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Welcome to this month’s highlights from the Lexis®PSL Banking & Finance team which cover the key news updates from September 2018.
On 13 September 2018, the government issued guidance on its stance on handling civil legal cases that involve EU countries should the UK leave the EU without agreement (see ‘Handling civil legal cases that involve EU countries if there’s no Brexit Deal’). This would involve the majority of the Recast Regulation on Insolvency, Regulation (EU) 2015/848, being repealed in all parts of the UK. News Analysis: Brexit no deal—impact on insolvency discusses the government’s stance in more detail.
The Loan Market Association (LMA) first produced a note in September 2016 on the documentary implications of Brexit for LMA facility documentation (the 2016 Brexit Note). The LMA has now produced a supplementary note to inform members of market discussions/concerns in this area (the Supplementary Note). The Supplementary Note does not replace the 2016 Brexit Note, but rather it is intended to be read in conjunction with it.
Members can log into the LMA website with their username and password to view the Supplementary Note. For a summary of the Supplementary Note, click here.
The LMA has published three additional documents to its desktop series—fees, prepayments and breaks.
The Desktop series was launched in May 2018 and can be found on the LMA Loan Operations Microsite.
LMA members can login to access the documents and the full series here.
The LMA and the Association of Corporate Treasurers (ACT) have updated their joint guidance: The future of LIBOR: What you need to know to reflect developments since the first edition was published in March 2018.
The joint guide aims to provide an overview of developments and key issues with respect to the proposed transition away from LIBOR benchmarks to near risk-free rates (RFRs). New developments include publication of the LMA's revised replacement of screen rate clause and the launch of a consultation on term rates in the sterling market. The guidance is available on the LMA website to members of the LMA.
The private sector working group on euro risk-free rates has recommended the euro short-term rate (ESTER) as the new euro risk-free rate. The working group recommends, in particular, replacing the euro overnight index average (EONIA) with the new euro risk-free rate. This is because the EONIA as it stands will no longer meet the criteria of the EU Benchmarks Regulation and will therefore see its use restricted as of 1 January 2020.
The Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) have written to CEOs of major banks and insurers supervised in the UK asking for the preparations and actions they are taking to manage transition from LIBOR to alternative interest rate benchmarks. The purpose of the letters is to seek assurance that firms’ senior managers and Boards understand the risks associated with this transition and are taking appropriate action now so that firms can transition to alternative rates ahead of the end of 2021.
The LMA has responded to the BEIS Open Consultation: Draft Registration of Overseas Entities Bill.Their response, available to members on the LMA webite, seeks to ensure that the relevant interests of security agents and lenders are not adversely impacted by the proposed regime, either from a legal or practical perspective.
HM Land Registry has updated its guidance on the local land charges service, which was set up to make searches of local land charges quicker and cheaper. The update specifies the date for the transfer of local land charges data for City of London Corporation as 8 October 2018.
Global emissions remain on track to exceed two degrees of warming, despite a ‘universe’ of unlabelled bonds financing green infrastructure, according to a report from the Climate Initiative Bonds (CIB). The report, ‘Bonds and Climate Change—the State of the Market 2018’, shows that despite ‘encouraging’ global growth in green finance, much more growth is needed.
The Prudential Regulation Authority (PRA) has published a report examining the financial risks from climate change that impact UK banks, building societies and PRA-designated investment firms. It assesses how banks are responding to these risks, and clarifies the PRA’s supervisory approach. The report is based on a PRA survey covering 90% of the UK banking sector, bilateral meetings with firms and stakeholders, and the findings from the Bank of England’s broader climate-related work.
Four leading trade associations have submitted a joint response to the consultation report on commodity storage and delivery: good or sound practices, which was published by the International Organization of Securities Commissions (IOSCO) in July 2018. The associations say that they welcome the report and support IOSCO's efforts to harmonise good practices in the commodity space, but they feel that further clarity is required regarding some aspects of the consultation report.
 EWCA Civ 2026
Ukraine had a good arguable case that the public policy exception had effect to disapply the rule that UK courts would not resolve challenges to the lawfulness of an act of a foreign state. It could therefore rely on its defence that its issue of notes with the Russian Federation as the sole subscriber had been procured by unlawful and illegitimate threats made, and pressure exerted, by Russia, constituting duress as a matter of English law. Accordingly, the Court of Appeal, Civil Division, allowed Ukraine's appeal against the judge's decision to enter summary judgment in the claimant trustee's action.
For the purposes of Article 5(3) of Regulation (EC) 44/2001, Brussels I, the Court of Justice held that, where an investor brings a tortious prospectus liability claim against a bank, the courts of the investor’s domicile have jurisdiction if the damage consists of financial loss occurring directly in an account held by the investor with a bank established within the jurisdiction of those courts, and where the attribution of jurisdiction to those courts is warranted by the circumstances of the case.
The European Securities and Markets Authority (ESMA) has published a working paper examining liquidity in EU fixed income markets, providing a broad overview of market liquidity in EU sovereign bond and corporate bond markets.
ESMA has published a speech by its chair, Steven Maijoor, on new technologies and capital markets, in which he discussed the ‘balancing act’ of responding to the risks that new technologies and entrants may bring, while at the same time trying not to stifle innovation. Mr Maijoor discussed automated advice, data-driven variable pricing, AI, machine learning and the use of pattern-matching and data analytics to detect market abuse.
The Association for Financial Markets in Europe (AFME) has published its 'Annual review 2018: Re-wiring Europe's capital markets'. The review includes discussion of the impact of Brexit on Europe's wholesale markets and calls for the industry to focus on tackling longer term structural issues. It also considers the impact of FinTech, the role of the European Supervisory Authorities (ESAs), and progress towards capital markets union (CMU). Each of AFME's divisions also provides an update.
The International Capital Market Association (ICMA) has found a rapid rise in issuance and the size of the G3 (USD, EUR, GBP), in particular USD, corporate bond market since 2011. ICMA’s report on the state and evolution of the Asia-Pacific cross border corporate bond secondary market highlights that the rise has accelerated in the past two years driven primarily by Chinese financial and non-financial issuers coming to the market.
Deutsche Bank is suing an Italian local authority in the English courts over the validity of two interest rate swaps, marking the latest in a series of suits brought to the UK over such contracts between lenders and European state-run bodies, which became ruinous during the financial crisis.
ISDA publishes benchmarks supplement
ISDA has published the ISDA Benchmarks Supplement, which gives firms the ability to improve the contractual robustness of derivatives that reference interest rate, FX, equity and commodities benchmarks. The ISDA Benchmarks Supplement has been developed in response to the European Union Benchmarks Regulation (BMR), which regulates the use of a wide variety of benchmarks across different asset classes. The BMR requires contracts between supervised entities and their clients to set out the actions they would take if a referenced benchmark is materially changed, ceases to be provided or is prohibited from use.
ISDA proposes changes to regulatory framework for OTC derivatives clearing
ISDA has published its response to the Financial Stability Board (FSB)'s Derivatives Assessment Team's August 2018 consultative report on incentives to centrally clear over-the-counter (OTC) derivatives. ISDA says that the incentives to clear created by the regulatory framework are not always appropriate and recommends a number of changes.
The Bank of England (BoE) has published the minutes of the Working Group on Sterling Risk-Free Reference Rate, from a meeting on 20 August 2018, where discussions related to the ISDA consultation on fallbacks in derivative contracts, market infrastructure, sub-group updates and the approach to accounting implications of transition.
BIS has published FAQs related to the treatment of settled-to-market (STM) derivatives under the Liquidity Coverage Ratio and Net Stable Funding Ratio. The FAQs aim to seek to clarify that the liquidity risks associated with STM derivatives are the same as those for more conventional ‘collateralised-to-market’ derivatives and should therefore be treated in an equivalent manner.
The Futures Industry Association (FIA), the Institute of International Finance (IIF), and the Global Financial Markets Association (GFMA) (together the associations) have jointly responded to the consultation by the Financial Stability Board’s Derivatives Assessment Team (DAT) on incentives to centrally clear OTC derivatives. The associations agree with the DAT’s findings that there are impediments to accessing central clearing, and urge global regulators to take action.
ESMA has published a study on data reported under the European Market Infrastructure Regulation (EU) 648/2012 (EMIR), which finds that funds that are part of a large group are more likely to use credit default swaps (CDS). According to the report, a high reliance on CDS is seen, in particular, among fixed income funds that invest in less liquid markets, and alternative funds that implement hedge-fund-like strategies. ESMA says the main driver of net CDS exposures is fund size.
The Association for Financial Markets in Europe has published its Securitisation Data Report for Q2 2018, finding that €67.2bn of securitised product was issued in Europe, an increase of 14.8% from Q1 2018 but a decline of 8% from Q2 2017. Of that €37.7bn was placed, representing 56.1% of issuance, compared to the 55.1% of issuance in Q1 2018 and the 54.2% of issuance in Q2 2017.
AFME, together with nine other trade and finance associations, has published a report tracking progress made on the European Commission’s capital markets union (CMU) project, through seven key performance indicators (KPIs). The report found growing intra-EU activity between EU Member States in private equity, M&A transactions, debt issuance, and cross-border holdings of portfolio assets. However, intra-EU integration remains below pre-crisis levels, suggesting more progress is needed towards a fully integrated capital market.
The European Parliament has published a briefing on the European Commission's proposed regulation on sovereign bond-backed securities (SBBS), which was adopted on 24 May 2018. The briefing outlines the main purposes of this 'enabling regulatory framework' for the development of SBBS and questions whether, in the absence of a change in the regulatory treatment of sovereign exposures, there will be sufficient demand for SBBS.
The European Parliament's Economic and Monetary Affairs (ECON) committee has published details of its September 2018 meetings, including consideration of European Commission proposals for a Directive on covered bonds, at its meeting on 10 September 2018.
Commission Delegated Regulation (EU) 2018/1221 (the Solvency II Delegated Act Amendment Regulation) has been published in the Official Journal of the EU. This makes changes to Commission Delegated Regulation (EU) 2015/35 (the Solvency II Delegated Act) to ensure alignment with Regulation (EU) 2017/2402 (the Securitisation Regulation) and Regulation (EU) 2017/2401 (the CRR Amendment Regulation).
ESMA has published the responses it received to its consultation paper no 6 on the clearing obligation under EMIR. The consultation dealt with an amending draft regulatory technical standards (RTS) regarding the treatment of intragroup transactions with a third country group entity, and proposed an extension of the temporary intragroup exemption. The consultation closed on 30 August 2018. ESMA received 10 responses.
ESMA has published an opinion in response to the European Commission’s proposed amendments of the technical standards on reporting under the Securities Financing Transactions Regulation (SFTR), which were notified to ESMA on 24 July 2018. ESMA has declined to amend the draft technical standards as proposed by the Commission, which relate to provisions on the use of legal entity identifiers for branches and unique transaction identifiers for reporting to trade repositories.
Rachael Markham and Cathryn Williams of Squire Patton Boggs, consider the Government’s response to the insolvency and corporate governance consultation that ended on 26 August 2018, and what this means for the insolvency world in News Analysis: Government proposes legislation to enhance UK insolvency regime.
HM Treasury is seeking views on the government's approach to transposing the Bank Creditor Hierarchy Directive into UK law before the transposition deadline of 29 December 2018. The directive will amend Article 108 of the Bank Recovery and Resolution Directive (BRRD), establishing a new class of non-preferred senior debt to be inserted in the creditor hierarchy. The consultation closes on 10 October 2018.
The Alternative Reference Rates Committee (ARRC) is consulting on LIBOR fallback language for syndicated business loans and for floating rate notes. The ARRC warns that LIBOR cessation has the potential to disrupt $200 trillion of US dollar contracts, including $4 trillion of syndicated loans and $500 billion of collateralised loan obligations (CLOs). Feedback is sought by 8 November 2018.
The Banking & Finance team were at the LMA Syndicated Loans Conference 2018 on 25 September 2018 where this year’s emphasis was on building a sustainable future. The day’s opening speech noted that, in addition to the theme of the conference, the LMA’s main areas of focus were LIBOR, Brexit, KYC and operational efficiency.
Click here for a summary of the key takeaways from the conference.
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