Sustainable Finance market in Europe. The report outlines up to date trends for the European Sustainable Finance market and a high-level regulatory and supervisory snapshot. Key highlights include that environmental, social and governance (ESG) bond and loan issuance continues to rapidly grow in Q1 2021, European carbon prices reached record highs, global ESG Funds continued to grow exponentially during Q1 2021 and spreads of Green and ESG bonds against non-sustainable benchmarks have continued to tighten during 2021.

Source: AFME European ESG Finance Quarterly Data Report: Q1 2021.

European Commission consults on draft delegated act detailing disclosure obligations under EU Taxonomy Regulation

The European Commission has launched a consultation on a draft delegated regulation supplementing the EU Taxonomy Regulation (EU) 2020/852 by specifying the content and presentation of information to be disclosed by undertakings subject to Articles 19a or 29a of Directive 2013/34/EU concerning environmentally sustainable economic activities, and specifying the methodology to comply with that disclosure obligation. The consultation closes on 2 June 2021.

Sources: European Commission: Sustainable finance—obligation for certain companies to publish non-financial information (draft delegated act for consultation)Delegated ActFAQs and General Taxonomy Regulation Implementing/Delegated Acts page.

Debt Capital Markets

European Investment Bank launches digital bond issuance on a public blockchain

The European Investment Bank (EIB) has launched a digital bond issuance on a blockchain platform, which will deploy distributed ledger technology for the registration and settlement of digital bonds. This has been launched in collaboration with Goldman Sachs, Santander and Societe Generale. Working with Banque de France, EIB states that 'payment of the issue monies from the underwriters to the EIB has been represented on the blockchain in the form of Central Bank Digital Currency’. The digitalisation of capital markets is expected to be beneficial to market participants in forthcoming years and may reduce intermediaries and fixed costs, provide better market transparency and produce a faster settlement speed.

Source:  EIB issues its first ever digital bond on a public blockchain.

ICMA publishes guide to definitions and best practice for bond pricing distribution

ICMA has published a guide to definitions and best practice for bond pricing distribution. It sets out standards and definitions agreed on by a representative group of industry participants on the subject of ‘axes’ (pre-trade bond pricing information). The guide notes that although axes are important for traders, the way in which they are distributed is not uniform and may even in some cases have been unintentionally misleading, causing ‘consternation’ amongst buy-side market participants.

Source: New ICMA industry guide to definitions and best practice for bond pricing distribution.

ICMA AMIC issues ESG KPIs for auto-loans/leases ABS discussion paper

In the context of growing demands from asset owners to evaluate their ESG footprint and greater regulatory scrutiny, such as the EU Sustainable Finance Disclosure Regulation (SFDR), ICMA’s AMIC set up an ad hoc working group to discuss ESG transparency of asset-backed securities. Following a statement laying down current challenges for this specific asset class and the buy-side, the AMIC has issued a discussion paper which focuses on ESG KPIs for auto-loans/leases ABS.

Source: ICMA AMIC publishes discussion paper on ESG KPIs for auto-loans/leases ABS.

FMSB publishes final Standard on execution of Large Trades in FICC markets

The Fixed Income, Currencies and Commodities (FICC) Markets Standards Board (FMSB) has published a final Standard setting out expected behaviours for the execution of Large Trades by participants in FICC markets. The Standard applies to all participants in wholesale FICC markets in Europe, subject to any applicable local regulatory restrictions, but market participants may elect to apply the Standard in other jurisdictions.

Source: FMSB publishes a Standard for the execution of Large Trades in FICC markets.

ESMA updates Q&As on the Prospectus Regulation

The European Securities and Markets Authority (ESMA) has updated its Q&As on Regulation (EU) 2017/1129 (the EU Prospectus Regulation) with three new Q&As covering: the application of Article 4(1) of the Credit Rating Agencies Regulation (EC) 1060/2009 to credit rating disclosure in prospectuses; how to determine a home Member State in the context of global depository receipts over shares; and the publication of supplements to prospectuses when new audited annual financial information is published by a non-equity issuer.

Source: ESMA updates its Q&As relating to the Prospectus Regulation.


BoE consults on the scope of the UK EMIR derivatives clearing obligation

The BoE has published a consultation paper (CP) on its proposal to modify the scope of the derivatives clearing obligation under Retained Regulation (EU) No 648/2012 (UK European Markets Infrastructure Regulation (UK EMIR)) to reflect the ongoing reforms to interest rate benchmarks. In its consultation, the BoE proposes amendments to Retained Delegated Commission Regulation 2015/2205 which contains technical standards on the EMIR clearing obligation. This CP is relevant to financial and non-financial counterparties that are subject to the clearing obligation under UK EMIR, and to central counterparties (CCPs). Responses are due by 4 July 2021.

Source: Derivatives clearing obligation—modifications to reflect interest rate benchmark reform: Amendments to BTS 2015/2205.

ISDA publishes 2021 SBS Protocol Agreement

The International Swaps and Derivatives Association (ISDA) has launched its 2021 Security-based Swaps (SBS) Protocol Agreement, aimed at helping firms meet certain rules developed by the US Securities and Exchange Commission (SEC) which will come into force later in 2021.

Source: ISDA publishes SBS Protocol Agreement.

ISDA publishes new US REC Annex

In addition, ISDA has published a US Renewable Energy Certificate (REC) Annex, which reflects the increased interest in trading products that supports companies with meeting their renewable energy and emission reduction targets as part of their ESG strategies. The US REC Annex provides firms the opportunity to buy and sell US RECs based on standardised product definitions and terms under the ISDA Master Agreement.

Source: ISDA Publishes US Renewable Energy Certificate Annex.

ISDA publishes CEO’s opening remarks for 2021 AGM

ISDA has published the opening remarks by its Chief Executive Officer (CEO), Scott O’Malia, on the first day of its Annual General Meeting (AGM). The major focus of the speech is the impact that coronavirus (COVID-19) has had on the working world. O’Malia notes that the pandemic has irreversibly spurred on the digitisation of the financial system. To allow the industry to keep up with this, O’Malia details three initiatives that he says will ‘revolutionise’ the market: the Common Domain Model, upgrading ISDA’s legal definitions and expending remote negotiations of documents. Before closing he also addresses the end of LIBOR. O’Malia discussed global developments in benchmarks, close-out netting and initial margin, with a focus on markets in the Asia-Pacific region on the second day and the resilience of financial markets during the coronavirus (COVID-19) pandemic; environmental, social and governance issues; the credit valuation adjustment (CVA) capital framework; and the post-Brexit landscape on the third day.

Source: ISDA AGM 2021: Day 1 Scott O’Malia opening remarks.

Source: ISDA AGM 2021: Day 2 Scott O’Malia opening remarks.

Source: ISDA AGM 2021: Day 3 Scott O’Malia opening remarks.

ISDA comments on China’s seminal netting milestone

ISDA has published comments on the draft Futures Law shared by the Standing Committee of the National People's Congress of China for public consultation which opened on 29 April 2021. According to ISDA, the provisions in the draft bill explicitly recognise netting enforceability in over-the-counter (OTC) derivatives which enables counterparties to ‘close out transactions and calculate a net amount payable in the event of a default’. The draft bill also expressly stipulates that in the case where a party has entered bankruptcy proceedings, close-out netting cannot be revoked nor invalidated. ISDA says that netting is ‘the single most important credit risk mitigant’, thus highlighting the importance of this legislation for China’s derivatives market. The draft legislation was open to public consultation until 28 May 2021.

Source: A Netting Milestone in China

UK government to remove the open access regime for exchange traded derivatives

HM Treasury (HMT) has announced that the government intends to permanently remove the open access regime for exchange traded derivatives (ETDs) when parliamentary time allows.

Source: HM Treasury guidance: Open access regime for exchange traded derivatives (updated).

Structured products and securitisation

EBF responds to ESA’s consultation on SFDR RTS

The European Banking Federation (EBF) has responded to the European Supervisory Authorities’ joint consultation on regulatory technical standards for taxonomy-related sustainability disclosures (SFDR RTS). The EBF says a lack of comparable, reliable and standardised data remains a critical issue, with companies only beginning to report their taxonomy alignment in 2022. The EBF also argues that it is not practical for the two sets of SFDR RTS to come into force at different times as templates implemented from the first RTS would have to be changed when the second RTS becomes applicable.

Source: ESAs joint consultation paper on taxonomy-related sustainability disclosures (SFDR RTS): EBF response

ESAs publish report on the implementation and functioning of the EU Securitisation Regulation

The joint committee of the European Supervisory Authorities has published an analysis of the implementation and functioning of the EU Securitisation Regulation EU 2017/2402 (EU SECR), including recommendations on how to address initial inconsistencies and challenges which may affect the overall efficiency of the regime. The report provides guidance to the European Commission for its review of the functioning of the EU SECR and provides initial inputs to the ongoing discussion on the efficiency of the securitisation framework given the role that it could play in the coronavirus (COVID-19) recovery.

Sources: ESAs’ report on the implementation and functioning of the Securitisation RegulationEBA press release and EIOPA press release.

ECB announces it will supervise bank compliance with risk retention, transparency and resecuritisation requirements under EU Securitisation Regulation

The ECB has announced that it will start ensuring that the banks it directly supervises comply with the requirements for risk retention, transparency and resecuritisation which are set out in Articles 6 to 8 of the EU Securitisation Regulation.

Source: ECB Banking Supervision to supervise securitisation requirements for banks.

Regulation for banking lawyers 

Financial and trade sanctions—tracking UK-EU divergence

The Sanctions and Anti-Money Laundering Act 2018 (SAMLA 2018) was passed to make provision enabling sanctions to be imposed by the UK where appropriate following Brexit. In practice, while the UK government has stated that the SAMLA regulations are intended to deliver substantially the same policy effect as the equivalent EU regimes, there are certain changes (with varying impacts) which businesses have been adjusting to this year. Jamie Rogers, partner and Ellie Rees, senior associate from Hogan Lovells, highlight some of these key differences and their consequences in News Analysis: Financial and trade sanctions—tracking UK-EU divergence.

UK joins US in implementing a global anti-corruption sanctions regime

Paige Berges, counsel in Ropes and Gray’s Anti-Corruption and International Risk group, considers the UK sanctions regime aimed at combatting global anti-corruption and draws comparisons between the UK and the US in implementing anti-corruption sanctions regimes in News Analysis: UK joins US in implementing a global anti-corruption sanctions regime.


Administration (Restrictions on Disposal etc to Connected Persons) Regulations (Northern Ireland) 2021

SR 2021/Draft: These draft Regulations are laid to prohibit disposal of a company's business or assets, or a substantial part thereof, to anyone connected with the company during the eight weeks following entry into administration, unless one of two conditions are met. These are that either the creditors have approved the disposal or a report on the disposal has been obtained from an independent and suitably qualified individual. This could involve one or more transactions. They come into force on 25 June 2021.

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About the author:

Miranda is a solicitor specialising in leveraged and acquisition finance. She trained at Hogan Lovells International LLP and qualified into the international banking and finance team. During her time at Hogan Lovells she worked on a variety of domestic and cross-border transactions, acting for both borrowers and lenders. She also experienced secondments to Barclays Bank PLC and Kaupthing Bank hf.