Monthly Highlights: September 2017

Welcome to this month’s highlights from the Lexis®PSL Banking & Finance team which cover the key news updates from September 2017.

Brexit

CLLS response to Insolvency Service—implications of Brexit

The City of London Law Society (CLLS) insolvency law committee has written a letter to the Insolvency Service on the implications of Brexit. The background to the letter is the government's service of its Article 50 notice, the Brexit White Paper and the recently introduced European Union (Withdrawal) Bill (the Bill). The letter notes that whilst the Bill suggests that existing EU regulations will be incorporated into English law, a ‘hard’ Brexit would mean that the UK would lose the benefit across the EU of the mutual recognition provisions in Council Regulation (EU) 2015/848 of 20 May 2015 on insolvency proceedings (the Recast Regulation).

Lending

LMA publishes revised secondary documents following changes to ERISA

The Loan Market Association (LMA) has updated documents from its secondary debt trading suite, including revised T&C’s which reflect changes to the US Employee Retirement Income Security Act of 1974 (ERISA), as well as revised participation agreements and the secondary debt trading documentation users guide.

The revised documents—updated to reflect changes to ERISA, among other reasons—include:

  1. T&Cs—with revisions to the delayed settlement compensation and settlement calculation
  2. participation agreements—transfer provisions are revised to allow the grantor to carry out its ‘know your customer’ checks on the new participant before being required to sign a transfer certificate
  1. secondary debt trading documentation user’s guide—revisions made to reflect the amends as above

The documents went live on 25 September 2017. Members can view the changes on the LMA website.

CLLS guide on scope of opinion letters updated

The City of London Law Society (CLLS) has updated its guide to the questions which a law firm should consider when seeking or providing an opinion letter under English law in a financial transaction. While the guide seeks to save time and costs for law firms and clients by explaining the issues and how they might be dealt with, it is not intended to lay down rules or a code of conduct.

Acquisition finance

LMA launches new fronted agreements for leveraged acquisition finance transactions

The LMA has announced the launch of new forms of:

  1. fronted funding and distribution agreement; and
  2. fronted distribution agreement, for leveraged acquisition finance transactions (the Fronted Agreements)

The Fronted Agreements were produced in response to demand from participants in the syndicated leveraged loan market for a form of ‘fronted underwriting agreement’. The Fronted Agreements document arrangements entered into between a group of mandated lead arrangers to facilitate the administration of initial drawdown of term facilities and/or distribution of allocations in primary syndication of term facilities in the context of a leveraged financing. These arrangements are often referred to as ‘fronting’ or ‘fronted underwriting’. The Fronted Agreements seek to reflect the two most commonly encountered fronting structures in the European leveraged finance market.

In addition, changes have been made to the definition of ‘Front Running’ in the Confidentiality and Front Running Letter for Primary Syndication, standalone Front Running Letter of Undertaking and the Mandate Letters (Best Efforts and Underwritten) to take account of the use of fronting structures.

Members can view the changes on the LMA website.

Asset finance

Treasury seeks views on Goods Mortgages Bill

HM Treasury has launched a consultation seeking views from stakeholders on whether they think reform of bills of sale legislation is required. The draft Goods Mortgages Bill aims to modernise the legal framework in this area and increase protection for consumers who use goods that they already own as security for loans. The deadline for responses is 13 October 2017. The consultation documents can be found here.

The background to the earlier Law Commission consultation on this area of the law is discussed in our News Analysis: Reforming bills of sale—what might the Goods Mortgages Bill look like? by Daria Popescu, lawyer at the Law Commission.

Islamic finance

Validity and enforceability of sukuk bonds

In Dana Gas PJSC v Dana Gas Sukuk Ltd [2017] All ER (D) 99 (Sep) the English High Court decided that a claim brought by Dana Gas over whether a mudarabah agreement governed by the law of the United Arab Emirates and a purchase undertaking governed by English law are valid and enforceable agreements would go to trial.

Dana Gas is arguing that due to changes in interpretation of Islamic finance the sukuk bonds are no longer sharia-compliant and are therefore unlawful under the laws of the UAE.

Payment under the associated English law governed purchase undertaking would fall due at the end of October. The main reason a separate English law governed purchase undertaking is taken in such transactions is to ensure repayment of the bonds whatever happens.

The English court allowed the case to proceed to trial despite an anti-suit injunction by the Sharjah court preventing both Dana Gas and other affected parties from participating in it. The English court regarded this as largely a self inflicted wound by Dana Gas and had little sympathy for its predicament.

Investment fund Blackrock, which has a significant financial stake as bondholder, has effectively stepped into the shoes of Dana Gas to make the arguments for the validity of the payment obligations under English law.

The English court stated it will not decide any questions of UAE law. It will decide the question of whether the purchase undertaking is enforceable as a matter of English law on the assumption that the mudarabah agreement is invalid under the law of the UAE and on the basis that the parties were mistaken in believing the mudarabah agreement to be valid when they entered into the English law governed purchase undertaking.

If Dana Gas and the other parties can persuade the court in Sharjah to overturn the anti-suit injunction they will be given an opportunity to present their arguments to the English court in mid October.

The case, which caught the attention of the Islamic finance market earlier this year, is being closely followed by participants. A finding that a change in Islamic law affected the validity of a transaction that was shariah compliant at its inception would create uncertainty for financings with a similar structure.

Real estate finance

LMA issues minor updates to real estate finance facility agreements

The LMA has published revised versions of two of its real estate finance facility agreements, and their respective user guides, to take into account minor updates to cross-references across the documents. Members can view the changes on the LMA website.

Trade and commodity finance

Blockchain in commodities financing still facing ‘significant hurdles’

While blockchain is discussed in increasingly excitable terms, questions still abound as to the real world implications of such a technological leap. In News Analysis: Blockchain in commodities financing still facing ‘significant hurdles’ Richard Usher, commodities lawyer at DLA Piper, examines the structure of the system as well as the nature of some of the problems it will solve, and those it won’t.

Government-backed overseas investment insurance offered to UK businesses

UK Export Finance (UKEF) has announced that it is offering wider access to government-backed insurance for UK businesses investing overseas. The Department for International Trade is looking to encourage more UK companies to invest abroad and UKEF’s enhanced overseas investment insurance offers protection against losses, primarily related to political or extraneous events.

Debt Capital Markets

ICMA responds to consultations on investment fund liquidity risk management

The International Capital Market Association (ICMA) has responded to two consultations by the International Organization of Securities Commissions (IOSCO) on investment fund liquidity risk management. ICMA broadly agreed with the suggested amendments to IOSCO’s 2013 liquidity risk management recommendations, but did make some suggestions to bring them in line with current market practice. It also urged caution on stress tests, which could be misleading on a systemic level.

ICMA’s responses can be found here and here.

Derivatives

ISDA issues recommendations for CCP recovery and resolution

The International Swaps and Derivatives Association (ISDA) has published recommendations for a comprehensive recovery and resolution framework for central counterparties (CCPs), and called on regulators to finalise and implement CCP recovery and resolution strategies. The ISDA says it hopes the guidance will help firms implement ‘robust, unambiguous and predictable’ mechanisms.

ISDA paper sets principles for harmonisation of derivatives regulatory regimes

ISDA has proposed a risk-based framework for evaluating and recognising the comparability of foreign-jurisdiction derivatives regulation regimes. ISDA says that while solid progress has been made since the financial crisis by the industry and regulators to improve the resilience of financial markets, ‘the hoped-for march towards global consistency and cross-border harmonisation has been much slower’. ISDA says the lack of consistency causes duplication, complexity and unnecessary compliance challenges for derivatives users.

Updates made to ISDA’s standard initial margin model (SIMM)

The International Swaps and Derivatives Association (ISDA) has launched the latest version of its standard initial margin model (SIMM), which includes several enhancements to further develop the SIMM methodology. The new SIMM includes new risk factors, as well as several other changes requested by the industry, including clarification of certain definitions and enhancements to the treatment of vega margin and commodity indices. The changes will come into effect on 4 December 2017.

New margin regulations for non-cleared derivatives

The Banking & Finance team has been speaking with Leslie Rahl and Peter Niculescu, partners at Capital Market Risk Advisors (CMRA) and members of the P.R.I.M.E. Finance Panel of Experts in relation to a survey that CMRA did about the new variation and initial margin requirements. In News Analysis: New margin regulations for non-cleared derivatives, they outline the responses on this topic and highlight the potential benefits and costs of implementing the new regulations and explain that while the new regulations seek to reduce both systemic risk and counterparty risk, they likely will not significantly curtail future legal disputes surrounding derivatives closeout.

Structured products & securitisation

EBA consultation on significant risk transfer in securitisations

The European Banking Authority (EBA) has published a discussion paper on 'Significant risk transfer in securitisation' (EBA-DP-2017-03) putting forward for public discussion proposals to strengthen the regulation and supervision framework of significant risk transfer (SRT) and to improve regulatory certainty and a level playing field for institutions transferring risk through securitisation. The consultation runs until 19 December 2017.

The EBA has also published an article on 'Harmonisation and standardisation of synthetic securitisations', which includes discussion of SRT for balance sheet synthetic transactions.

New model for repo clearing launched by LCH

A leading global clearing house, LCH, has announced that its RepoClear service has introduced a new model which brings the advantages of clearing repos on the buy side. The service aims to widen the number of repo trades available for netting. An asset manager, Insight Investment, has used the service, acting for a pension fund. The first trade took place on Tradeweb Markets.

Regulation of derivatives and capital markets products

Joint CCP12-EACH response to consultation on CCP stress testing framework

The Global Association of Central Counterparties (CCP12) and the European Association of CCP Clearing Houses (EACH) have published a joint press release on the CPMI-IOSCO consultation 'Framework for supervisory stress testing of central counterparties (CCPs)’. CCP12 and EACH support the efforts taken by CPMI and IOSCO to establish a high-level framework for supervisory stress tests (SSTs) that can be used as a guidepost for regulators conducting multi-jurisdictional and local CCP stress tests.

Proposed Regulation on the recovery and resolution of central counterparties

ECB delivers its opinion on the proposed Regulation

The European Central Bank (ECB) has delivered its opinion on the proposal for a Regulation on the recovery and resolution of central counterparties (CCPs). The ECB says it strongly supports the European Commission’s initiative but suggests a number of ways in which the proposal could be ‘enhanced’.

European Parliament’s Committee on Economic and Monetary Affairs publishes draft report

The European Parliament’s Committee on Economic and Monetary Affairs (ECON) has published a draft reporton the proposal for a regulation of the European Parliament and of the Council on a framework for the recovery and resolution of central counterparties and amending the ESMA Regulation ((EU) 1095/2010), European Markets and Infrastructure Regulation (EMIR) ((EU) 648/2012), and the Securities Financing Transactions Regulation (SFTR) ((EU) 2015/2365). The report sets out amendments and calls on the European Commission to refer the matter to Parliament again if it replaces, substantially amends or intends to substantially amend its proposal. The report will now be forwarded to the Council, the Commission and the national parliaments.

Regulation for banking lawyers

BCBS consults on fintech and the banking sector

The Basel Committee on Banking Supervision (BCBS) has published a consultation: Sound practices: Implications of fintech developments for banks and bank supervisors, looking at how fintech may affect the banking industry and the activities of supervisors in the near to medium-term. The report sets out a number of scenarios for fintech implications on the sector and studies the risks and opportunities they present. Feedback is sought by 31 October 2017.

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