Welcome to this month’s highlights from the Lexis®PSL Banking & Finance team which cover the key news updates from December 2017.
Michel Barnier—no financial services passporting if UK leaves single market
It is unavoidable that British banks and financial firms will lose EU passporting rights as a result of any decision to quit the single market, the chief EU Brexit negotiator Michel Barnier has said. Speaking to the Guardian, Mr Barnier said there is not a single trade agreement with the EU that covers financial services.
BoE consults on its approach to the authorisation and supervision of international banks, insurers and central counterparties
As discussions on the UK’s future relationship with the EU continue, the Bank of England (BoE) has published consultations on an updated approach to authorising and supervising international banks (CP29/17) and insurers (CP31/17), and it is issuing guidance on its approach to international central counterparties (CCPs). The BoE has also published letters to relevant firms which set out the BoE’s approach to the authorisation of those firms, so that this process can proceed in an orderly manner.
LMA updates secondary debt trading documents to take account of the discontinuance of LIBOR
The LMA has updated the following documents from its secondary debt trading suite: (i) Terms and Conditions, (ii) Trade Confirmations, and (iii) Users Guide.
The Terms and Conditions have been amended to include an additional fallback to the Relevant Benchmark Rate (RBR) in the event of its discontinuance. If a RBR for any currency is not available and it is not possible to calculate the interpolated rate, the RBR for that currency will be as specified in the Agreed Terms or if no rate is specified, the rate specified by the Seller (acting reasonably). The Trade Confirmations and Users Guide have been amended to reflect this change to the Terms and Conditions.
The documents went live on 22 December 2017. Members can login into the LMA website with their username and password to access the revised documents.
LMA publishes a new developing markets revolving facility agreement with a letter of credit option
The LMA has published a single currency unsecured revolving facility agreement (incorporating a letter of credit facility) for use in developing market jurisdictions. The document is based on the developing markets revolving facility agreement, but incorporates letter of credit provisions from the LMA’s leveraged document. The LMA has also revised its developing markets users guide to include reference to the new facility agreement.
Members can login into the LMA website with their username and password to access the documents.
LMA updates developing markets facility agreements and users guide
The LMA has updated its developing markets facility documentation and users guide. The key amendments incorporate provisions relating to optional fixed interest rate language and basic sanctions definitions. The anti-bribery and anti-corruption provisions have also been expanded (with further guidance on both the sanctions definitions and the anti-bribery/anti-corruption provisions being set out in the user guide). In addition, amendments have been made to reflect updates to the LMA’s leveraged and investment grade documentation made earlier this year.
The LMA has also conducted a detailed proof reading exercise of the facility agreements and amended the documents as appropriate. Any changes applicable to the wider suite will be replicated across in due course.
LMA updates private placement facility documentation
The LMA has updated its pan-European private placement facility agreement, subscription agreement, users’ guide, confidentiality letter and term sheet. The updated documents include minor amendments to bring the documents in line with the rest of the suite.
Members can login into the LMA website with their username and password to access the revised documents.
Permitted assignees and early termination payments (Grant and others as Joint Administrators of Olympia Securities Commercial Plc (in administration)) v WDW 3 Investments Ltd and another
The case of Grant and others as Joint Administrators of Olympia Securities Commercial Plc (in administration)) v WDW 3 Investments Ltd and another  EWHC 2807 (Ch)) considers the possibility that a purported assignee of a loan and associated swap and security interests could not rely upon the assignment or the security because of certain alleged defects in the way in which the documents were drafted and the timing of notices given under those documents. For more information, see News Analysis: Permitted assignees and early termination payments (Grant and others as Joint Administrators of Olympia Securities Commercial Plc (in administration)) v WDW 3 Investments Ltd and another  EWHC 2807 (Ch)).
Golden Belt 1 Sukuk Company BSC(C) v BNP Paribas; FCOF II UB Securities LLC and others v BNP Paribas  EWHC 3182 (Comm)
The Financial List held that the defendant bank, BNP Paribas, (BNPP), as the arranger of an Islamic financing transaction known as a ‘Sukuk’, had owed a duty to the claimant in the second action (together, the Funds), but not to the claimants in the first action, to take reasonable care to ensure that a promissory note issued in respect of the Sukuk had been properly executed. The Funds were the holders of the Sukuk certificates in question. The court held that BNPP had breached the duty owed to the Funds and was liable to them in damages to be assessed at a further hearing.
New CfD consultation aims to ‘boost remote island wind projects’
The Department for Business, Energy and Industrial Strategy (BEIS) has launched a consultation on proposed amendments to the Contracts for Difference (CfD) scheme. Among other things, the BEIS consultation aims to ensure the CfD scheme supports new generation and provides the best value to the public. The consultation sets out a proposed definition of remote islands wind, as a new technology that can compete in future auctions for ‘less established’ technologies. The consultation also offers proposals to facilitate more accurate forecasting of budget spend. The consultation closes on 9 March 2018.
Reference guide published on green finance initiatives
The Global Green Finance Council’s reference guide to global and regional policy initiatives on green finance has been published, the Association for Financial Markets in Europe has announced. This finance policy directory was made as a reference guide to the major initiatives on green finance, sustainability and climate change being implemented by international and regional bodies and industry organisations.
Government unveils new paper to ‘transform’ infrastructure
The government has released a policy paper on transforming infrastructure performance, as it plans to ‘increase the effectiveness of investment in infrastructure by improving productivity’. The report offers a long-term approach over ten years, ‘building on existing best practice and tackling the systemic issues that are still limiting the performance of UK infrastructure’. It also includes a number of ways in which the government plans to address core issues, including prioritising investment in the ‘right’ projects and improving productivity through delivery.
Equator Principles adopted by Taipei Fubon Commercial Bank
Taipei Fubon Commercial Bank (TFB) has adopted the Equator Principles, the benchmark for the financial industry to manage environmental, social and corporate governance risks. TFB is a commercial bank offering its customers a wide range of products and services including deposits, loans, trust, investments, and consulting services. TFB is a wholly owned subsidiary of Fubon FHC, the second largest financial holding company in Taiwan.
Real estate finance
Tiuta International Ltd (in liquidation) v De Villiers Surveyors Ltd  UKSC 77
The Supreme Court reversed the Court of Appeal decision and held that a negligent valuation of a development prepared in connection with a second loan made to pay off an earlier advance by the same lender did not cause the loss to that lender. The fact that the advance under the second loan was used to pay off indebtedness under the earlier loan did not require the Court to ignore the fact that Tiuta would have lost the sums which had been outstanding under the first loan in any event.
For more information, see News Analysis: Negligent valuer and lender in re-financing situations (Tiuta International Ltd v De Villiers Surveyors).
Debt capital markets
AFME report on the impact of banking reforms on EU capital markets and the real economy
The Association for Financial Markets in Europe (AFME) has published a report, ‘The links between the risk reduction package and the development of Europe’s capital markets’, which highlights the significant impact that key elements of the Commission’s risk reduction measures (RRM) legislative package can have on Europe’s capital markets and the real economy.
Bitcoin trading on major exchange deemed a ‘success’
The cryptocurrency Bitcoin has started trading on a major exchange for the first time. The digital currency has been launched on the CBOE futures exchange in Chicago, which could signify a move towards legitimising the currency. Lawyers from Forsters say the launch has so far been a success and could be a stepping stone towards mainstream adoption of cryptocurrency.
International standard-setting bodies launch surveys on incentives to centrally clear OTC derivatives trades
The Financial Stability Board (FSB), the Basel Committee on Banking Supervision (BCBS), the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) have launched surveys as part of their joint work to review the effects on incentives to centrally clear over-the-counter (OTC) derivatives trades following the implementation of the G20 regulatory reforms. Financial and non-financial firms that are participants in derivatives markets are encouraged to complete the surveys.
The work will be undertaken by the FSB-BCBS-CPMI-IOSCO Derivatives Assessment Team (DAT) and the BCBS. The DAT study is being carried out under the FSB’s framework for post-implementation evaluation of effects of the G20 financial regulatory reforms. The study began in July 2017 and the final report is expected to be completed in late 2018.
FIA and SIFMA
FIA and the Securities Industry and Financial Markets Association (SIFMA) have released a white paper setting out recommendations for improving US access to international swap markets. They propose a revised approach that is clear and predictable, consistent with the Dodd-Frank Act, and founded on the long-standing approach taken by the Commodity Futures Trading Commission (CFTC) to regulating US access to non-US futures markets.
ECB seeks feedback on assessment of internal models used for calculating counterparty credit risk
The European Central Bank (ECB) has published a draft guide on the assessment methodology for the internal model method (IMM) and advanced credit valuation adjustment (CVA) capital charge (A-CVA) for counterparty (CCP) credit risk. The guide explains how supervisors assess compliance of internal models for CCP credit risk and CVA risk with legal requirements. Feedback is sought by 31 March 2018 and will be taken into account in the further development of the guide.
ISDA letter confirms terms of Credit Derivatives Transactions
The International Swaps and Derivatives Association (ISDA) has released an updated letter confirming the terms and conditions of credit derivative transactions entered into by the two parties on the trade date referencing the Credit Derivatives Physical Settlement Matrix (version 24—December 8, 2017). This confirmation constitutes a ‘confirmation’ as referred to in the ISDA Master Agreement.
CFTC extends swap data reporting relief
The Commodity Futures Trading Commission (CFTC) has issued a no-action letter extending swap data reporting relief for EU, Australian, Canadian, Japanese and Swiss swap dealers (SDs) and major swap participants (MSPs) which do not have an ultimate US parent. The relief has been extended to 1 December 2020, or if earlier, 30 days following the issuance of a comparability determination by the CFTC with respect to the SDR Reporting Rules for the jurisdiction in which the non-US SD or non-US MSP is established.
Regulation of derivatives and capital markets products
Capital Markets Union
The European Commission has adopted proposals for a regulation and a Directive to amend the current EU prudential rules for investment firms. The aim of the review is to introduce more proportionate and risk-sensitive rules for investment firms. Under the proposals, the vast majority of investment firms in the EU would no longer be subject to rules that were originally designed for banks. At the same time, the largest and most systemic investment firms would be subject to the same regime as European banks.
The two acts would amend the existing prudential framework for investment firms set out in the capital requirements directive and regulation (CRD IV/CRR) and in the markets in financial instruments directive and regulation (MiFID2/MiFIR).
CCP Recovery and Resolution Regulation
The Presidency of the Council of the EU has published a compromise text on the European Commission’s proposal for a regulation on a framework for the recovery and resolution of central counterparties (CCP Recovery and Resolution Regulation), suggesting a number of amendments to the Commission’s proposal.
ESMA has opened a consultation on draft regulatory technical standards (RTS) under the new Prospectus Regulation (Regulation (EU) 2017/1129). Feedback is sought by 9 March 2018.
The new Prospectus Regulation requires ESMA to submit, by 21 July 2018, draft RTS on:
- key financial information for the prospectus summary
- data for classification of prospectuses and the practical arrangements to ensure that such data is machine readable
- provisions concerning advertisements, and
- situations where a significant new factor, material mistake or material inaccuracy relating to the information included in the prospectus require a supplement to the European Commission
ESMA is also allowed to submit draft RTS further specifying the requirements relating to the publication of the prospectus.
ESMA updates its Q&As on post-trading issues
ESMA has updated its Q&As on post-trading issues regarding the implementation of the Markets in Financial Instruments Directive (MiFID II) and Regulation (MiFIR).
The updated Q&A includes a new answer in relation to the segregation level for indirect clearing accounts which relates to Article 4(2)(b) of Commission Delegated Regulation (EU) 2017/2154 which supplements MiFIR with regulatory technical standards on indirect clearing arrangements.
Interim arrangements for MiFID II/MiFIR registers
From 3 January 2018, the date on which the majority of the provisions of MiFID II and MiFIR take effect, the European Securities and Markets Authority (ESMA) will be required to update existing registers maintained under MiFID I and maintain new registers required by MiFID II/MiFIR. ESMA is currently working on a new IT release for these registers for Q1 2018. Until the release is fully available, ESMA will publish, fortnightly, the latest information from the registers in an excel format which will be available for download.
Council endorses rules on MiFIR derivatives trading and BRRD valuations
The General Secretariat of the Council of the European Union has recommended that the Council confirm that it has no objection to the European Commission’s delegated regulation specifying the derivatives that will be subject to the trading obligation under the Markets in Financial Instruments Regulation (MiFIR). The General Secretariat has also endorsed two delegated regulations specifying valuation methodologies under the Bank Recovery and Resolution Directive (BRRD).
The first delegated regulation was adopted by the Commission on 17 November 2017 and supplements MiFIR (Regulation (EU) 600/2014) with regard to regulatory technical standards (RTS) on the trading obligation for certain derivatives.
The other two delegated regulations (here and here) were adopted by the Commission on 14 November 2017 and supplement the BRRD (Directive 2014/59/EU) with regard to RTS specifying the criteria relating to the methodologies for valuation of difference in treatment in resolution and assessing the value of assets and liabilities of institutions or entities.
In separate ‘I/A’ Item Notes to the Permanent Representatives Committee of the Council (Coreper) dated 30 November 2017, the General Secretariat suggests that Coreper invites the Council to confirm that it has no intention to object to the delegated regulations.
Once the Council has formally confirmed that it will not object to the delegated regulations, unless the European Parliament objects, the delegated regulations will be published in the Official Journal and enter into force.
Packaged Retail and Insurance-based Investment Products Regulation 2017
Specified articles of the Regulation on Key Information Documents (KIDs) for Packaged Retail and Insurance-based Investment Products (PRIIPs Regulation) are implemented in part. These changes became effective from 1 January 2018.
The PRIIPs Regulation is a directly applicable EU regulation. These Regulations designate the Financial Conduct Authority (FCA) as the competent authority for the purposes of the PRIIPs Regulation. They give the FCA enforcement powers including:
- making orders prohibiting a person from marketing a PRIIP
- making orders requiring a person to suspend the marketing of a PRIIP
- issuing a statement about a contravention of the PRIIPs Regulation, and
imposing penalties in connection with a contravention of the PRIIPs Regulation
Risk Transformation Regulations 2017
A new regulatory and supervisory framework for Insurance Linked Securities (ILS) was implemented in the UK from 8 December 2017. The framework is designed to attract ILS business to the UK. The Risk Transformation Regulations 2017 create a new form of regulated activity under the Financial Services and Markets Act 2000 for ILS. They also enable the creation of a new form of body corporate called a ‘protected cell company’ to act as a special purpose vehicle in ILS transactions.
Structured products and securitisation
Council of the EU and the European Parliament adopt text on a framework for securitisation
The Council of the European Union and the European Parliament have adopted the text of a Regulation laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation, and amending the UCITS IV Directive 2009/65/EC, the Solvency II Directive 2009/138/EC and the Alterative Investment Fund Managers Directive 2011/61/EU (AIFMD) and the Credit Ratings Agency Regulation (EC) 1060/2009 and the European Markets Infrastructure Regulation (EU) 648/2012 (EMIR). It aims to strengthen the legislative framework implemented after the financial crisis to address the risks inherent in highly complex, opaque and risky securitisation. It is essential to ensure that rules are adopted to better differentiate simple, transparent and standardised products from complex, opaque and risky instruments and to apply a more risk-sensitive prudential framework.
Regulation for banking lawyers
CHAPS no longer Banking Act payment system
Pursuant to powers granted under the Banking Act 2009 the government has issued a derecognition order in respect of CHAPS. This order will revoke the specification of CHAPS as a recognised payment system for the purposes of the Banking Act 2009. The revocation of CHAPS came into force on 20 December 2017.
FCA issues application forms and near-final rules on Benchmarks Regulation
The FCA has published a policy statement (PS17/28) with near-final draft rules to reflect the application of the EU Benchmarks Regulation (EU) 2016/1011 and feedback to its June 2017 consultation paper (CP17/17). The FCA has also published the final drafts of the application forms for authorisation, registration, recognition and endorsement.
Council of the EU publishes text of new rules on who bears banks’ losses
The Council of the EU has published the text of a Directive amending the Bank Recovery and Resolution Directive (Directive 2014/59/EU) as regards the ranking of unsecured debt instruments in insolvency hierarchy, ahead of formal adoption by the Council.
Exchanges agree to protect customers and maintain orderly markets regarding Bitcoin
The Chicago Mercantile Exchange Inc (CME), the CBOE Futures Exchange (CFE) and the Cantor Exchange (Cantor) have agreed with the US Commodity Futures Trading Commission (CFTC) to significant enhancements to its proposed self-certified new contracts for bitcoin futures products and bitcoin binary options to protect customers and maintain orderly markets.
Dates for your diary
1 January 2018: The Benchmarks Regulation applies from this date.
3 January 2018: MiFID II and MiFIR apply in practice.
3 January 2018: The House of Commons Environmental Audit Committee has launched a new inquiry into green finance. The inquiry will look closely at the government’s strategy to develop ‘world-leading green finance capabilities’, including measures set out in the clean growth strategy.
Responses to questions posed by the Committee must have been submitted by 3 January 2018.