Monthly Highlights: September 2016

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

Brexit

In News Analysis: After the vote for Brexit—implications for project finance, Philip Vernon, global practice co-head of corporate projects at Ashurst, sets out his view on the short-term and long-term implications for project finance. In particular:

  1. whether the UK’s vote in favour of Brexit had any immediate effects on funding for infrastructure projects
  2. what the implications of Brexit are for existing projects funded by the European Investment bank (EIB)
  3. what the EIB’s role in future projects in the UK will be
  4. how Brexit might impact on procurement of projects
  5. whether there are any potential upsides of Brexit for project finance, and
  6. whether there is anything else that project lenders and/or sponsors ought to be thinking about

Lending

Tackling settlement delays in the LMA secondary loan market

Delays to settlement in the Loan Market Association's (LMA) secondary loan market remains a significant issue. In News Analysis: Tackling settlement delays in the LMA secondary loan market, Jacqui Allen, partner at Mandel, Katz & Brosnan, considers some of the most frequent causes of delay, and outlines the steps that are being taken to help reduce settlement times.

Law Commission makes recommendations for reform of Bills of Sale legislation

The Law Commission has published a report recommending that the Bills of Sale Act 1878 and the Bills of Sale Act (1878) Amendment Act 1882 (the Bills of Sale Acts) be repealed and replaced with modern legislation that imposes fewer burdens on lenders and provides more protection to borrowers.

A bill of sale is a document by which a person transfers ownership of goods to another while nevertheless retaining possession of the goods. Most often, bills of sale are used as security for loans. Unlike company charges (which are granted by companies and limited liability partnerships), bills of sale can only be granted by consumers and unincorporated businesses.

Bills of sale granted as security for loans are currently overwhelmingly used for logbook loans. This is where borrowers transfer ownership of their existing vehicle to the logbook lender while continuing to use the vehicle. When the logbook loan is repaid, the borrower regains ownership of the vehicle.

The report outlines the reasons for reform, including:

  • the long list of technical requirements for bills of sale documents serve to confuse the borrower
  • the registration regime under the Bills of Sale Acts uses the High Court as the repository of the bills of sale register; the High Court registration regime is seriously out-of-date as it is still paper-based and reliant on manual processes
  • the current law offers minimal protection to borrowers as it does little to prevent a logbook lender seizing a vehicle
  • the current regime is unfair to purchasers as if a person buys a vehicle subject to a logbook loan, the logbook lender is entitled to repossess the vehicle from them at will, even when the purchaser acted in good faith and without notice of the logbook loan, and
  • the current system makes it difficult for individuals, partnerships and unincorporated associations to register general assignments of receivables, restricting access to an important potential source of finance

The majority of the report is given over to detailed explanation of the recommendations. However, the key recommendation of the report is that the Bills of Sale Acts should be repealed and replaced with a new Goods Mortgages Act. The new system would apply in circumstances where: (1) an individual (including in the context of general partnerships and unincorporated associations); (2) uses goods; (3) that the individual already owns; (4) as security for a loan or non-monetary obligation; and (5) retains possession of the goods.

To view the report, click here.

LMA sets out the documentary implications of Brexit for LMA facility documentation

The LMA has produced a note addressing a number of Brexit-related considerations for LMA facility documentation.

The note focuses on:

  1. governing law
  2. jurisdiction provisions
  3. references to the EU and EU legislation
  4. lending restrictions, and
  5. Article 55 bail-in clauses

The note is available on the LMA website to its members.  To read News Analysis produced by LexisPSL providing a summary of the note published by the LMA, see: Brexit—how does it impact LMA facility documentation?

Real estate finance

New Loan Market Association (LMA) intercreditor agreement for real estate finance transactions

The LMA has launched a new recommended form of contractual subordination-only intercreditor agreement for real estate finance transactions (REF Contractual ICA).

The REF Contractual ICA seeks to govern the relationship between two classes of creditor providing finance to the same borrower group in the context of a real estate finance transaction. It does this by ranking the creditors' debt and their entitlements to the proceeds of any guarantees and security and by contractually restricting their behaviour: for example, by controlling when and by whom security might be enforced and when payments can be made by a borrower to a given class of creditor. It was produced in response to demand from members documenting smaller to mid-sized transactions in the regional real estate finance market, who were increasingly seeing loans provided via a combination of senior and mezzanine finance and ranked by way of contractual subordination only and with common security.

The starting point for the preparation of the REF Contractual ICA was the LMA recommended form of intercreditor agreement for leveraged acquisition finance transactions (senior/mezzanine) (the Leveraged ICA). The REF Contractual ICA uses the same boilerplate as the Leveraged ICA and so should be immediately familiar to all users of LMA documentation.

The REF Contractual ICA and the associated user guide are available to LMA members on the LMA's REF microsite (part of the LMA website).

Debt capital markets

ICMA launches consultation on the buy-in rules

The International Capital Markets Authority (ICMA) has launched a consultation to review and potentially update the ICMA Buy-in Rules under the Secondary Market Rules and Recommendations. This is in response to feedback from members with respect to the efficiency of the existing buy-in process in the current market environment. ICMA has highlighted that it is aware the Central Securities Depositories Regulation (CSDR) (EU) 909/2014 introduces a harmonised buy-in regime across the EU. However, ICMA has emphasised that until then, in the event of settlement fails, the ICMA Buy-in Rules continue to serve as an 'efficient and practical remedy' available to participants in the cross-border bond markets. Among the proposed improvements are:

  1. the requirement (or not) to appoint a buy-in agent
  2. flexibility in the timing of the buy-in, and
  3. the potential for buy-in auctions

The consultation closes on 14 October 2016.

For more information on the Buy-in Rules, see ICMA Guidance: Buy-ins how they work and the challenge of CSDR.

Derivatives

ISDA publishes a new white paper

The International Swaps and Derivatives Association, Inc. (ISDA) published a new white paper entitled 'The future of derivatives processing and market infrastructure' which provides an insight into the challenges facing market participants across all parts of the derivatives process, and proposes a path forward for developing a system to support the needs of market participants.

The paper focuses on three key areas:

  • data—agreement on formats and identifiers would significantly benefit market participants and regulators to remove systemic inefficiencies and promote transparency
  • documentation—despite standard documents published for industry use, many documents are still customised between transacting parties. However, the ISDA highlights the opportunities for further standardisation and digitisation across the suite of existing ISDA documentation, from Master Agreements to definitions booklets and confirmation templates, which will drive more efficient processing and adoption of technology, both within firms and across the market
  • process—the complexity and multiplicity of business processes required to support the same functions within or across asset classes is significant. However, ISDA highlights the opportunity for the industry, working collaboratively with global regulators, to reassess and promote improved standards in this space

ISDA launches the ISDA SIMM

The financial crisis of 2007 exposed significant weaknesses in the resiliency of banks and other financial institutions. As a result of this, the G-20 initiated a reform programme in 2009, including to OTC derivatives. The suggested reforms in 2009 focused on certain OTC derivatives being subject to central clearing and for non-cleared derivatives to be subject to higher capital requirements. In 2011, they added to their reform programme margin requirements for derivatives that were not subject to mandatory clearing. The Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO), in consultation with the Committee on Payment and Settlement Systems (CPSS) and the Committee on the Global Financial System (CGFS), set up a Working Group on Margin Requirements (WGMR) to address this requirement.

The framework set by the WGMR means that firms can use their own internal models to calculate initial margin if those models meet set criteria and have received regulatory approval. However, the risk is that these models will differ significantly between firms and jurisdictions, leading to disputes arising as counterparties may not agree on the initial margin that needs to be calculated. ISDA therefore has developed a Standard Initial Margin Model (SIMM). The ISDA SIMM offers firms a standard methodology to use, thereby reducing the risk of dispute between entities. The aim is for the process of calculating initial margin to be largely standardised, so that less calculations are needed to be made and the calculations can be done consistently.

The ISDA SIMM is available on the ISDA website.

Restructuring

Update to the timing announcement for the Insolvency (England and Wales) Rules 2016

At the Institute of Chartered Accountants in England and Wales' Insolvency and Restructuring Group's roadshow on 22 September 2016, the Insolvency Service said that it was aiming to lay the new insolvency rules before Parliament week commencing 10 October 2016, with a commencement date of 6 April 2017, subject to Ministerial approval. For more information, see the R&I News Analysis: Update to the timing announcement for the Insolvency (England and Wales) Rules 2016.

Dates for your diary

October 2016

Date Subject matter Key Development
4 Oct Derivatives: non-cleared margin rules EC expected to publish its final non-cleared margin rules.
14 Oct Buy-in rules Deadline for responding to The International Capital Markets Authority's (ICMA) consultation to review and potentially update the ICMA Buy-in Rules under the Secondary Market Rules and Recommendations. For more information, see ICMA website.
28 Oct MiFID II Deadline for responding to the FCA's second consultation on the implementation of MiFID II.

Relevant Articles
Area of Interest