Monthly Highlights: April 2018
Welcome to this month’s highlights from the Lexis®PSL Banking & Finance team which cover the key news updates from April 2018.
AFME welcomes Bank of England update on approach to Brexit preparations for banks
The Association for Financial Markets in Europe (AFME) has issued a press release welcoming the Bank of England's update on its approach to Brexit preparations for banks, on which we reported last week.
The chief executive of AFME, Simon Lewis, said: 'We welcome this further guidance from the Bank of England, confirming that member firms can plan on the basis of the transitional period agreed last week. We also welcome the publication of the final policy on the authorisation of branches of international banks, providing further clarity for banks. It will now be important for the UK and EU regulators to put in place co-operation arrangements to support this. While this additional regulatory clarity is very helpful, the approach of the regulators in the EU27 will also be key in achieving the objective of an orderly withdrawal. We hope that over the coming weeks, much-needed further clarity can be provided on issues such as contractual continuity, access to financial markets infrastructure and data flows.'
Treasury releases PFI and PF2 data summary for 2017
The government has released the summary data from both the Private Finance Initiative (PFI) and the Private Finance 2 (PF2) projects as at 31 March 2017, which is collected every year. The information is provided by the departments and devolved administrations that procured or sponsored the projects, and is not audited by HM Treasury. The findings show that, as at 31 March 2017, there were 715 current PFI and PF2 projects, with a total capital value of £59.1bn—compared to £59.4bn as at 31 March 2016.
LMA launches a new export credit agency buyer credit facility agreement
The Loan Market Association (LMA) has launched a new recommended form of facility agreement for use in export finance buyer credit transactions supported by an export credit agency (ECA). The ECA buyer credit facility seeks to provide for a typical export credit agency supported buyer credit structure.
The ECA buyer credit facility was produced by a working party consisting of representatives from banks (including in-house lawyers) and major city law firms active in the ECA market, and certain ECAs.
Members can log into the LMA website with their username and password to access the ECA buyer credit facility and related user guide.
Debt capital markets
New Sustainability Awareness Bond created to support sustainability goals
The European Investment Bank has announced plans for a new Sustainability Awareness Bond, created to support the achievement of the UN Sustainable Development Goals by further unlocking investment in social, green and sustainable projects. The new Bond will initially focus on activities in the water sector, and then encompass activities in other areas with positive social impacts, such as health and education.
ICMA welcomes EU proposals on covered bonds
The Covered Bond Investor Council (CBIC) of International Capital Market Association (ICMA) has published a position paper in which it welcomes the European Commission’s legislative proposal on covered bonds. The CBIC says that investors ‘appreciate the blueprint this law will provide to countries that do not yet have a covered bond law’.
ICMA publishes its 2018 updates to ICMA GMRA legal opinions
ICMA has published the 2018 updates to the ICMA Global Master Repurchase Agreement (GMRA) legal opinions, which concern the effectiveness of the enforcement of the netting provisions and the validity of the GMRA in general.
ICMA’s latest quarterly report on market practice and policy
ICMA has released its assessment of market practice and regulatory policy. It assesses the current state of the Brexit negotiations between the UK and the EU27 from the perspective of the international capital markets, focusing on the transition period after Brexit, the framework for a future trade agreement and the implications for international capital market firms operating in the UK and in the EU27.
The report also looks at how the agreement between the UK and the EU27 on a transition period after Brexit gives international capital market firms more time to prepare for the outcome of the UK/EU27 negotiations on a future trade agreement, provided that the transition period goes ahead as planned.
ISDA partners with Linklaters on online initial margin documentation negotiation tool
ISDA has partnered with law firm Linklaters to develop an online tool that will allow firms to electronically negotiate initial margin (IM) documentation. The new platform is designed to help facilitate compliance with ‘regulatory IM requirements as a wider universe of buy-and sell-side firms come into scope of the rules’. The tool will allow firms to efficiently negotiate IM documentation with a large number of counterparties simultaneously, and to deliver and store the documents electronically. It will also make commercial data contained in the IM documentation more easily accessible, along with the metadata associated with the negotiation process which can be used for risk management, resource management and other applications.
FIA publishes eight sets of contractual indirect clearing terms
Mitja Siraj, Vice President of Legal Europe at FIA, discusses the recent publication by FIA of eight sets of contractual indirect clearing terms in News Analysis: FIA publishes eight sets of contractual indirect clearing terms.
Post-trade risk reduction incentivised by a clearing obligation exemption
In News Analysis: A clearing obligation exemption to incentivise post-trade risk reduction, Andy Brindle, a derivatives, securities and structured products veteran with more than 25 years of experience in the equity, credit and interest rate marketplaces, and currently a principal at Valere Capital Partners LLP as well as a P.R.I.M.E. Finance expert, discusses the recent publication of a white paper in which it is proposed that EMIR is amended to allow transactions that result from post-trade risk reduction services to be exempted from the clearing obligation.
ISDA updates Brexit FAQs
The International Swaps and Derivatives Association (ISDA) has published an updated version of its Brexit FAQs.
FCA issues statement on requirement for firms offering cryptocurrency derivatives to be authorised
The Financial Conduct Authority (FCA) has issued a statement confirming that firms conducting regulated activities in cryptocurrency derivatives must comply with all applicable rules in the FCA's Handbook and any relevant provisions in directly applicable European Union regulations. Specifically, it is likely that dealing in, arranging transactions in, advising on or providing other services that amount to regulated activities in relation to derivatives that reference either cryptocurrencies or tokens issued through an initial coin offering will require authorisation by the FCA. This includes cryptocurrency futures, contracts for differences and options.
ESMA values ETD market at €200trn
The European Securities and Markets Authority (ESMA) has drawn attention to a section in its 20 March 2018 report 'Trends, risks and vulnerabilities (TRV) No 1, 2018' which shows that the EU market for exchange-traded derivatives (ETDs) is worth approximately €200trn and has an average daily turnover of €1.3trn. The TRV report also shows high concentration both in terms of products and trading venue location - interest rate derivatives represent more than 80% (€166trn) of total EU volumes, with the UK being the largest market followed by Germany.
ISDA publishes SONIA reform FAQs and supplement to the ISDA Definitions
ISDA has published FAQs concerning the reforms to the sterling overnight index average (SONIA) interest rate benchmark. ISDA has also published a draft of supplement  to the 2006 ISDA Definitions to reflect the SONIA reforms.
The reforms, which took effect on 23 April 2018, will see the Bank of England taking over the end-to-end administration, including the calculation and publication of SONIA from the Wholesale Market Brokers' Association (WMBA). The coverage of SONIA will be broadened to include overnight unsecured transactions negotiated bilaterally, as well as those arranged via brokers, using the Bank's sterling money market data collection as the data source.
ISDA's FAQs, which may be updated from time to time, comprise information on the SONIA benchmark reforms and the derivatives industry's implementation of the relevant changes.
Regulation of derivatives and capital markets products
ISDA and AFME have issued a joint response to the European Commission's exploratory consultation on the implementation of the Basel III international prudential standards.
The Commission is encouraged to implement the final Basel III standard in a way that drives a robust banking sector, while supporting the real economy. The Commission is urged to assess proposals against the Basel Committee's overarching commitment to not significantly increase capital requirements and ensure the EU's impact analysis goes beyond the aggregate analysis undertaken by the Basel Committee. In line with this, the response urges the Commission and the EBA to consider further review of the Pillar 2 requirements and application, following the indication from regulators that Pillar 1 increases could be offset through the Pillar 2 framework. Among other things, the response urges the Commission to be clear on how it sees the adoption of national options and discretions and how these will be incorporated into CRR3.
ESMA submits first part of technical advice under the Prospectus Regulation
ESMA has published the first part of its technical advice (TA) under the Prospectus Regulation. The TA covers the areas of format and content of prospectuses, the EU Growth Prospectus, and the scrutiny and approval of prospectuses. In developing the advice, ESMA has taken into account responses to three consultation papers published on 6 July 2017.
The TA largely proposes to maintain the requirements of the existing prospectus regime. ESMA is proposing a number of changes to ease requirements for issuers, with a view to reducing the cost and administrative burden in using a prospectus, as well as proposing a number of additional disclosure requirements that are deemed necessary for investor protection.
The TA was developed in response to a mandate from the European Commission of 28 February 2017. ESMA submitted the TA to the Commission on 28 March 2018 in line with the deadline indicated in the mandate. Subject to endorsement by the Commission, the technical advice will form the basis for the delegated acts to be adopted by the Commission by 21 January 2019.
Structured Products & Securitisation
Understanding the meaning of ‘fair market value’ in the Global Master Repurchase Agreement (GMRA)
The case of LBI EHF v Raiffeisen Bank International AG  EWCA Civ 719, concerned the interpretation of ‘fair market value’ as it appears in the Global Master Repurchase Agreement (GMRA). For more information, see News Analysis: Constructing the default valuation procedures found in the GMRA (LBI EHF v Raiffeisen Bank International AG).
For analysis on the previous High Court decision, see News Analysis: Effective service of default notices under a GMRA and GMSLA (LBI EHF (in winding up) v Raiffeisen Zentralbank Österreich AG and Raiffeisen Bank International AG)
EBA consults on guidelines for interpreting the STS criteria in securitisation
The European Banking Authority (EBA) is consulting on draft guidelines which aim to provide a harmonised interpretation of the criteria for securitisations to be eligible as simple, transparent and standardised (STS). The EBA says the guidelines will play a crucial role in the new EU securitisation framework, by providing a single point of consistent interpretation of the STS criteria to originators, sponsors, investors and competent authorities throughout the EU. The consultation runs until 20 July 2018.
The guidelines have been developed according to Articles 19(2) and 23(3) of the Securitisation Regulation, which mandates the EBA, in close co-operation with ESMA and the European Insurance and Occupational Pensions Authority, to adopt guidelines and recommendations on the harmonised interpretation and application of the criteria related to STS for non-asset-backed commercial paper (ABCP) securitisations, and transaction level and programme level criteria for ABCP securitisations.
ESMA holds open hearings on consultations on securitisation repositories
ESMA held an open hearing at its premises on 13 April 2018 on ESMA's consultations on draft RTS on application for registration as a securitisation repository and on technical advice on fees for securitisation repositories. The closing date for both consultations is 23 May 2018.
The Securitisation Regulation (EU) 2017/2402 requires certain information to be reported about securitisations to securitisation repositories, which will be registered and supervised by ESMA, and allows ESMA to charge fees to securitisation repositories.
ESMA publishes securitisation consultation responses
ESMA has published responses on its consultations on securitisation.
Regulation for banking lawyers
BoE implements SONIA reforms
The Bank of England implemented reforms to the sterling overnight index average benchmark on 23 April 2018. Previously, the benchmark was based on a market for brokered deposits which has limited transaction volumes. It will now use a different methodology, which captures a broader scope of overnight unsecured deposits by including bilaterally negotiated transactions alongside brokered transactions.
HM Treasury endorses European Commission's NPL proposals
The Department for Exiting the European Union has published an explanatory memorandum submitted by HM Treasury to Parliament on 16 April 2018 regarding the European Commission's package of proposals to address non-performing loans (NPLs) in Europe. The government says that it supports the Commission's proposals, which are unlikely to affect UK firms due to the relatively low levels of NPLs in the UK.
EMMI consults on Euribor hybrid methodology
The European Money Markets Institute (EMMI) is consulting on a hybrid methodology for Euribor which leverages on market transactions whenever available, in line with regulatory requirements such as the EU Benchmarks Regulation (Regulation (EU) 2016/1011). The methodology is composed of a three-level waterfall, and provides further details on the determination of each level respectively. Feedback is sought by 15 May 2018.
A second consultation providing further details on some of these parameters is scheduled for Q3 2018. In the meantime, EMMI says it will continue to duly inform and engage all stakeholders, prior to the launching of the hybrid methodology by Q4 2019 at the latest, in accordance with the transitional period provided by the EU Benchmarks Regulation.