Monthly Highlights: October 2018
Welcome to this month’s highlights from the Lexis®PSL Banking & Finance team which cover the key news updates from October 2018.
HM Treasury issues proposal for temporary transitional power to be exercised by UK financial regulators in the event of a no-deal Brexit
HM Treasury (HMT) has set out its proposal for a temporary transition tool to be exercised by the UK financial regulators including the Bank of England (BoE), the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) in the event of a no-deal Brexit scenario. The regulators will have the power to phase in requirements for UK regulated firms that will change under onshoring legislation. The power will be delegated to UK regulators in secondary legislation under the European Union (Withdrawal) Act and will only be used in the no-deal scenario.
AFME warns of cliff-edge risks without a transition period
The managing director for Brexit and head of recovery and resolution at the Association for Financial Markets in Europe (AFME), Oliver Moullin, has warned that, with less than six months until the UK is due to leave the EU, there remains ‘very significant uncertainty’ for Europe’s financial services industry. He said reaching a withdrawal agreement that includes a transition period should be the priority for all stakeholders involved, in order to ensure an orderly withdrawal, preserve financial stability and avoid market disruption.
Loan Market Association introduces trade recap template
The Loan Market Association (LMA) has produced a trade recap template with the aim of prompting lenders with the required details necessary to complete a trade confirmation. Ideally, the trade recap details will have been agreed upon at the time of trade. By using this trade recap, it is hoped that settlement times will continue to reduce in the secondary loan market.
LMA members can login to access the template here.
LMA outlines concerns relating to National Security and Investment White Paper
The LMA has responded to a consultation by the Department for Business, Energy & Industrial Strategy relating to the National Security and Investment White Paper. The LMA raises concerns about the express reference to trigger events for loans and related collateral on the basis that this is likely to have an unnecessarily detrimental impact on the functioning of the syndicated loan market.
LMA publishes updated version of revised replacement of screen clause
The LMA has published an updated version of its revised replacement of screen rate clause, which was published in May 2018 to facilitate further flexibility in light of the uncertainty relating to the London Interbank Offered Rate (LIBOR) and other benchmark rates. The update now takes into account the publication of the clause by the Sterling Risk Free Rate Working Group, as well as the correction of minor typographical errors.
LMA updates secondary documents to account for revocation of ERISA fiduciary rule
The LMA has updated secondary documents to take account of the revocation on 21 June 2018 of the ERISA fiduciary rule that was introduced in the US in June 2017. The Standard Terms and Conditions and each of the Participation Agreements have been amended, the additional provisions that were included in the ERISA representations given by both sellers and buyers as a result of the 2017 ERISA fiduciary rule have been removed. The documents are currently listed as pending, with a go live date of 29 October 2018.
WFE sets out sustainability principles for exchanges
The World Federation of Exchanges (WFE) has published five sustainability principles for member exchanges, aiming to make finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development, and promoting the transition towards an inclusive, and sustainable economy.
SMSG advice to ESMA on sustainable finance
The Securities and Markets Stakeholder Group (SMSG) has published advice to the European Securities and Markets Authority (ESMA) on sustainable finance. SMSG's advice focuses on ESMA's deliverables for 2018 and 2019 as listed in the European Commission's Action Plan on Green and Sustainable Finance. It focuses particularly on general advice principles and taxonomy, as well as on suitability requirements and investors duties.
Real estate finance
LMA updates real estate finance documents
The LMA has produced a mezzanine mark-up of a senior facility agreement, for use on real estate finance investment transactions which anticipate both a senior and mezzanine loan being advanced.
In addition, the LMA has also published a separate, additional, senior REF investment facility agreement template (with an accompanying PDF to show how it differs from the original LMA REF investment facility agreement). The mezzanine mark-up contained in the guide is then a mark-up of the clean senior facility agreement.
Finally, the LMA has also amended the REF financial covenants cure rider to take account of the fact that mezzanine lenders may be given the right to cure senior financial covenant breaches by way of a mezzanine loan.
Members of the LMA can access the documents here.
UK Finance and FMB issue guide to development finance for SME housebuilders
UK Finance and the Federation of Master Builders have published a guide to development finance for small-to-medium enterprise (SME) housebuilders. It offers practical advice to smaller housebuilders on how they should present their project to lenders to improve their chances of success, as well as the alternative options available if an application for finance is turned down.
Debt capital markets
GFXC launches new survey on awareness and adoption of the FX Global Code
The Global Foreign Exchange Committee (GFXC) has launched a new survey to measure awareness and adoption of the FX Global Code among market participants. The information collected will support the GFXC in promoting, maintaining, and updating the Code, and will help determine effective mechanisms for fostering adherence. The GFXC will consider the results of the survey at its next meeting, which will take place on 29–30 November 2018 in Paris.
Implications of Brexit on CCPs
Timothy G Massad (TM) and Eddy Wymeersch (EW), both P.R.I.M.E. Finance Experts, discuss the potential implications of Brexit for central counterparties (CCPs) in News Analysis: What are the potential implications of Brexit on CCPs?
Loss on derecognition of derivatives did not ‘arise from’ derivatives (Union Castle v HMRC)
The Upper Tribunal (UT) dismissed the taxpayer’s appeal in The Union Castle Mail Steamship Company Ltd v HMRC,  UKUT 0316 (TCC) concerning the application of the derivative contracts rules to a scheme involving the issue of bonus shares which carried a right to substantially all of the returns on certain derivatives, finding that whilst the accounting treatment did result in a ‘loss’ for the purposes of that regime, the loss did not ‘arise from’ the derivatives so no tax deduction was available. Although obiter given that finding, the UT also found that the First-tier Tax Tribunal (FTT) had been wrong to conclude that the transfer pricing rules could not apply.
ESMA publishes its first annual review of the EU derivatives markets
The European Securities and Markets Authority (ESMA) has published its first Annual Statistical Report on the EU derivatives markets. Based on data submitted under the European Markets and Infrastructure Regulation (EMIR), the report provides the first comprehensive market-level view and finds that, in Q4 2017, the market amounted to €660tn of gross notional outstanding transactions.
ISDA updates its Model Netting Act
The International Swaps and Derivatives Association (ISDA) has updated its Model Netting Act (the 2018 Act), a template for jurisdictions considering legislation to ensure the enforceability of close-out netting. It provides guidance and model provisions for legislators seeking greater legal certainty under local law for netting. The 2018 Act and accompanying guide expand upon previous versions, with updates to reflect the widespread adoption of bank resolution regimes, the introduction of mandatory margin requirements and the growth of Islamic finance.
ISDA publishes updates to FX and credit disclosure annexes
ISDA has published updates to the FX and credit derivatives disclosure annexes. ISDA has stated that these updates should be read in conjunction with the general disclosure statement.
ISDA paper calls for initial margin changes and role of margin as a clearing incentive to be re-calibrated
ISDA has published a paper on clearing incentives, systemic risk and margin requirements for non-cleared derivatives. ISDA says it is becoming increasingly clear that certain aspects of the current rules related to initial margin (IM) do not effectively align with their stated goals of mitigating systemic risk and promoting central clearing. Instead, they impose unnecessary costs and may impede economic and risk management activity.
ISDA issues paper on the impact of a no-deal Brexit on OTC derivatives
ISDA has issued a paper, The impact of Brexit on OTC derivatives: Other 'cliff edge' effects under EU law in a 'no deal' scenario. The paper sets out reasons why a no-deal Brexit scenario has the potential to create a disruptive cliff-edge change in the EU regulatory requirements that apply to over-the-counter (OTC) derivatives business in a way that may adversely affect EU27 or UK firms and their EU27 and UK clients and counterparties.
ISDA and KWM set out framework for smart derivatives contracts
ISDA and law firm King & Wood Mallesons (KWM) have published a white paper setting out the steps for developing smart derivatives contracts. The paper called, Smart derivatives contracts: from concept to construction sets out a framework for approaching issues to be considered such as determining which contractual terms are suitable for automation, and highlights areas where additional collaborative work is required.
ISDA and Linklaters launch beta version of new initial margin documentation tool
ISDA and law firm Linklaters have launched a test version of a new online tool that will allow firms to electronically negotiate and execute initial margin (IM) documentation. The IM module is the first step in a broader push to make ISDA documentation available online through ISDA Create, ISDA's new digital documentation platform.
Regulation of derivatives and structured products
ICMA quarterly report for Q4 2018
ICMA has published its quarterly report for Q4 2018, which assesses market practice and regulatory policy relating to international capital markets. The report includes an assessment of the impact of a cliff-edge Brexit, risk-free rates and the industry’s position at a crossroads due to technological developments.
ICMA responds to call for input over PRIIPS Regulation
ICMA has published a response to the Financial Conduct Authority’s call for input on the Packaged Retail and Insurance-based Investment Products Regulation (EU) 1286/2014 (PRIIPs Regulation).
ICMA has stated that it has been engaging in the PRIIPs Regulation debate for over a decade and provides clarity on the PRIIPs Regulation product scope, key information documents (KID) content, KID concept and provides a suggestion that one should not disrupt European Economic Area (EEA) wholesale funding markets, since they are vital to the economy.
Paper on mandatory buy-ins and securities financing transactions published
ICMA has published a discussion paper on the Central Securities Depositories Regulation (EU) 909/2014 (CSDR) mandatory buy-ins and securities financing transactions (SFTs). The paper highlights the potential challenges of applying the CSDR mandatory buy-in framework to SFTs and the potential impacts, considerations, and risks specifically in relation to in-scope SFTs.
MiFID II developments
ESMA opinions endorse BaFin and FCA position limits under MiFID II
ESMA has published three opinions endorsing position limits in commodity derivatives adopted under Article 57 of the recast Markets in Financial Instruments Directive 2014/65/EU (MiFID II) by the German Federal Financial Supervisory Authority (BaFin) with respect to the Phelix DE/AT base power futures and options commodity contract and Swiss power base futures commodity contracts and by the UK Financial Conduct Authority (FCA) with respect to UK Natural Gas commodity futures and options contracts.
Click here for the opinion on position limits on the Phelix DE/AT Base Power contract.
Click here for the opinion on position limits on UK Natural Gas contracts.
Click here for the opinion on position limits on Swiss Power Base contracts.
HM Treasury publishes draft SIs amending retained EU law related to MiFID II and trade repositories.
HMT has published two draft statutory instruments (SIs), which will make amendments to retained EU law related to markets in financial instruments and the registration and supervision of trade repositories. The government expects to lay the SIs before Parliament under the European Union (Withdrawal) Act 2018 in autumn 2018.
Click here for the draft Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018.
Click here for the draft Trade Repositories (Amendment and Transitional Provision) (EU Exit) Regulations 2018.
ESMA to publish new completeness indicators for DVC data and bond liquidity for trading venues
ESMA has announced details of two new data completeness indicators for trading venues on the delivery of double volume cap (DVC) and bond liquidity data under MiFID II. The two indicators—the completeness ratio and the completeness shortfall—will provide performance information on the timeliness and completeness of data provision by trading venues. The indicators were published for the first time on 8 October 2018 for DVC data and by 1 November 2018 for bond liquidity.
ESMA updates opinion on MiFID II ancillary activity calculations
ESMA has updated its opinion on ancillary activity calculations, providing an estimation of the market size of commodity derivatives and emission allowances for the year 2017. ESMA has prepared those estimations based on data collected from trading venues as well as data reported to trade repositories under the European Market Infrastructure Regulation (EU) 648/2012 (EMIR).
Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018
This draft enactment is laid in exercise of legislative powers under the European Communities Act 1972 and the European Union (Withdrawal) Act 2018 in preparation for Brexit. This draft enactment amends key pieces of UK domestic law and EU tertiary legislation in relation to markets in financial instruments arising from the withdrawal of the UK from the EU, to ensure that the legislation continues to operate effectively at the point at which the UK leaves the EU. It comes into force partly on exit day.
ESMA publishes responses to its consultations on the Prospectus Regulation
ESMA has published the responses it received to its consultations on draft guidelines on risk factors under the Prospectus Regulation, and on the draft technical advice on minimum information content for prospectus exemption.
ESMA final report amending RTS on the clearing obligation for intragroup transactions
ESMA has published its 'Final report on the clearing obligation under EMIR (no 6)'. The report presents a new set of draft regulatory technical standards (RTS) on the clearing obligation. The draft RTS relate to the deferred date of application for the treatment of certain intragroup transactions concluded with a third country group entity.
ECON publishes suggested amends to proposed sovereign bond-backed securities (SBBS) regulation
The European Parliament’s Committee on Economic and Monetary Affairs (ECON) has published suggested amendments to the proposal for a regulation of the European Parliament and of the Council on sovereign bond-backed securities.
ECB opinion on proposals for directive and regulation on covered bonds
The European Central Bank (ECB) has delivered its opinion on (1) the proposal for a directive of the European Parliament and of the Council of the European Union (the Council) on the issue of covered bonds and covered bond public supervision and amending Directive 2009/65/EC and Directive 2014/59/EU; and (2) the proposal for a regulation of the European Parliament and of the Council on amending Regulation (EU) No 575/2013 as regards exposures in the form of covered bonds (CON/2018/37).
ESMA statement on clearing and trading obligations ahead of 21 December 2018 deadline
ESMA has issued a statement on the challenges that certain groups, as well as certain non-financial counterparties above the clearing threshold (NFC+), would face on 21 December 2018 to start central counterparty (CCP) clearing of some of their OTC derivative contracts and trading them on trading venues.
FCA consults on Handbook changes to reflect the EU Securitisation Regulation
The FCA has published a consultation paper CP18/30: EU Securitisation Regulation Implementation (DEPP and EG). The FCA is consulting on a number of changes to ensure that its Handbook is consistent with the Regulation and related amendment to the Capital Requirements Regulation (CRR). Feedback is sought by 2 November 2018. The government has also confirmed that the FCA will be the UK’s competent authority (CA) responsible for the supervision of compliance with the Regulation.
Regulation for banking lawyers
EMMI launches second consultation on Euribor hybrid methodology
The European Money Markets Institute (EMMI) has published the second stakeholder consultation on the hybrid methodology for Euribor, as part of EMMI’s aim to deliver a reformed and robust methodology that meets regulatory and stakeholder expectations. Feedback is sought by 30 November 2018.
LSTA note discusses trigger events in the ARRC’s LIBOR fallback consultation
The Loan Syndication and Trading Association (LSTA) has published a note on trigger events and the September 2018 consultation by the Alternative Reference Rates Committee (ARRC) on proposed LIBOR fallbacks. Feedback on the ARRC consultation is sought by 8 November 2018.
ESRB publishes report on macroprudential approaches to NPLs
The European Systemic Risk Board (ESRB) has published a report by its advisory scientific committee (ASC) discussing the conceptual foundations for a macroprudential approach to non-performing loans (NPLs). The report is a contribution to the ESRB's response to the mandate it was given by the Council of the EU in July 2017 as part of the action plan to tackle NPLs in Europe. The ESRB was requested to develop macro-prudential approaches to prevent the emergence of system-wide NPL problems, while taking due consideration of procyclical effects of measures addressing NPLs' stocks and potential effects on financial stability. The ESRB plans to publish a policy report by the end of 2018.