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Welcome to this month’s highlights from the Lexis®PSL Banking & Finance team which cover the key news updates from October 2017.
The Loan Market Association (LMA) has highlighted the need for, and importance of, transitional arrangements for the loan market following the UK leaving the EU. The LMA’s comments were in response to the House of Lords European Union Select Committee’s ‘Brexit: deal or no deal’ inquiry.
The LMA says that Brexit will have a major impact on some lending and loan market activities conducted by banks in and through the UK, unless mitigating measures are agreed. It therefore believes a transitional period following exit from the EU is necessary.
The LMA sets out two ‘significant groups of issues’ in considering the need for, and the importance of, transitional arrangements:
According to the LMA, transitional arrangements are required to avoid the damaging effects of a sudden withdrawal of passporting rights which could affect both the enforceability of existing loan agreements and the ability and willingness by UK-based lenders to enter into future agreements.
Members can access the response on the LMA website.
The European Banking Authority (EBA) has published an opinion on Brexit to ensure the consistent application of EU legislation to businesses seeking to establish or enhance their EU27 presence in order to retain access to the EU single market. In the opinion, the EBA addresses a number of relevant policy topics relating to authorisations, the prudential regulation and supervision of investment firms, internal models, outsourcing, internal governance, risk transfers via back-to-back and intragroup operations, and resolution and deposit guarantee scheme issues. The EBA will monitor how the opinion will be applied in practice by authorities and will continue its policy and risk analysis work in relation to the challenges posed by Brexit.
The LMA has responded to a consultation on the development of secondary markets for non-performing loans (NPLs) and distressed assets and protection of secured creditors from borrowers' default. It does not believe ‘obstacles to the management and resolution of NPLs across the EU are significant’, but does note ‘there are considerable variances across jurisdictions’.
The LMA advocates the adoption of best practice and standard form documentation across the market and is clear that it does not believe that regulation of the transfer of loans would be useful in facilitating accelerated NPL sales.
HMRC has added a new Banking Manual to its collection of internal guidance manuals. The new Manual contains sections on corporation tax issues around bank compensation payments, carried-forward losses, and the banking surcharge.
The LMA introduced new forms of fronted agreements for leveraged acquisition finance transactions on 31 August 2017. The new agreements came as a response to participants in the syndicated leveraged loan market calling for a form of fronted underwriting to assist in the smooth running of the syndication process. The new forms of fronted agreements will help ease the administrative burdens on lead arrangers and underwriters, primary syndication lenders and borrowers.
For more information, see our News Analysis: Fronted Distribution Agreements to smooth syndication process.
Small and medium-sized enterprises (SME’s) across the UK can access government-backed export finance directly from their banks. International Trade Secretary Liam Fox announced the new partnership between the UK Export Finance (UKEF) and five major high street banks, allowing SME’s to access government-backed trade finance, directly from their bank in seconds.
The new partnership, which can provide finance up to £2m means that SMEs can access UKEF support directly from their bank quickly, without the need to apply separately. Now, companies which supply exporters can access UKEF-backed finance, to become part of major export contracts.
The International Capital Market Association (ICMA) and China’s National Association of Financial Market Institutional Investors (NAFMII) have jointly published a report outlining the views of foreign investors on the attractiveness of China’s ‘panda bond’ market. ICMA chief executive Martin Scheck said the report shows that the onshore Chinese bond market is ‘an increasingly attractive potential funding source for a wide range of international issuers and that progress is being made in encouraging them to issue panda bonds’.
Secure Capital SA v Credit Suisse AG  EWCA Civ 1486
The case concerns the correct choice of law for disputes arising in relation to bearer notes. Secure Capital SA argued that it had locus to bring proceedings against Credit Suisse under the laws of Luxembourg and that the laws of Luxembourg should be applied when determining if it had locus as that was the place of negotiation and/or settlement.
The Court of Appeal rejected that argument. In deciding which person(s) had locus to bring proceedings against the issuer of Notes, the choice of law was to be determined by reference to the instrument itself. In this case, the Notes contained a choice of law clause in favour of England and Wales. As such, English law was to be applied. Secure Capital had no locus to bring the proceedings against Credit Suisse, as it was not in contract with it.
ICMA has welcomed a consultation report by the International Organization of Securities Commissions (IOSCO) on regulatory reporting and public transparency in the secondary corporate bond markets. While ICMA endorses IOSCO’s assertion that ‘public transparency and accessibility to information are key components of robust capital markets’, it adds that transparency is ‘not an end in itself’.
The European Securities and Markets Authority (ESMA) has released data on the size and structure of EU derivatives markets, estimating the value of the EU’s derivatives markets across all asset classes as €453trn, with approximately 33 million transactions. The data, which has been collected for the first time, comes under the reporting requirements of the European Markets Infrastructure Regulation (EU) 648/2012 and will help ESMA comprehensively consider the different EU markets.
The International Swaps and Derivatives Association (ISDA) has published a paper on the European Commission’s proposed moratoria powers under the Bank Recovery and Resolution Directive (BRRD). ISDA warns that the proposed powers could trigger opt-out rights for entities that have adhered to the ISDA 2015 Universal Resolution Stay Protocol (Universal Stay Protocol), thereby jeopardising the protocol’s effectiveness for EU financial institutions.
ISDA says the new moratoria powers would contravene the efforts of the Financial Stability Board to develop effective cross-border resolution frameworks, and would be a step backwards in the implementation of resolution strategies for EU financial institutions with global operations. ISDA warns it would also likely result in an unlevel playing field, with counterparties to non-EU-law-governed agreements standing to benefit at the expense of counterparties to EU-law-governed agreements.
The Committee on Payments and Market Infrastructures (CPMI) and IOSCO have co-published a report on Harmonisation of the Unique Product Identifier (UPI), providing technical guidance to authorities on a uniform global UPI applying to over-the-counter (OTC) derivatives transactions.
The guidance is complementary to the Technical Guidance on Harmonisation of the Unique Transaction Identifier, published in February 2017. The CPMI and IOSCO intend to also produce guidance on harmonisation of other critical OTC derivatives data elements in the coming months.
ISDA has published a conceptual version of its Common Domain Model (CDM). The ISDA CDM aims to be a first step towards realising the potential for new technologies such as distributed ledger and smart contracts to replace current derivatives market infrastructures, which ISDA describes as old, complex, duplicative and heavily reliant on manual intervention and reconciliation.
ISDA has launched the 2017 Venezuela Additional Provisions Protocol which is intended to help market participants that have entered into credit derivatives transactions referencing Venezuela or Petroleos de Venezuela, S.A. following the imposition of sanctions on Venezuela by the US. The protocol is open for adherence for ISDA members and non-members from 11 October 2017 until 18 October 2017.
The European Commission has published a report to the European Parliament and Council on progress in international efforts to mitigate the risks associated with securities financing transactions (SFTs). The report concludes that recommendations by the Financial Stability Board (FSB) have largely been addressed in the EU through the adoption of the Securities Financing Transactions Regulation (SFTR) and other financial services legislation and guidelines, and so no further regulatory action is needed at this time.
Draft regulations implementing a new regulatory and tax framework for insurance linked securities have been laid before Parliament. The draft Risk Transformation Regulations 2017 and Risk Transformation (Tax) Regulations 2017 are intended to help cement the UK's position at the forefront of the global reinsurance business.
The European Commission has asked the European Banking Authority (EBA) for technical advice on its plan to create an EU framework on covered bonds and assess the case for European Secured Notes (ESNs) for SME bank loans and infrastructure bank loans. The ESN asset class would aim to cover a funding segment located between traditional covered bonds and STS securitisations. The Commission says it could increase the variety of funding tools available to banks, unlocking more financing for SMEs and infrastructure projects, and contributing to economic growth and investment.
The Australian Securitisation Forum, the Global Financial Markets Association, the International Capital Market Association, and the Institute of International Finance have made a joint response to the Basel Committee on Banking Supervision and IOSCO consultation on the criteria for and capital treatment of simple, transparent and comparable short-term securitisations (July 2017). The criteria were designed to help the parties to such transactions to evaluate the risks of a particular securitisation across similar products and to assist investors with their conduct of due diligence on securitisations.
The European Securities and Markets Authority (ESMA) has published nine opinions agreeing the Financial Conduct Authority (FCA)'s proposed position limits for commodity derivatives under Article 57 of the Markets in Financial Instruments Directive 2014/65/EU (MiFID II). With effect from 3 January 2018, when MiFID II must be implemented into national law, limits will apply to the net position a person can hold in commodity derivative contracts.
The position limits relate to contracts on:
ESMA has also published a list of liquid contracts that will receive a bespoke position limit.
ESMA has published the responses received to its three consultation papers on technical advice under the new Prospectus Regulation, which were published in July 2017. The consultation papers contained draft technical advice on the format and content of the prospectus, on the EU growth prospectus and on scrutiny and approval.
The European Commission has published a draft implementing regulation on the extension of the transitional periods related to own funds requirements for exposures to central counterparties set out in the Capital Requirements Regulation (EU) 575/2013(CRR) and the European Market Infrastructure Regulation (EU) 648/2012 (EMIR). The draft implementing regulation extends to 15 June 2018 the transitional periods under Article 497(2) of CRR and Article 89(5a) of EMIR.
ESMA has issued final draft regulatory technical standards (RTS) implementing the trading obligation for derivatives under the Markets in Financial Instruments Regulation (MiFIR). The draft RTS provide the implementing details for on-venue trading of interest rate swaps (IRS) and credit default swaps (CDS).
ESMA’s draft RTS have been submitted to the European Commission (EC) for endorsement. The EC expressed to ESMA its strong commitment to apply the trading obligation from the start date of the MiFID II framework. ESMA has therefore maintained 3 January 2018 as the envisaged date of application.
The Court of Appeal’s approach in Burlington v Lomas (part of the Lehman Waterfall litigation) to the entitlement to surplus and calculating the statutory interest due to creditors on the debts of a company in administration is examined by Robert Amey, of South Square in News Analysis: Calculating statutory interest following administration (Burlington Loan Management Ltd and others v Lomas and others).
The new Business and Property Courts of England and Wales (B&PCs) became operational on 2 October 2017. The B&PCs create a single umbrella for specialist jurisdictions across England and Wales, including the Chancery Division courts used in most insolvency cases. For more information, see News Analysis: Business and Property Courts of England and Wales operational.
The Committee on Economic and Monetary Affairs of the European Parliament has published a draft resolution 'Banking Union—Annual Report 2017' covering developments since the European Parliament's 'Banking Union—Annual Report 2016' adopted in February 2017. The draft report focuses on supervision of the banking sector, development of the regime for resolution of failing banks and deposit insurance.
The Bank of England (BoE) has confirmed that its reforms to the sterling overnight index average (SONIA) interest rate benchmark will take effect on Monday 23 April 2018. The reforms will see the Bank taking on the end-to-end administration, including the calculation and publication of SONIA. The coverage of SONIA will be broadened to include overnight unsecured transactions negotiated bilaterally, as well as those arranged via brokers, using the Bank’s sterling money market data collection as the data source.
The Financial Stability Board (FSB) has published a report 'Reforming major interest rate benchmarks' covering progress on implementation of the FSB's recommendations to reform major interest rate benchmarks. The report concludes that administrators of key interbank offered rates (IBORs) have continued to take important steps to implement the FSB's recommendations, but in the case of some IBORs, such as LIBOR and EURIBOR, underlying reference transactions in some currency-tenor combinations are scarce and submissions therefore necessarily remain based on a mixture of factors including transactions and judgement by submitters.
The European Central Bank (ECB) has launched a public consultation on a draft addendum to the ECB guidance on non-performing loans (NPLs). The draft addendum specifies quantitative supervisory expectations for minimum levels of prudential provisions for new NPLs, and further reinforces the guidance of 20 March 2017 with regard to fostering timely provisioning and write-off practices. The supervisory expectations will apply to all exposures that are newly classified as non-performing in line with the EBA definition as of 1 January 2018.
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