Monthly highlights: November 2019

Monthly highlights: November 2019

In this issue


LIBOR and benchmarks
Asset finance
Acquisition finance
Debt capital markets
Sustainable finance
Securitisation and structured products
Regulation of derivatives and structured products
Claims and remedies
Regulation for banking lawyers



FMLC updates its Brexit analysis on third country regimes in EU legislation

The Financial Markets Law Committee (FMLC) has published an addendum to its 2017 report entitled ‘Issues of legal uncertainty arising in the context of the withdrawal of the UK from the EU—the provision and application of third country regimes in EU legislation’ (the 2017 report). The addendum sets out key updates to the 2017 report. The FMLC concludes that the uncertainties highlighted in the 2017 report continue to paint a daunting picture for UK market participants who have been, and would like to continue, providing services into the EU. The risk of a ‘cliff edge’ continues to present a substantial danger of market disruption and of litigation in relation to legacy business.

UK delays accession to Hague Convention for third time

The UK government has notified the Dutch Ministry of Foreign Affairs that its accession to the Hague Convention of 30 June 2005 on Choice of Court Agreements has once again been delayed by the Brexit extension. The government notifies the ministry that the UK and Gibraltar’s accession shall be suspended until 1 February 2020. The government reiterates that if a Withdrawal Agreement is signed, ratified and approved, before or on 1 February 2020, the UK will withdraw the Instrument of Accession deposited on 28 December 2018.

FCA updates statement on derivatives reporting obligations in a No deal Brexit scenario

The Financial Conduct Authority (FCA) has updated its statement explaining what trade repositories (TRs), and UK counterparties that use them, should do to make sure they are compliant with their Regulation (EU)  648/2012  (EMIR) reporting obligations if the UK leaves the EU without an agreed deal. ‘UK counterparties’ includes UK firms and UK central counterparties (CCPs) who will be subject to the UK EMIR reporting regime. The updated statement includes a link to the UK EMIR validation rules.

Comment: Post-Brexit clearinghouse access fees might create a barrier to entry

EU rules that have the power to block the biggest clearinghouses’ access to clients in the bloc may result in smaller UK companies being inadvertently obstructed from carrying out business there. The fee structure proposed by EU policymakers might present a barrier to entry for smaller clearinghouses, even if they aren’t designed to be captured by the strictest aspects of the rules—and they will have to decide whether the costs are worth it.

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LIBOR and benchmarks

Working group on euro risk-free rates makes EURIBOR fallback recommendations

The private sector working group on euro risk-free rates (RFRs) has published a set of recommendations for fallback provisions in contracts for cash products and derivative transactions referencing Euro Interbank Offered Rate (EURIBOR). The recommendations support compliance with the EU Benchmarks Regulation (BMR) (EU) 2016/1011, and aim to enhance legal and commercial certainty.

Consultation launched on Secured Overnight Financing Rate

The Alternative Reference Rates Committee (ARRC) has welcomed the opening of a consultation on the subject of the publication of Secured Overnight Financing Rate (SOFR) averages and a SOFR index. The consultation was released by the Federal Reserve Bank of New York, in co-operation with the Treasury Department’s Office of Financial Research. The bank intends to initiate publication of SOFR averages during the first half of 2020. The consultation closes 4 December 2019.

New appendix for Conventions Matrix is additional resource for market participants

The ARRC has released an appendix to SOFR Floating Rate Notes (FRN) Conventions Matrix. The Conventions Matrix was released in August 2019, and was designed to identify ‘considerations relevant to using SOFR…in new FRNs’. It supplements the ARRC’s paper ‘A User’s Guide to SOFR’, which was published in April 2019. The new appendix, which is ‘intended as an additional resource for market participants to consider’, includes terms sheets providing examples of conventions and how they are used in SOFR-based FRNs, as well as recommended fallback language for SOFR-based FRNs.

ECB publishes minutes of the working group on euro risk-free rates

The European Central Bank (ECB) has published the minutes of a meeting of its working group on euro RFRs. At the meeting, held on 16 October 2019, the working group discussed topics including the first publication of the Euro Short-term Rate (€STR) and of the recalibrated Euro Overnight Index Average (EONIA), which both took place on 2 October 2019; the status of three information documents currently being prepared for market participants; and an update from the International Swaps and Derivatives Association (ISDA) on its plans for a consultation on EURIBOR fallbacks.

Working group on euro RFRs publishes report on €STR fallback arrangements

The private sector working group on euro RFRs has published a report on €STR fallback arrangements. The purpose of the report is to provide supervised entities with guidance on potential ways to comply with Article 28.2 of the EU Benchmarks Regulation (BMR) when using €STR as the euro RFRs in contracts.

Committee reports on latest developments with regards to alternative reference rates

The ARRC has published its newsletter for October–November 2019, in which the ARRC aims to inform on key news relating to alternative reference rates transition both in the US and the global markets. The newsletter contains sections on the most recent development within the ARRC, US, international and market developments, as well as the market liquidity of the SOFR.

UK Finance publishes members guide on LIBOR transition

UK Finance has published a guide for its members which is intended for business customers who hold LIBOR-linked financial products, including loans, to help them understand more about the discontinuation and what they should expect to hear from their bank or lender in the coming months.

FCA Q&As outline expectations to minimise conduct risk arising from LIBOR transition

The Financial Conduct Authority (FCA) has published key questions and answers for firms on conduct risk arising from the LIBOR transition. The Q&As outline in detail the FCA’s core expectations of firms during the transition away from LIBOR. They set out what firms should do in relation to issues including: governance and accountability; treating customers fairly when replacing LIBOR; offering new products with RFRs or alternative rates; communicating with customers about LIBOR and alternative rates/products; and acting in the best interests of clients when making investment decisions in relation to LIBOR and RFR-linked products.

FCA director outlines next steps in LIBOR transition

The FCA has published a speech by its director of markets and wholesale policy, Edwin Schooling Latter, outlining the next steps in the transition from LIBOR. Schooling Latter said the aim was to end the use of LIBOR in new sterling loans from Q3 2020, and make it standard to quote based on Sterling Overnight Index Average (SONIA) in sterling swap markets.

Amendments to interest rate benchmark reform

The Council of the European Union has published an annex to interest rate benchmark reform covering amendments to IFRS 9, IAS 39 and IFRS 7. The amendments aim to address the consequences of the reform in financial reporting by alleviating the hedge accounting requirements.

International Swaps and Derivatives Association to make benchmark fallback adjustments

The Brattle Group has published its report on behalf of International Swaps and Derivatives Association (ISDA) summarising consultation responses on the final parameters for the spread and term adjustments in derivatives fallbacks for key interbank offered rates (IBORs). The report covers technical issues on specific methodologies for two preferences—the compound setting in arrears rate to address differences in tenor between IBORs and overnight RFRs and the historical mean/median approach to deal with differences in credit risks. Following the results of the consultation, ISDA will adjust the 2016 ISDA definitions and publish a protocol enabling participants to include fallbacks within legacy IBOR contracts. Implementation is expected in 2020.

The European Commission and the European Financial Reporting Advisory Group (EFRAG) has published its endorsement of the amendments to the interest rate benchmark reform. The amendments are applicable from 1 January 2020 with earlier application permitted.

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Reforming the law of security—what is the state of play?

The Lexis®PSL Banking & Finance team attended the Secured Transactions Conference on the 6 November 2019 held at University College London at which academics, practitioners and industry representatives came together to discuss the most recent draft of the Secured Transactions Code. For information on the key points arising from the discussion and on next steps, see News Analysis: Reforming the law of security—what is the state of play?

Leon v Her Majesty's Attorney-General and others

[2019] EWCA Civ 2047

The Court of Appeal confirmed the lower court’s decision in relation to a vesting order of a leasehold property previously owned by a company which was struck off the register. The company had taken a loan jointly with the beneficial owner of the company (Mr Leon), which was secured on the leasehold property owned by the company. The company was struck off the register but no application had been made to have it restored to the register within applicable time limits. The property vested in the Crown as bona vacantia and Mr Leon applied for a vesting order claiming he had an interest in the property. His application was refused and a vesting order was granted in favour of the lender with any surplus realised on enforcement of the security payable to whichever party may be entitled to it. Mr Leon appealed on the basis that he was entitled to the property as a result of his beneficial interest in the company, and because of the fact that he was co-borrower on a loan secured on the property and was still required to make payments on the loan. He also argued that he was entitled to the equity of redemption in the secured property which meant he was entitled to a vesting order. These arguments failed. In particular, Mr Leon confused his standing as borrower with standing as mortgagor (the latter of which he did not have, as he did not have an ownership interest in the property and had not granted security on it). Mr Leon’s appeal against the judgment was dismissed.

Commission welcomes agreement on new collateral rules to avoid build-up of NPLs

The European Commission has welcomed an agreement by Member States to start interinstitutional negotiations on new rules for the accelerated extrajudicial enforcement of collateral. The rules aim to increase the efficiency of enforcement regimes, helping to prevent the future build-up of non-performing loans (NPLs) while maintaining a high level of borrower protection.

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TMF Trustee Ltd and other companies v Fire Navigation Inc

[2019] EWHC 2918 (Comm)

The claimant companies’ application for summary judgment failed, in a dispute concerning the alleged failure of the defendants to repay sums due under a loan for the purchase of two ships. The no-set off clause in the contract did not exclude the application of the ‘prevention principle’: namely, that a party in breach of contract was excused where he had been prevented from performing the relevant obligation by the breach of the other party.

Loan repayment—application of the prevention principle

TMF Trustee Ltd v Fire Navigation Inc [2019] EWHC 2910 (Comm)

The court refused to grant summary judgment to lenders seeking repayment of a loan even though the agreement had included a no set-off clause. So where borrowers are able to plead the ‘prevention principle’, and that plea has a real prospect of success, lenders will not be able to obtain summary judgment (unless, possibly, they have an express clause that bars the operation of this principle). James Collins QC, a barrister at Essex Court Chambers, explains the decision in News Analysis: Loan repayment—application of the ‘prevention principle’ (TMF Trustee Ltd v Fire Navigation Inc).

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Asset finance

Commission Delegated Regulation aligning the auctioning of greenhouse gas emission allowances with the EU ETS rules and the classification of allowances as financial instruments under MiFID II published in OJ

Commission Delegated Regulation (EU) 2019/1868 of 28 August 2019 amending Regulation (EU) 1031/2010 to align the auctioning of allowances with the EU ETS rules for the period 2021 to 2030 and with the classification of allowances as financial instruments pursuant to Directive 2014/65/EU (MiFID II) has been published in the Official Journal of the EU.

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Acquisition finance

State Street Bank International GmbH v Banca d'Italia


The concept of ‘change of status’ within the meaning of Article 12(2) of Commission Delegated Regulation (EU) 2015/63 should be interpreted as including a transaction by which an institution ceased, in the course of a year, to be under the supervision of the national resolution authority following a cross-border merger through acquisition by its parent company, and as a result that transaction had no impact on the institution’s obligation to pay in full the ordinary contributions due for the contribution year in question. The Court of Justice of the European Union so held, among other things, in a preliminary ruling in proceedings concerning the payment by the applicant bank of contributions to the respondent national resolution fund in Italy.

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Debt capital markets

CMA updates mapping directory to include new venues

The International Capital Markets Association (ICMA) has updated its mapping directory of Electronic Trading Platforms, which now outlines a total of 41 electronic execution venues, Order Management Systems and information networks. ICMA’s mapping directory is designed to ‘help market participants understand what execution and non-execution venues are available for cash bonds’.

ICMA survey finds CSDR buy-in regime will hit bond market liquidity and efficiency

ICMA has published a study on the expected impact of the new mandatory buy-in regime, to be introduced in 2020 under the EU Central Securities Depositories Regulation (EU) 909/2014 (CSDR), on bond markets in Europe. ICMA says the results of its member survey, representing buy-side firms, sell-side firms and repo and securities lending desks, show that the new regime will negatively impact bond market liquidity and efficiency.

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Standardisation and digitisation to transform the derivatives market

The International Swaps and Derivatives Association's (ISDA’s) chief executive officer, Scott O’Malia, has commented on the importance of digital solutions in banking. O’Malia outlines the need to standardise and highlighted the role the ISDA common domain model plays in that process and has also highlighted the digital regulatory reporting pilot as well as the launch of ISDA Create earlier in 2019.

ISDA requests extension to RTS on novation

The CEO of the ISDA, Scott O’Malia, has written to the head of ESMA’s markets department, Fabrizio Planta, and the head of financial markets infrastructures at the European Commission—DG FISMA, Patrick Pearson, to request an extension to the regulatory technical standards (RTS) related to novation (Novation RTS), to ensure they achieve their intended objective and apply in the event of a No deal Brexit on 31 January 2020.

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Sustainable finance

AFME comments on adopted texts of proposed Taxonomy Regulation

The Association for Financial Markets in Europe (AFME) has commented on the adopted texts of the proposed Regulation of the European Parliament and of the Council on the establishment of a framework to facilitate sustainable investment (also referred to as the Taxonomy Regulation) in light of the trilogue negotiations.

European Investment Bank reveals climate strategy and energy lending policy

The European Investment Bank (EIB) has launched a new climate strategy and energy lending policy. According to EIB president, Werner Hoyer, the bank intends to stop financing fossil fuels and ‘launch the most ambitious climate investment strategy of any public financial institution anywhere’.

Islamic finance conference makes case for global innovation and collaboration

The 14th Islamic Financial Services Board (IFSB) Summit 2019 saw consensus between thought leaders, market players, and regulators that technological innovation would create positive impacts in sustaining Islamic finance development that are in line with the global sustainable development agenda.

Making money greener—the drive towards sustainable finance

The Paris Agreement on Climate Change has charged the finance sector with the obligation of ‘making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development’. The industry has responded by launching national and international initiatives to support sustainable development, but how can investors ensure they make the right green investments and how is regulation developing? In News Analysis: Making money greener—the drive towards sustainable finance, Nigel Howorth and Clare Burgess, both partners at Clifford Chance, comment on the importance of companies increasing the information they publish on their environmental impact, and what the future holds for the sustainable finance market.

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Securitisation and structured products

EU Securitisation Regulation: FMLC asks Commission to clarify third country due diligence ambiguity

The Financial Markets Law Committee (FMLC) has written to the European Commission in connection with the interpretation of Article 5(1)(e) of the EU Securitisation Regulation (EU) 2017/24. The letter sets out the FMLC’s preferred interpretation and calls on the Commission to issue guidance on the approach to the due diligence assessments of transactions involving third country entities, so as to promote legal certainty in this area.

Commission publishes final RTS on information to be provided for STS notifications under Securitisation Regulation

The European Commission has published a delegated regulation supplementing Regulation (EU) 2017/2402 (the Securitisation Regulation) and laying down RTS specifying the information to be provided in accordance with the simple, transparent and standardised criteria (STS) notification requirements.

ESMA issues updated Q&As on Securitisation Regulation

The European Securities and Markets Authority (ESMA) has updated its Q&As on the Securitisation Regulation. The update includes new questions on securitisation repositories, STS notification and disclosure requirements, and templates. In addition, ESMA has added a summary table giving an easy overview of the list of Q&As and adjusted the order of some Q&As compared to the previous version, with a view to grouping Q&As treating similar topics.

FSB updates report on haircuts on non-centrally cleared securities financing transactions

The Financial Stability Board (FSB) has updated its report: ‘Transforming shadow banking into resilient market-based finance—Regulatory framework for haircuts on non-centrally cleared securities financing transactions’, to reflect that this framework has been extended to non-bank-to-non-bank transactions. Financing provided to banks and broker-dealers subject to adequate capital and liquidity regulation on a consolidated basis is excluded.

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Regulation of derivatives and structured products

ESMA consults on commodity derivatives position limits

ESMA has launched a consultation paper on position limits and position management in commodity derivatives, in the context of the review ESMA and the European Commission are required to carry out under Directive 2014/65/EU (MiFID II) into the impact of position limits and position management on liquidity, market abuse, and orderly pricing and settlement conditions in the commodity derivatives markets. The consultation closes on 8 January 2020.

ESMA publishes EMIR 2.2 technical advice on third-country CCPs

The European Securities and Markets Authority (ESMA) has published three sets of technical advice to the European Commission regarding third-country central counterparties (TC-CCPs) under the revised European Market Infrastructure Regulation (EMIR 2.2). ESMA has sent its advice to the Commission for the development of the corresponding Delegated Acts under EMIR 2.2, on which the Commission will consult publicly before it finalises them.

EEA Joint Committee decisions on MiFID II and MiFIR published in OJ

Two decisions of the European Economic Area (EEA) Joint Committee have been published in the Official Journal of the EU, both of which incorporate MiFID II, 2004/39/EC and MiFIR, (EU) 600/2014—and related Commission Delegated Regulations, (EU) 2018/815 and Commission Implementing Regulations, (EU) 2015/207—into the EEA Agreement.

Dombrovskis proposes renewal of UK CCP temporary equivalence beyond 30 March 2020

The European Commission has published a speech by its vice-president, Valdis Dombrovskis, centred on the Commission’s priorities for sustainability and green finance. But Dombrovskis also used the speech to propose the renewal of the central clearing time-limited equivalence decision beyond 30 March 2020, in order to ‘prepare for any eventuality’.

Association replies to European Commission’s extension of UK temporary equivalence

The Association for Financial Markets in Europe (AFME) has welcomed an announcement by the European Commission on extending temporary equivalence for UK CCPs. The Commission declared this extension in a speech on 15 November 2019 in London.

ICMA Buy-in Rules to be amended to support incoming EU regulation

The International Capital Market Association (ICMA) has declared that it will amend its Buy-in Rules to support the implementation of the EU Central Securities Depositories Regulation (CSDR) mandatory buy-in provisions. The CSDR buy-in provisions, which are to ‘create a mandatory obligation for trading parties to execute buy-ins against CCPs who fail to settle their trades within a required period’, are expected to enter into force in September 2020.

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Promontoria (Oak) Ltd v Emanuel

[2019] EWHC 2896 (Ch)

The respondent company had claimed, as the assignee of Clydesdale Bank (the bank), debts owed to the bank by the appellants. The claim had succeeded on the basis of secondary evidence regarding the assignment, namely a redacted assignment deed. The appellants were granted permission to appeal on three out of six grounds of appeal. The Chancery Division dismissed their applications: (i) to admit new evidence; and (ii) to introduce a seventh ground of appeal. The court ruled that, given that ground seven involved a contention that the judgment on the claim had been obtained by fraud, it had to be pursued by what would, in substance, be separate action. Further, the court held that the ‘new’ material that the appellants sought to adduce did not come close to meeting the requirement in authority that, if it had been adduced at trial, that evidence would have had an important influence on the result of the case.

Administration Expenses—Lundy Granite principle

Re London Bridge Entertainment Partners LLP (in administration) [2019] EWHC 2932 (Ch)

In this case, Insolvency and Companies Court (ICC) Judge Barber held that the Lundy Granite principle does not extend to an obligation to ‘top up’ a rent deposit deed, where sums had been withdrawn from the fund to pay rent. For more information, see News Analysis: Administration Expenses—Lundy Granite principle (Re London Bridge Entertainment Partners LLP (in administration)).

Wood v Commercial First Business Ltd (in liquidation) and other companies

[2019] EWHC 2205 (Ch)

The claimant's claim succeeded in part, in a dispute concerning mortgages that she had taken out with the first defendant mortgage loan company. The Chancery Division held that the claims based on forgery, lack of due attestation, undue influence and breach of duty all failed. The claims based on secret commissions and under the unfair relationships legislation succeeded.

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Claims and remedies

Mortgages—validity—mortgage broker receiving payment from both lender and borrower

Wood v Commercial First Business Ltd (in Liquidation) [2019] EWHC 2205 (Ch),

A mortgage broker was retained by Mrs Wood to find her suitable sources of lending. Mrs Wood owned two farms, and following her introduction to a lender (Commercial First Business Ltd) she borrowed substantial sums of money secured by separate mortgages in 2006 and 2007 over the farms. She later borrowed further sums against one of the securities. She fell into financial difficulty and in 2008 possession orders were made in respect of each farm. In due course she commenced proceedings alleging that the mortgages were invalid or unenforceable on various grounds, the most interesting of which were: (i) her signature had not been properly attested on the first mortgage because the witness had not signed the document in front of her, (ii) the broker had received a secret commission in respect of each loan from the lender without her knowledge giving rise to a right to rescind the loans, and (iii) her relationship with the lender was an unfair relationship within the scope of the Consumer Credit Act 1974 (CCA 1974). Mrs Wood succeeded on the grounds of secret commission and unfair relationship and was entitled to rescission of the agreements, subject to counter-restitution. An account was ordered to be taken of the sums which Mrs Wood ought to pay notwithstanding the rescission of the loan agreements. The case also considers whether the assignees of the debt were liable to pay to Mrs Wood the amount of the secret commissions, and whether Mrs Wood could set off the value of the secret commissions against the debt owed to the assignees. For further information, see News Analysis: Mortgages—validity—mortgage broker receiving payment from both lender and borrower (Wood v Commercial First Business Ltd (in Liquidation)), written by Charles Joseph, barrister, at Tanfield Chambers.

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Regulation for banking lawyers

HMRC guidance on tax treatment of hybrid regulatory capital

HMRC has issued two notes explaining HM Treasury regulations coming into force on 29 November 2019, which ensure that interest payments made on certain hybrid instruments issued by banks and insurers as regulatory capital under the new Bank of England requirements continue to receive a tax deduction. These regulations have effect for payments made on or after 1 January 2019 and will be replaced from 1 January 2020 by new regulations to comply with more stringent rules under the EU anti-tax avoidance directive.

P.R.I.M.E. Finance New York Conference 2019

In News Analysis: P.R.I.M.E. Finance New York Conference 2019, Camilla Macpherson, new Head of Secretariat at PRIME Finance, discusses P.R.I.M.E. Finance’s key achievements in 2019, plans for 2020 and the main issues discussed at the P.R.I.M.E. Finance New York conference 2019.

Cryptoassets to be treated as property, LawTech Delivery Panel statement concludes

The Chancellor of the High Court and chair of the UK Jurisdiction Taskforce, Sir Geoffery Vos, has launched the LawTech Delivery Panel’s legal statement on cryptoassets and smart contracts. In his speech at the launch, Vos stated that following ‘rigorous legal analysis’, the legal statement concludes that cryptoassets generally have all the legal indicia of property and are to be treated as property, according to English legal principle.

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About the author:

Zahra started working as a paralegal at LexisNexis in the Lexis®PSL Banking & Finance and Restructuring & Insolvency teams in April 2019 and moved to the Corporate team in June 2020, where she currently works as a Market Tracker Analyst. Zahra graduated with 2.1 honours in BA French and Spanish and completed the GDL at BPP University. She has undertaken voluntary work for law firms in London, Argentina and Colombia.