Monthly Highlights: November 2018
Welcome to this month’s highlights from the Lexis®PSL Banking & Finance team which cover the key news updates from November 2018.
A no deal Brexit—what are the key concerns for the lending market?
The Loan Market Association (LMA) has published a paper on the consequences of a ‘no deal’ Brexit on the European loan market. News Analysis: A no deal Brexit—what are the key concerns for the lending market? summarises the key concerns highlighted by the paper.
ESMA outlines plans to recognise UK CCPs in case of no-deal Brexit
The European Securities and Markets Authority (ESMA) has published a public statement to address the risks of a no-deal Brexit scenario in the area of central clearing. ESMA says that its Board of Supervisors supports the continued access to UK central counterparties (CCPs) to limit the risk of disruption in central clearing and to avoid negatively impacting EU financial market stability.
ESMA proposes a regulatory change to support the Brexit preparations of counterparties to uncleared OTC derivatives
ESMA has published a final report with draft regulatory technical standards (RTS) proposing to amend the three Commission Delegated Regulations on the clearing obligation under the European Market Infrastructure Regulation 648/2012 (EMIR). The draft RTS propose, in the context of the UK’s withdrawal from the EU, to introduce a limited exemption in order to facilitate the novation of certain non-centrally cleared OTC derivative contracts to EU counterparties during a specific time-window. The amendments would only apply if the UK leaves the EU without the conclusion of a withdrawal agreement.
Reform of interest rate benchmarks—what is the state of play?
On 14 November 2018, the FSB issued a report on progress in reforming major interest rate benchmarks. News Analysis: Reform of interest rate benchmarks—what is the state of play? summarises the key points in the report, looking in particular at the current position in relation to LIBOR and Euribor.
Working Group on Sterling Risk-Free Reference Rates communication pack on LIBOR transition
The Working Group on Sterling Risk-Free Reference Rates (RFRWG), whose objective is to catalyse a broad-based transition from the London Interbank Offered Rate (LIBOR) to the Sterling Overnight Indexed Average (SONIA) across sterling bond, loan and derivative markets, has published a communication pack entitled ‘Preparing for 2022: What you need to know about LIBOR transition’.
The communication pack looks at the following areas:
- the problem with LIBOR
- why SONIA is the preferred alternative
- what firms should be doing
- the role of the Working Group
- transition challenges
- working group milestones, and
- what is happening internationally
The Working Group has also published a timeline for 2019 which includes:
- the development of operational capability for SONIA-referencing floating rates notes (FRNs), loans and other instruments
- term benchmark rate produced and made available to use (subject to outcome of consultation)
- GBP fall-back language agreed and beginning of implementation, and
- transition metrics demonstrating significant SONIA adoption for new business across derivatives, bonds and loans
BoE and FCA appoint new Sterling Risk Free Reference Rates Working Group chair
The Bank of England (BoE) and the Financial Conduct Authority (FCA) have appointed a new chair of the Sterling Risk Free Reference Rates Working Group. Tushar Morzaria will take over from François Jourdain, who has been chair since the Group was formed in 2015 to implement the Financial Stability Board's recommendation to develop alternative risk-free rates for use instead of Libor-style reference rates.
FSB on implementation of interest rate benchmarks reforms
The Financial Stability Board (FSB) has published a progress report on the implementation of its recommendations to reform major interest rate benchmarks. The report sets out the progress made on the development of overnight nearly risk-free rates (RFRs), and markets based on these rates, and on further reforms to interbank offered rates (IBORs).
BoE publishes minutes of SONIA stakeholder advisory group
The Bank of England (BoE) has published minutes of the SONIA stakeholder advisory group meeting on 10 October 2018. The group, made up of external stakeholders, supports the BoE's administration of the sterling overnight index average (SONIA) interest rate benchmark by providing advice and technical input to the BoE and the SONIA oversight committee. Discussion topics included the transition to reformed SONIA, market conditions, and the evolving uses of SONIA.
City of London Law Society publishes response to Law Commission consultation on electronic execution of documents
The Financial and Company Law Committees of the City of London Law Society (CLLS) have published a response to the Law Commission consultation paper on electronic execution of documents. The aim of the Commission’s consultation was to address any uncertainty surrounding the formalities around the electronic execution of documents and to ensure that the law governing said formalities is flexible and certain enough to remain competitive in a post-Brexit environment.
The scope of a creditor’s equitable duty (General Mediterranean Holding SA spf v Qucomhaps Holdings Ltd and others)
Discussing the judgment in General Mediterranean Holding, Richard Spearman QC, barrister at 39 Essex Chambers, advises that the Court of Appeal has clarified the extent of a creditor’s obligations to a surety and a debtor under English law in News Analysis: The scope of a creditor’s equitable duty (General Mediterranean Holding SA spf v Qucomhaps Holdings Ltd and others).
Sustainable Blue Economy Finance Principles launched
The European Commission, together with the World Wildlife Fund, World Resources Institute (WRI) and the European Investment Bank (EIB), have launched the Sustainable Blue Economy Finance Principles, intended to be a pioneering global framework for sustainable ocean finance and to bring sustainability into the boardrooms of all ocean-based industries, from shipping, fisheries and tourism, to aquaculture, energy and biotechnology. The principles will become part of a new sustainable blue economy finance initiative under the auspices of the UN Environment Finance Initiative (UNEP FI).
Ten-fold increase in euro-denominated net green bond issuance since 2013
The European Central Bank (ECB) has published Issue 7 of its Economic Bulletin, highlighting the rapid development of the green bond market in recent years, with global issuance rising from less than €1bn in 2008 to more than €120bn in 2017. However, while euro-denominated net green bond issuance has increased ten-fold since 2013, in the same period green bonds still accounted for only 1% of the overall bond supply denominated in euro.
Real estate finance
ESRB publishes report on vulnerabilities in the EU commercial real estate sector
The European Systemic Risk Board (ESRB) has published a report on vulnerabilities in the EU commercial real estate sector. This is the second analysis by the ESRB of the financial stability risks stemming from this sector, following the work of the Expert Group on Real Estate in 2015.
HM Land Registry updates PG64 and PG78 guidance
HM Land Registry has updated section 3 of practice guide 64—prescribed clauses leases—that referred to an expired voluntary period for including prescribed clauses in leases, resulting in the renumbering of the following sections. There have also been other minor amendments related to this change. Section 3.1 of practice guide 78—overseas companies and limited liability partnerships has been amended to add guidance on no-European cross-border mergers.
HM Land Registry updates practice guides 8, 26, 28 and 68
HM Land Registry has updated practice guidance documents on execution of deeds (PG8), leases: determination (PG26), extension of leases (PG28) and amending deeds that effect dispositions of land (PG68).
International Trade Committee launches inquiry on UK trade in services
The International Trade Committee has launched an inquiry on the UK's trade in services. The inquiry will examine the main barriers faced by UK services exporters, how the UK should seek to liberalise international trade in services, including negotiating international agreements, and potential domestic policy implications. The deadline for written submissions is 5pm on 21 January 2019.
Debt capital markets
International Capital Market Association responds to LIBOR fallback contract language consultation
The International Capital Market Association (ICMA) Legal and Documentation Committee has responded to the LIBOR fallback contract language consultation, which was published by the Alternative References Rates Committee (ARRC). ICMA's response notes that any alternative fallbacks must be ‘both commercially acceptable and sufficiently legally certain to operate as expected by the parties in the event of LIBOR discontinuation’.
ESMA publishes responses to its consultation on revised guidelines on periodic reporting by CRAs
The European Securities and Markets Authority (ESMA) has published the responses received to its consultation paper, ‘Guidelines on the submission of periodic information to ESMA by Credit Rating Agencies (CRAs)’. The consultation opened on 19 July 2018 and closed on 26 September 2018.
ISDA briefing on the need to extend the transition period of the Benchmark Regulation
The International Swaps and Derivatives Association (ISDA) has published a briefing that it has produced with three other trade associations—namely the Global Financial Markets Association (GFMA), the Futures Industry Association (FIA) and the Emerging Markets Traders Association (EMTA)—which requests EU policymakers to extend the transition period of the Benchmark Regulation for critical and non-critical benchmarks due to significant negative implications for financial stability in European and global financial markets and competitive disadvantages for European companies.
ISDA chart sets out initial and variation margin requirements for derivatives
ISDA has published a summary chart of derivatives which are subject to regulatory initial and variation margin requirements in jurisdictions which have final requirements for regulatory margin.
ISDA to use collateralised cash price as EUR swaptions default cash settlement method
ISDA has announced that, effective from 26 November 2018, it will update the 2006 ISDA definitions settlement matrix for early termination and swaptions to show collateralised cash price as the default cash settlement method for EUR swaptions from that date onwards. The move follows ISDA’s 2017 survey on changing the market convention for the cash settlement of EUR swaptions from ‘par yield curve—unadjusted’.
Market practice change for settlement of EUR swaptions
ISDA has updated its 2006 ISDA Definitions Settlement Matrix for Early Termination and Swaptions (the ISDA Settlement Matrix) to show Collateralised Cash Price as the default cash settlement method for EUR swaptions, which was effective from 26 November 2018.
ISDA research paper on Q3 2018 interest rate benchmarks review
As the financial industry is preparing to transition from LIBOR and other interbank offered rates (IBORs) to alternative risk-free rates (RFRs), ISDA has published a quarterly review of trading volumes of interest rate derivatives (IRD) referencing alternative RFRs and major IBORs. The report is entitled Interest rate benchmarks review: Third quarter of 2018 and nine months ended September 30, 2018.
Report on incentives to centrally clear derivatives finds G20 reforms broadly working
The Financial Stability Board (FSB), the Basel Committee on Banking Supervision (BCBS), the Committee on Payments and Market Infrastructures (CPMI) and IOSCO have published a final report on the effects of the G20 financial regulatory reforms on the incentives to centrally clear over-the-counter (OTC) derivatives. The report concludes that the reforms—particularly capital requirements, clearing mandates and margin requirements for non-centrally cleared derivatives—are achieving their goals of promoting central clearing, especially for the most systemic market participants. The FSB has also published its 13th progress report on implementation of the OTC derivatives market reforms and an update on trade reporting legal barriers.
Netting arrangements in qualified financial contracts made enforceable in the UAE
For decades, banks and other counterparties in the UAE have obtained financial services from foreign financial institutions. Industry bodies, such as ISDA, the International Capital Market Association and the International Securities Lending Association, have developed standard documentation for these kinds of transactions. A new statute in the UAE makes it clear for the first time that the netting and set-off provisions in such documentation are valid and enforceable under UAE law. Among other matters, this clarity should reduce the cost to UAE counterparties of obtaining these financial services.
Regulation of derivatives and structured products
MiFID II developments
Trade associations urge regulators to rethink MiFID II equivalence proposals
A group of trade associations has urged EU regulators to reconsider proposed changes to the Markets in Financial Instruments Directive 2014/65/EU (MiFID II) equivalence regime that they say would effectively remove the ability to provide certain investment services on a cross-border basis to European clients by third country firms.
ECON publishes report on crowdfunding amendments to MiFID II
ECON has published its report on the directive proposed by the European Commission in March 2018 that would amend MiFID II so that crowdfunding service providers authorised under the proposed crowdfunding regulation would be excluded from the scope of MiFID II. The report was adopted on 5 November 2018 and has been tabled for plenary.
MiFID II: ESMA makes new bond liquidity data available
ESMA has made available new data for bonds subject to the pre- and post-trade requirements of MiFID II and MiFIR through its data register. From 31 October 2018, ESMA will make available the third quarterly liquidity assessment for bonds available for trading on EU trading venues at the end of October 2018. For this period, there are currently 470 liquid bonds subject to MiFID II transparency requirements.
PRA policy statement on new EU securitisation framework and Significant Risk Transfer
The Prudential Regulation Authority (PRA) has published a Policy Statement entitled 'Securitisation: The new EU framework and Significant Risk Transfer' (PS28/18). This provides feedback to responses to PRA CP 12/18 'Securitisation: The new EU framework and Significant Risk Transfer'. It also contains the PRA's final policy, as follows: final Supervisory Statement SS10/18 'Securitisation: General requirements and capital framework' (Appendix 1); updated SS9/13 'Securitisation: Significant Risk Transfer' (Appendix 2); and updated SS31/15 'The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP)' (Appendix 3).
ESMA provides standards and guidance for securitisation repositories under the Securitisation Regulation
ESMA has published several documents which aim to implement the new European regulatory framework for securitisations (Regulation (EU) 2017/2402) (the Securitisation Regulation) and help promote simple, transparent and standardised (STS) securitisations.
Click here to access the Press release: ESMA provides standards and guidance for securitisation repositories under the Securitisation Regulation.
Click here to access the Final report: Securitisation Regulation technical standards on securitisation repository application requirements, operational standards, and access conditions.
Click here to access the Final report: ESMA’s technical advice to the Commission on fees for securitisation repositories under the Securitisation Regulation.
ECON committee adopts reports on proposed covered bonds legislation
The European Parliament's Economic and Monetary Affairs (ECON) committee has adopted its draft reports on the European Commission proposals for a Directive on covered bonds and covered bond public supervision, and a Regulation on exposures in the form of covered bonds.
Council of the EU agrees stance on EU framework for covered bonds
The Council of the European Union has issued a press release stating that EU ambassadors have taken a step forward in expanding the capital markets union and promoting access to long-term finance by reaching an agreement on the Council's stance on a harmonised EU framework for covered bonds.
ESAs consult on proposed changes to the key information document for PRIIPs
The European Supervisory Authorities (ESAs) have issued a consultation paper on targeted amendments to Commission Delegated Regulation (EU) 2017/653 of 8 March 2017 covering the rules for the key information document (KID) for packaged retail and insurance-based investment products (PRIIPs). Comments were requested by 6 December 2018.
Regulation for banking lawyers
Commission reports on risk reduction progress and calls for faster progress on CMU
The European Commission has published a press release and two fact sheets which take stock of the latest developments in risk reduction in the banking sector and progress towards an even more integrated and stable EU financial system. According to the press release, financial stability has been considerably reinforced in recent years and risk reduction in the EU banking sector is continuing at a sustained pace, where decisions on the deepening of Europe's Economic and Monetary Union should be taken. At the same time, the work on financial stability and integration needs to continue, and it is now time for the co-legislators to agree on all key outstanding files.
ECB opinion on the proposed directive on credit servicers, credit purchasers and the recovery of collateral
The European Central Bank (ECB) has issued an opinion on the Commission's March 2018 proposal for a directive on credit servicers, credit purchasers and the recovery of collateral. The proposal forms part of the EU's Capital Markets Union and the Banking Union’s focus to reduce the number of non-performing loans (NPLs).
Council publishes final compromise text on NPL regulation
The Council of the European Union has published the final Presidency compromise text on the European Commission's proposal for a regulation amending Regulation (EU) 575/2013 (the Capital Requirements Regulation) as regards minimum loss coverage for non-performing exposures. The position was adopted by the Council on 31 October 2018, enabling the Presidency to start negotiations with the European Parliament as soon as the Parliament is ready to negotiate.