Monthly highlights: September 2019

Monthly highlights: September 2019

In this issue


LIBOR and benchmarks
Trade finance
Sustainable finance
Securitisation and structured products
Regulation for banking lawyers
Execution of documents



Legislative developments

Financial Services (Electronic Money, Payment Services and Miscellaneous Amendments) (EU Exit) Regulations 2019

Prospectus (Amendment etc) (EU Exit) Regulations 2019

Capital Requirements (Amendment) (EU Exit) Regulations 2019

Risk Transformation and Solvency 2 (Amendment) (EU Exit) Regulations 2019

Financial Services (Implementation of Legislation) Bill 2017–19 falls with prorogation of Parliament

How will No deal Brexit affect real estate finance transactions?

In News Analysis: How will No deal Brexit affect real estate finance transactions?, Mark Lewis, head of property finance at Browne Jacobson, examines the implications of a No deal Brexit on real estate finance transactions.

Brexit Bulletin—Supreme Court declares prorogation of Parliament unlawful, void and of no effect

In a unanimous judgment, the Supreme Court concluded that the question of the lawfulness of the Prime Minister’s advice to Her Majesty the Queen to prorogue Parliament was justiciable, and in this case the decision to advise the Queen prorogue Parliament was unlawful as it had the effect of frustrating/preventing Parliament’s ability to carry out its constitutional functions without reasonable justification. On this basis the prorogation was void and of no effect. Parliament has therefore not been prorogued. Nick Wrightson, senior associate in the Public Law team at Kingsley Napley, and Kieran Laird, partner and head of constitutional affairs in the Gowling WLG Brexit Unit give their analysis of the Supreme Court’s decision, highlighting key legal and constitutional implications.

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LIBOR and benchmarks

ISDA webpage collates links to plain English offered rates guides

The International Swaps and Derivatives Association (ISDA) has collated a set of links to ‘plain English’ guides to derivatives referencing London Interbank Offered Rate (LIBOR) and other inter-bank offered rates (IBOR). The guides cover LIBOR in the five currencies in which it is currently published (USD, GBP, CHF, JPY and EUR), EURIBOR, TIBOR, Euroyen TIBOR, BBSW, HIBOR and CDOR (each an IBOR) and their current administrators.

ISDA releases FAQs concerning EURIBOR benchmark reforms

As the European Money Markets Institute (EMMI) plans to transition from the current Euro Interbank Offered Rate (EURIBOR) to the hybrid methodology by the end of 2019, ISDA has published a frequently asked questions (FAQs) document in relation to EURIBOR benchmark reforms. The ISDA has stated that this document may be updated from time to time.

ISDA launches consultation on derivatives fallback adjustments

ISDA has launched a consultation to finalise the methodologies for the adjustments that will be made to derivatives fallbacks in the event of the permanent discontinuation of certain IBORs. The adjustments reflect the fact that the IBORs are currently available in multiple tenors, but the risk-free rates (RFRs) identified as fallbacks are overnight rates. The consultation welcomed responses until 23 October 2019.

Financial Services and Markets Act 2000 (Benchmarks) (Amendment) Regulations 2019

An amendment is made to Financial Services and Markets Act 2000 (Benchmarks) Regulations 2018 (2018 Regulations) to clarify the scope of the powers of the Financial Conduct Authority under regulation 6(1)(b) of the 2018 Regulations to impose requirements on Miscellaneous Benchmark Persons ‘in order to advance any of its operational objectives’. These Regulations came into force on 14 October 2019.

CFTC approves ‘plain English’ IBOR disclosures

The US Commodity Futures Trading Commission’s (CFTC’s) market risk advisory committee has approved plain English disclosures for new derivatives referencing LIBOR and other IBORs. The disclosures inform clients and counterparties about the implications of using such products.

BoE publishes terms of reference for new risk-free rates senior advisory group

The Bank of England (BoE) RFR working group has published the terms of reference for its new RFR senior advisory group. The working group, which was established in 2015 to develop alternative RFR for use instead of LIBOR-style reference rates, has determined it would benefit from an advisory group to provide strategic support and senior engagement in firms, to help achieve the working group’s deliverables and objectives.

The LMA publishes exposure drafts of compounded RFR facility agreements for sterling and US dollars

The Loan Market Association (LMA) has published exposure drafts of compounded RFR facility agreements for sterling and US dollars. The exposure drafts include a compounded Sterling Overnight Index Average (SONIA) based sterling term and revolving facilities agreement and a Secured Overnight Financing Rate (SOFR) based dollar term and revolving facilities agreement. SONIA and SOFR have been chosen as the replacement near RFRs for the LIBOR and US dollar markets respectively.

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Promontoria (Henrico) Ltd v Samra

[2019] EWHC 2327 (Ch)

The claimant bank succeeded in its claim against the defendant, to whom it had lent money. The Chancery Division held that the relationship between the parties had not been unfair, and the bank had not resiled from the alleged common intention or understanding between the parties, as there had been no common intention or understanding as the defendant had alleged.

Nicoll v Promontoria (Ram 2) Ltd

[2019] All ER (D) 37 (Sep)

The appellant debtor failed in his appeal against the dismissal of his application to dismiss a statutory demand. The Chancery Division held that there had been sufficient evidence to enable the respondent (Promontoria), the assignee of a debt owed by the debtor to a bank, to establish, beyond the balance of probabilities, that the relevant date of assignment had been reached, or that the parties to the assignment had at least treated it as having been reached. The court held that, where the terms of the notice of the assignment, which had emanated from both assignor and assignee, had made it clear that the parties to the assignment had considered it to have been complete, the debtor was not entitled to challenge the title of Promontoria. The evidence before the judge had been sufficient to justify her overall conclusion. The court further allowed Promontoria's cross-appeal on a procedural point.

Lehman Brothers International (Europe) (in administration) v Exotix Partners LLP 

[2019] EWHC 2380 (Ch)

Lehman orally agreed to sell certain Peruvian notes to Exotix. Unfortunately, owing to a misunderstanding of the way the notes worked, Lehman transferred a thousand-fold more of the notes to Exotix (worth approximately $7m instead of the $7,000 paid). Exotix pocketed the windfall and Lehman sued. Despite the clear evidence of the oral trade, the High Court accepted Lehman’s argument that the trade should be construed as a sale of notes having a value commensurate with the price paid despite the fact this would necessitate delivery by Lehman of a fraction of a note which was impossible. A term permitting a small balancing payment to be made by Lehman to Exotix to take this impossibility into account would be implied into the contract.

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Trade finance

Revised Incoterms® rules set out for 2020

The International Chamber of Commerce has released Incoterms® 2020, which is the latest edition of its trade terms for the sale of goods for businesses and traders across the globe. Incoterms® 2020 features more detailed explanatory notes with improved graphics to illustrate the responsibilities of importers and exporters for each Incoterms® rule, as well as a more precise explanation on how to choose the most appropriate Incoterms® rule for certain transactions or how a sales contract interacts with ancillary contracts.

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Commerzbank and Nomura involved in landmark swaps negotiation

The International Swaps and Derivatives Association (ISDA) reports that Commerzbank and Nomura have completed the first ever fully electronic negotiation of relationship-level swaps documentation between two counterparts. The initial margin (IM) documentation was agreed via ISDA Create, a platform designed for the electronic negotiation and execution of derivatives documents. Since its launch in January 2019, 53 firms have signed up to the platform, on which users are able to deliver documentation electronically to multiple counterparties simultaneously, and to negotiate those agreements completely online.

FIA and ISDA recommend amendments to proposed derivatives rules

The Futures Industry Association (FIA) and ISDA have sent a letter calling for changes to CFTC rules for derivatives clearing houses. The letter was in response to the CFTC’s own call to enhance the rules relating to various aspects of the core principles applicable to derivatives clearing organisations. Although both the FIA and ISDA support many of the amendments and clarifications put forward by the CFTC, they also recommend ‘that the Commission amend or re-issue certain proposed rule changes to ensure that the regulatory framework supports the transparent, efficient and safe clearing of derivatives’.

FCA update on opportunistic strategies in the credit derivatives market

The Financial Conduct Authority (FCA) has published an update to its joint statement with the US Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) on opportunistic strategies in the credit derivatives market, including ‘manufactured credit events’ or ‘narrowly tailored credit events’. The FCA welcomed the ISDA’s recently proposed protocol which addresses the risk of ‘narrowly tailored credit events’, for instance by suggesting amendments to the 2014 ISDA Credit Derivatives Definitions.

ESMA publishes opinions on MiFID II/MiFIR position limits

European Securities and Markets Authority (ESMA) has published two opinions on position limits regarding commodity derivatives under the Markets in Financial Instruments Directive (Directive 2014/65/EU) (MiFID II) and Regulation (Regulation (EU) 600/2014) (MiFIR).

ISDA developments 

New ISDA protocol allows parties to amend terms of protocol covered transactions and agreements

ISDA has published its 2019 NTCE Protocol that permits parties to protocol covered transactions and/or protocol covered agreements to alter the terms of those transactions and agreements. By completing and delivering a letter in the form of Exhibit 1 to this protocol to ISDA, a party that has entered and/or intends on entering into a protocol covered transaction or a protocol covered agreement may adhere to the protocol and be bound by its terms.

The end of narrowly tailored credit events?

In News Analysis: The end of narrowly tailored credit events?, Colin Rice, partner and head of the Asian derivatives & structured products team at Norton Rose Fulbright, discusses ISDA’s recently published 2019 Narrowly Tailored Credit Event Supplement to the 2014 ISDA Credit Derivatives Definitions.

ISDA announces multi-lateral IM self-disclosure exercise for Phases 5 and 6

ISDA has announced that it is running a multi-lateral initial margin (IM) self-disclosure exercise for Phases 5 and 6. This is intended to help the industry be best prepared for IM requirements ahead of 1 September 2020 (Phase 5) and 1 September 2021 (Phase 6), and follows on from the 23 July 2019 statement by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions confirming their agreement to extend the final implementation date for the IM requirements to 1 September 2021.

ISDA releases third guidance document on smart derivatives contracts

ISDA has released its third document on legal guidelines for smart derivatives contracts. The guidelines are ‘intended to explain the core principles of ISDA collateral documentation and raise awareness among technology developers, collateral operations, risk managers and other key stakeholders of important legal and regulatory issues that must be considered when a technology solution is applied to the collateral management process’.

ISDA welcomes US swap margin requirements proposal

ISDA has welcomed the US-proposed rule-making on swap margin requirements, saying the proposed rule reflects a global effort by regulators to make the margin requirements more sensitive to risk, and to align those rules across jurisdictions. ISDA says its analysis suggested the number of in-scope firms would have jumped by roughly 20-fold under the original phase-five initial margin implementation deadline, raising doubts about the capacity of these entities to comply in time.

ISDA updates floating rate options

ISDA has made available a pre-publication draft of its compounded EuroSTR Floating Rate Option on its website ahead of planned publication on 1 October 2019. The definition is to be published in a supplement to the 2006 ISDA Definitions. This will allow it to be used in new cleared and non-cleared derivatives trades. ISDA has also pre-published a draft of a supplement that aims to embed robust fallbacks into floating rate operations in the same definitions that reference euro overnight index average (EONIA).

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Sustainable finance

AFME paper outlines key factors for growth of green securitisation market in Europe

The Association for Financial Markets in Europe (AFME) has published a paper outlining the key factors needed to boost the growth of a green securitisation market in Europe. The paper notes that while demand for green securitisation bonds is still relatively low, many institutional investors have increased their commitment to investing in green assets and AFME members are also seeing an increasing number of queries around green securitisations. AFME therefore expects this market to grow considerably in the near term.

ICMA response to European Commission's consultation on EU Taxonomy report

The International Capital Market Association (ICMA), along with the Green Bond Principles Executive Committee, have responded to a call for feedback to the European Commission's consultation on the technical expert group (TEG) report on EU taxonomy. The TEG report outlines the basis for a future EU taxonomy in legislation.

Principles for developing a green securitisation market in Europe

In News Analysis: Principles for developing a green securitisation market in Europe, Mindy Hauman is PS Counsel in White & Case Capital Markets Group and a core member of their Sustainable Finance team. She is also a co-author of the G20 Sustainable Finance Study Group’s White paper on the development of a sustainable CLO market to implement the Paris Agreement.

WFE and the UN Sustainable Stock Exchanges initiative publish sustainability report

The World Federation of Exchanges (WFE), the global industry group for exchanges and central counterparties, has partnered with the United Nations (UN) Sustainable Stock Exchanges (SSE) initiative to publish a report looking at how exchanges can embed sustainability within their operations, and to establish effective internal governance and operational processes and policies to support this.

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Securitisation and structured products

EBA adds Securitisation Regulation to Interactive Single Rulebook and Q&A tools

The European Banking Authority (EBA) has published an updated version of its online Interactive Single Rulebook and Q&A tool, which now includes Regulation (EU) 2017/2402 (the Securitisation Regulation). All the EBA’s final technical standards and guidelines associated with the Securitisation Regulation can now be viewed on an article-by-article basis in the Single Rulebook, and questions can be submitted on the application of the Regulation and the EBA’s work related to it using the Q&A tool.

European guidance provides clarity on securitising acquired portfolios

The EBA has published Q&A guidance on securitising acquired portfolios. The guidance provides clarity for the obligations of securitisation originators in relation to Article 9 of Regulation (EU) 2017/2402, the Securitisation Regulation to verify the credit granting standards used to originate securitised assets.

EBA consults on STS framework for synthetic securitisation

The EBA is consulting on its proposals for a simple, transparent and standardised (STS) framework for synthetic securitisation under article 45 of the Securitisation Regulation. The EBA’s discussion paper contains extensive analysis of synthetic securitisation market developments and trends in the EU, including data on historical default and loss performance. It examines the rationale of the STS synthetic product and assesses positive and negative implications of its possible introduction, both with and without differentiated regulatory treatment. The EBA’s proposals include a list of criteria to be considered when labelling the synthetic securitisation as ‘STS'. Feedback is sought by 25 November 2019.

ISLA publishes new guide to securities lending

The International Securities Lending Association (ISLA) has published its new Regulator & policy maker guide to securities lending, produced in association with Finadium. It forms part of a series of guides developed for relevant market participants and industry stakeholders and covers, among other things, the mechanics of the market and the actors involved.

ISLA publishes paper on securities financing transactions and the LEI

ISLA has published a paper entitled ‘The LEI and Securities Financing Transaction Regulation (SFTR)’. The paper is intended to provide information on the introduction of the global legal entity identifier (LEI) for financial markets, and its relevance and application around the industry, in light of the Securities Financing Transaction Regulation (EU) 2015/2365 (SFTR) reporting requirements, which will begin to apply to market participants in 2020.

ICMA rolls out second edition of its primary markets technology mapping directory

International Capital Market Association (ICMA) has released the second edition of its primary markets technology mapping directory which assesses the features and capabilities of 28 available technology solutions that automate all or part of the process of issuing debt securities. The directory aims to inform ICMA members of available platforms and technology solutions as the competitive market grows.

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Regulation for banking lawyers

Government publishes guidance on UK sanctions and applying for a licence

The Foreign & Commonwealth Office, Home Office, Export Control Joint Unit, and Office of Financial Sanctions Implementation​ has published information on UK sanctions currently in place and how to apply for a licence. The guidance provides an overview of UK sanctions, types of sanctions and licences and useful contact information​. The types of sanctions cover trade sanctions, financial sanctions and immigration sanctions.

European Parliament briefing discusses the structure and future of AML supervision

The European Parliament has published an analysis paper on anti-money laundering (AML)—reinforcing the supervisory and regulatory framework. It presents current initiatives and actions aimed at reinforcing the AML supervisory and regulatory framework in the EU, and outlines the EU supervisory architecture. The paper also discusses ways that have been proposed to further improve the AML supervisory and regulatory frameworks.

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Execution of documents

Law Commission confirms e-signatures are valid under current law

The Law Commission has confirmed electronic signatures (e-signatures) are valid and can be used to execute documents. This also applies when there is a statutory requirement for a signature. The Commission’s view is based upon both legislation and court decisions relating to non-electronic and e-signatures.

The report also aims to provide an accessible explanation of the law governing the electronic execution of documents, including the use of e-signatures and electronic execution of deeds. It looks in particular at the issues of witnessing and delivery of deeds in this context. It recommends that an industry working group should be established, convened by government, to consider practical and technical issues associated with the electronic execution of documents.

The Commission has also suggested the government look at codifying the law on e-signatures in order to increase the accessibility of the law.

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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.