Welcome to this month’s highlights from the Lexis®PSL Banking & Finance team which cover the key news updates from January 2018.
BoE evidence to House of Lords EU Financial Affairs sub-committee inquiry into financial regulation and supervision following Brexit
The House of Lords EU Financial Affairs Sub-Committee has published the transcript of oral evidence given by Bank of England (BoE) officials at an evidence session on 1 November 2017 held as part of its inquiry into financial regulation and supervision following Brexit.
FIA announces three Brexit working groups
The Futures Industry Association (FIA) has launched three new Brexit working groups, via which FIA members can provide their direct input into the FIA’s Brexit work. The FIA aims to hold the first working group call for each group in early February 2018, and will circulate agendas in due course. Each working group will be chaired by the FIA’s head of Europe, Simon Puleston Jones, and will operate under the direction of the FIA board’s Brexit working group.
Brexit: AFME paper on key cliff-edge risks in wholesale financial services
The Association for Financial Markets in Europe (AFME) has published a paper highlighting potential cliff-edge risks that Brexit could create for market efficiency and financial stability in wholesale financial services. The paper focuses on issues which may require intervention from policymakers and regulators in the UK and EU27.
Replacing LIBOR—current position and implications for loan agreements
In News Analysis: Replacing LIBOR: current position and implications for loan agreements, we summarise the current work being carried out by a variety of bodies related to the possible replacement of the London Interbank Offered Rate (LIBOR) as a benchmark rate in finance documents across a range of markets and outlines some implications for loan agreements.
LMA revises secondary debt trading terms and conditions to account for discontinuance of LIBOR
The Loan Market Association (LMA) has released a series of documents from its secondary debt trading suite, including terms & conditions, trade confirmations, and a users’ guide to account for the discontinuance of LIBOR. The documents went live on 22 December 2017.
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 an 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.
Members can log into the LMA website with their username and password to access the documents.
Beneficial ownership of money held in a joint bank account (Whitlock v Moree)
The case of Whitlock and another v Moree (Bahamas)  UKPC 44 considers the entitlement of a surviving joint bank account holder to the beneficial interest in the monies represented by that account where the deceased joint account holder provided all the funds for the account. For information, see News Analysis: Beneficial ownership of money held on a joint bank account (Whitlock v Moree).
IFSB working paper looks at recovery and resolution framework for Islamic finance
The Islamic Financial Services Board (IFSB) has published a working paper on recovery, resolution and insolvency issues for institutions offering Islamic financial services (IIFS). The paper sets out legal, structural and operational issues, and aims to make policymakers, regulators, deposit insurance providers and individual institutions aware of the challenges. The IFSB says the paper shows the need to harmonise Shari’ah law principles of recovery and resolution plans as well as bankruptcy and insolvency frameworks that are currently embodied in existing legal systems.
Real estate finance
UK public register of overseas entity beneficial ownership
The government has confirmed in a written ministerial statement its intention to introduce a draft Bill before the summer recess in 2018 to establish a public register of beneficial ownership for foreign companies owning property in the UK. Formal introduction of the Bill is planned for summer 2019, with the register expected to become operational by early 2021. This follows an announcement made in the House of Lords during the debate on the Sanctions and Anti-Money Laundering Bill on 17 January.
Debt Capital Markets
Commission seeks views on developing sovereign bond-backed securities market
The European Commission has launched an inception impact assessment to explore the regulatory hindrances faced by sovereign bond-backed securities (SBBS) under the status quo. It will also look at the benefits of developing an SBBS market in terms of diversification of banks’ balance sheets, de-risking, and expansion of the supply of euro-denominated low-risk assets. The Commission has suggested SBBS on several occasions as a possible measure to advance the completion of the banking union and the deepening of economic and monetary union. Feedback is sought by 20 February 2018.
IOSCO board communication highlights concerns relating to initial coin offerings
In its meeting on 18–19 October 2017 the board of the International Organization of Securities Commissions (IOSCO) discussed the growing usage of initial coin offerings (ICOs) to raise capital as an area of concern. Following this meeting, IOSCO issued a statement to its members regarding the risks of ICOs and referenced various approaches to ICOs taken by members and other regulatory bodies.
AFME updates its due diligence questionnaire to include global custodians
The AFME has published a revised version of its due diligence questionnaire (DDQ) which harmonises and simplifies the process of completing questionnaires for global custodians. The revised DDQ now incorporates approximately 20 additional questions, and aims to further standardise the process by allowing firms to use the AFME DDQ without sending a sizeable addendum of additional questions. An additional section has also been added for when the recipient is providing global custody services, following requests from AFME members.
ICMA publishes its quarterly report
The International Capital Market Association (ICMA) has published its Quarterly Report for Q1 2018. The issue contains a review of 2017 and the outlook for 2018 by ICMA’s chief executive, Martin Scheck, and feature articles on the transition from LIBOR, improving European corporate bond markets, and the implementation of the recast Markets in Financial Instruments Directive (MiFID II) and the Markets in Financial Instruments Regulation (MiFIR).
RBS beats UK misselling case over ‘toxic’ swaps deal (London Executive Aviation v Royal Bank of Scotland)
In London Executive Aviation Ltd v Royal Bank of Scotland plc  EWHC 74 (Ch), a High Court judge freed the Royal Bank of Scotland PLC from an interest rate swaps case brought by a private jet charter company, rejecting claims that bank employees behaved dishonestly or misled the firm during negotiations that led to a ‘toxic’ derivatives contract.
ISDA publishes Brexit FAQs
The International Swaps and Derivatives Association (ISDA) has published a set of FAQs addressing the possible UK position post-Brexit, ie after conclusion of the exit process under Article 50 of the Lisbon Treaty. ISDA notes that there is still considerable uncertainty as to the format of the UK’s relationship with the EU after conclusion of the exit negotiations, so that the responses to the FAQs involve an assessment of the various outcomes of the exit negotiations and the consequences of those outcomes, so it is not possible in all cases to give a definitive answer.
ISDA’s plans for derivatives post-Brexit
ISDA has confirmed plans to draft new documentation for derivatives transactions that will conform with French and Irish law and allow disputes to take place in an EU court post-Brexit.
The ISDA blog, derivatiViews, stressed that an English court judgment can still be recognised and enforced by an EU court after Brexit, and European counterparties will still be able to continue using English law master agreements. But such arrangements may potentially lead to ‘more expense, more uncertainty and more red tape.’
Structured products and securitisation
2017 European repo market year-end ‘less disorderly’ than 2016
ICMA has published a report which has found that year-end effects on repo rates and on liquidity, particularly affecting the ability of the pension and insurance funds to manage their cash and collateral requirements over the year-end period, were less severe in 2017 than in 2016. ICMA notes that ‘2017 year-end effects are a reminder that the European repo and collateral markets are innately dependent on bank intermediation to function effectively, and that regulatory pressures on banks’ balance sheets directly impact repo market liquidity’.
Regulation of derivatives and capital markets products
Capital Requirements Regulation
The European Commission has adopted a Delegated Regulation (C(2018) 256 final) supplementing the Capital Requirements Regulation 575/2013 (CRR) with regard to regulatory technical standards (RTS) on the procedures for excluding transactions with non-financial counterparties (NFC) established in a third country from the own funds requirement for credit valuation adjustment (CVA) risk.
The European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) are to hold a joint public hearing on the new EU Securitisation Regulation (EU) 2017/2402. The hearing will cover the two consultation papers recently published by ESMA and EBA on draft regulatory technical standards (RTS) under the Securitisation Regulation. The hearing will be held on 19 February 2018 at the EBA’s premises, beginning at 10:00 am.
ESMA releases data on third country CCPs
ESMA has released data on third country central counterparties (CCPs) which offer services and activities in the EU in accordance with Regulation (EU) 648/2012 of the European Parliament and of the Council of 4 July 2012 on over the counter derivatives, central counterparties and trade repositories (EMIR).
The report includes various tables including:
- a list of CCPs established in a third country that have been recognised to offer services and activities in the European Union
- classes of financial instruments covered by the CCP’s recognition, and
- the definition of the classes of financial instruments
ESMA updates register for clearing obligation under EMIR
ESMA has published an update to its public register for informing market participants on the clearing obligation. The update is dated 19 January 2018.
ESMA proposes guidelines on EMIR anti-procyclicality margin provisions for CCPs
ESMA has launched a consultation on draft guidelines that aim to clarify the implementation of anti-procyclicality provisions for central counterparties (CCPs) under the European Markets Infrastructure Regulation (EU) 648/2012 (EMIR). ESMA is seeking stakeholders’ feedback by 28 February 2018 and aims to finalise the guidelines by the first half of 2018.
ESMA updates transitional transparency calculations
ESMA has published an extended version of its MiFID II/MiFIR transitional transparency calculations (TTCs) for equity and bond instruments, adding further instruments. The TTCs for these additional instruments are displayed alongside the already published TTCs that were published on 22 December 2017, which remain unchanged.
ESMA publishes overview of position management controls under MiFID II
ESMA has published an overview of the position management controls that have been implemented by trading venues with respect to commodity derivatives and reported to competent authorities pursuant to Article 57 of MiFID II.
ESMA lists derivatives to be traded on-venue under MiFIR
ESMA has published a public register of those derivative contracts that are subject to the trading obligation under MiFIR. The register clarifies the classes of derivatives subject to the trading obligation, the trading venues on which those derivatives can be traded, and the dates on which the obligation takes effect per category of counterparties.
ESMA lists trading venues temporarily exempt from the open access provisions
ESMA has published a list of trading venues for which a temporary exemption from the open access provisions under Article 36(5) of MiFIR exists.
AFME CEO says MiFID II strengthens investor protection
AFME has commented on the coming into force of MiFID II and MiFIR as of 3 January 2018. AFME’s chief executive, Simon Lewis, said it was ‘one of the most impactful and wide-reaching’ pieces of financial regulation to affect the industry to date, and would fundamentally affect the way investment firms trade and interact with their clients, as well as how the European securities market ecosystem works.
FCA and BaFin allow MiFIR transitional period applications
The Financial Conduct Authority (FCA) has announced that, with effect from 3 January 2018, ICE Futures Europe and the London Metal Exchange (LME) will not be required to consider open access requests made under Articles 35 or 36 of MiFIR, insofar as they relate to exchange-traded derivatives, until the expiry of the transitional period on 3 July 2020. The German regulator BaFIN has also approved an application from Eurex Clearing for a transitional period until 3 July 2020 to comply with MiFIR requirements that a trading venue has the right to non-discriminatory access to a CCP if certain conditions are met.
The FCA has adopted the Enforcement (Packaged Retail and Insurance-based Investment Products Regulations 2017) Instrument 2018 (FCA 2018/1), which amends the Decision Procedure and Penalties manual (DEPP) and the Enforcement Guide (EG) to set out the FCA’s enforcement approach to breaches of Regulation (EU) 1286/2014 (the PRIIPs Regulation). The instrument was consulted on in the FCA’s quarterly consultation paper of September 2017 (CP17/32) and came into force on 4 January 2018.
Carillion’s insolvency—how to protect yourself
Following the liquidation of Carillion earlier this week, Ray O’Connor, Devinder Singh, Russ Hill, Graeme Bradley and Roy Grist of Squire Patton Boggs LLP look at the practical issues for subcontractors, employers/developers and funders in News Analysis: Carillion’s insolvency—how to protect yourself.
Regulation for banking lawyers
Commission sets out progress and plans on NPLs
The European Commission has published its first progress report on the reduction of non-performing loans (NPLs) in Europe. The report notes that the EU banking sector is ‘in a much better shape than in previous years’ and that high stocks of NPLs in certain banks and Member States are being reduced, but says NPLs continue to pose risks to economic growth and financial stability.
ECB issues results of latest bank lending survey
The European Central Bank (ECB) has published the results of the January 2018 euro area bank lending survey. The figures show Euro area banks continued to adjust to regulatory and supervisory actions in the second half of 2017 by further strengthening their capital positions. At the euro area level, banks reported a broadly neutral impact on credit standards from regulatory and supervisory actions across all loan categories, with the exception of consumer credit and other lending to households, where they had a slightly tightening effect. Supervisory actions narrowed credit margins in loans to firms, had a broadly neutral impact on housing loans, and widened margins in consumer credit.
Minutes of the BoE working group on sterling risk-free reference rates—December 2017
The BoE has published minutes of the meeting of its working group on sterling risk-free reference rates, which took place on 12 December 2017. The minutes summarise the development of sterling risk-free interest rates and the next phase of sterling LIBOR transition, including broadening the participation in the working group.