Welcome to this month’s highlights from the Lexis®PSL Banking & Finance team which cover the key news updates from June 2018.
European Union (Withdrawal) Bill receives Royal Assent
The European Union (Withdrawal) Bill received Royal Assent on 26 June 2018. Following over 250 hours of parliamentary debate, and over 1,400 tabled amendments, the final text of the European Union (Withdrawal) Act 2018 will reflect several changes to the version originally introduced in the House of Commons in July 2017. Now that the government’s flagship Brexit legislation has become law, the government can start using delegated powers to prepare the UK statute book for Brexit.
EBA opinion sets out preparations firms should take for no-deal Brexit
The European Banking Authority (EBA) has published an opinion on the risks of inadequate preparations by financial institutions for the possibility of a no-deal Brexit. The EBA says firms should not rely on political agreements or public policy interventions that may not be proposed and/or agreed in time. In particular, financial institutions should ensure they have the correct regulatory permissions and associated management capacity in place ahead of time, and are aware of their customer protection obligations in these circumstances.
ICMA open letter warns of the cliff-edge risks of Brexit for capital markets
The International Capital Market Association (ICMA) has written an open letter to European Commission president Jean-Claude Junker and UK prime minister Theresa May, expressing ‘real and increasingly pressing concerns’ about the cliff-edge risks of Brexit. It says these risks would fragment international debt capital markets, and damage business in the real economy and financial stability.
FIA survey looks at clearing brokers’ Brexit contingency plans
The Futures Industry Association (FIA) has released survey results that provide a high-level snapshot into clearing brokers’ Brexit contingency plans, the issues they face when structuring and executing such plans, and the policy proposals that would help address these issues. The FIA sets out a number of proposals to preserve market access and prevent fragmentation.
One year review of the standards of lending practices for businesses
In a recent speech David Pickering, chief executive of the Lending Standards Board (LSB) has reviewed the standards of lending practices a year down the line since its launch.
Pickering outlines the LSB’s dedication to making progress on tackling late payments and eradicating unfavourable payment practices, believing that this will benefit not just registered firms who are impacted by Small Medium Enterprises (SME) when they can’t repay their borrowing due to late invoice payments, but the SME’s themselves.
Pickering also highlights the achievements made regarding the LSB’s operating territory of credit cards, loans and overdrafts. He notes that it has extended its scope by launching a Standards of Lending Practice to cover asset finance products for small businesses, as well as adding commercial mortgages to the list under its territory.
Joint working party of Law Society committees publishes guidance notes on guarantees, intra-group loans and distributions
A joint working party of the Company Law Committee of the Law Society of England and Wales and the Company Law and Financial Law Committees of the City of London Law Society (the Joint Working Party) has published two guidance notes on guarantees, intra-group loans and distributions. The first note considers whether a guarantee of a parent company or fellow subsidiary’s debt (without payment of an appropriate fee) will be a distribution, while the second considers whether an intra-group loan on off-market terms will be a distribution. The Joint Working Party has emphasised that these notes do not constitute advice.
LMA highlights issues with EU Directive on credit servicers and purchasers
The Loan Market Association (LMA) has highlighted some of the potentially negative consequences for the syndicated loan market following the proposal for an EU Directive on credit servicers, credit purchasers and the recovery of collateral. The LMA has said that, while it acknowledges the potential positive intention of the proposals such as encouraging non-performing loans in secondary markets, it has concerns regarding the number of measures which could cause uncertainty in primary and secondary syndicated loan markets.
Loan Market Association’s ‘super senior/senior ICA’—a new standard?
In News Analysis: Loan Market Association’s ‘super senior/senior ICA’—a new standard?, Paul Mullen, partner in the leveraged and acquisition finance team at Hogan Lovells in London, predicts that the new form of leveraged intercreditor agreement (ICA) for a super senior revolving facility and senior term facility structure will prove a good starting point, not only for those deals adopting this type of structure, but also for the increasing number of first in/ last out deals seen in the market.
Sixth edition of IFSI stability report released
The Islamic Financial Services Board (IFSB) has published the sixth edition of its annual Islamic Financial Services Industry (IFSI) stability report, which finds that the IFSI has returned to a robust growth of 8.3%—primarily driven by the Islamic banking, Islamic capital market and takāful sectors—after two years of only marginal increases, with its total worth now surpassing the $2trn mark.
Treasury urged to clarify its position on private finance initiatives
The Public Accounts Committee has called for the Treasury to assess the value for money of private finance initiatives (PFI) and to set out a clear strategy for working with local public-sector bodies to promote more efficient managing of existing PFI deals. The committee has released a report which concludes that the Treasury needs to be much clearer about its position on PFI and its value for money to taxpayers.
Energy Efficient Mortgages pilot scheme launches
The Royal Institution of Chartered Surveyors announced the official launch of the Energy Efficient Mortgages pilot scheme during the Energy Efficient Mortgages Events in Windsor on 14 June 2018. This is part of the Energy Efficient Mortgages Initiative, which aims to deliver a standardised European framework and data collection process for energy-efficient mortgages, with favourable financing conditions for energy-efficient buildings and energy saving renovations. The pilot scheme will last two years, with lessons learnt during it fed back into the framework.
Real estate finance
Multi-billion pound government boost to social housing
The government has confirmed details of investment to support a new generation of council housing in England. This includes around 23,000 new affordable homes to be delivered through a £1.67bn government investment deal, with at least 12,500 social rent homes in high cost areas.
UK Export Finance overseas lending in 2017–18 double previous year
UK Export Finance (UKEF) has published its performance highlights for 2017–18, showing that, among other things, the export credit agency (ECA) provided £2.5bn of support for UK exports in that period, helping 191 companies sell to 75 markets around the world. UKEF also added 22 new currencies to its local currency financing offer, taking the total to 62.
Debt capital markets
ICMA addresses new Central Securities Depository Regulation
ICMA has assessed the potential market consequences of one of the provisions of the Central Securities Depository Regulation (CSDR). The report addresses the potential risks the CSDR buy-in regime will create for bond market participants—buyers and sellers and intermediaries and lenders of securities. It also looks at the incentives which will face market participants as they try to minimise these risks and the potential to incur losses beyond their control. The CSDR contains a section on ‘settlement discipline’, which includes measures to improve settlement efficiency, such as cash penalties for fails and the provision for mandatory buy-ins.
Green, social and sustainability bonds updated for 2018
ICMA published the 2018 updates of the Green Bond Principles, the Social Bond Principles and the Sustainability Bond Guidelines. They are collectively referred to as the ‘Principles’ and have become the leading framework globally for issuance of green, social and sustainability bonds.
Asset purchase programme will end in December 2018
The European Central Bank has announced that its asset purchase programme will reduce its purchases of €30bn per month to €15bn per month after September 2018, and cease at the end of December 2018, subject to future economic data.
Commission launches risk reduction proposal to enable sovereign bond-backed securities
The European Commission has proposed a regulation which will allow market-led solutions to support further integration and diversification within Europe’s financial sector, leading to a stronger and more resilient economic and monetary union by introducing the market-led development of sovereign bond-backed securities (SBBS). The proposal aims to remove regulatory obstacles to the development of SBBS.
ESMA 2018 first quarter risk dashboard sees complex products and volatility as key risks
The European Securities and Markets Authority (ESMA) has issued the latest iteration of its risk dashboard, covering risks in the EU’s securities markets for the first quarter 2018. ESMA’s overall risk assessment remains unchanged from the fourth quarter of 2017 at high levels.
IA best practice principles aim to increase transparency in bond markets
The Investment Association (IA) has published a series of best practice principles designed to improve the functioning of the bond markets during exchange and tender offers—the process whereby an issuer exchanges its existing bonds for new bond issuance or buys them back for cash. IA has identified a number of areas of concern within the processes, including a general lack of transparency as to the rationale, process and outcome of such transactions, potentially leaving investors with insufficient information to allow them to reach a sound investment decision.
FCA occasional paper examines drivers of October 2016 flash crash in an OTC market
The Financial Conduct Authority (FCA) has published an occasional paper which uses proprietary data reported to the FCA under the European Market Infrastructure Regulation (EMIR) to examine the underlying drivers of the flash crash in the spot rate for pound sterling vs US dollar (GBP/USD) in October 2016. The paper contributes to the research on flash crashes and the potential risks they pose.
ISDA proposes revised US GAAP treatment of cross-border acquisition and foreign debt issuance hedges
The International Swaps and Derivatives Association (ISDA) has published two letters to the Financial Accounting Standards Board (FASB) asking FASB to consider agenda topics relating to the treatment under US generally accepted accounting principles (US GAAP) of transactions hedging foreign currency exposure arising in connection with cross-border business acquisitions and transactions hedging the functional-currency-equivalent proceeds to be received from a forecasted foreign-currency-denominated debt issuance.
ISDA CEO on implementation of the Basel III capital rules
In a recent publication, the chief executive of ISDA, Scott O’Malia, has said that with many post-crisis reforms successfully implemented, what remains is to ensure global regulatory convergence and to ensure that the entire rule set is appropriate and reflects risk. Mr O’Malia warned that divergence on the core components of the capital rules would create significant hurdles for internationally active firms, reducing the efficiency of markets and increasing compliance costs—costs which would likely be passed on to end users.
ISDA says Common Domain Model will reduce complexity in derivatives trading
ISDA has published an initial digital representation of the Common Domain Model (CDM). The ISDA says the CDM will reduce complexity and create greater efficiency in the derivatives market. The CDM is intended to provide a standard digital representation of events and actions that occur during the life of a derivatives trade, expressed in a machine-readable format. Using this common standard will enhance consistency and facilitate interoperability across firms and platforms, irrespective of the programming language ultimately used for each technology.
Structured products and securitisation
Commission adopts changes to Solvency II delegated act to reflect STS securitisations
The European Commission has adopted a delegated regulation amending Delegated Regulation (EU) 2015/35 (the Solvency II Delegated Act) with regard to the calculation of regulatory capital requirements for securitisations and simple, transparent and standardised (STS) securitisations held by insurance and reinsurance undertakings.
ICMA stresses importance of legislation securitisation
The ICMA has united with leading European trade associations to sign a letter to the European Commission welcoming the agreed STS securitisation framework in Europe. However, the letter also says that for the STS to work, it is necessary to ensure other pieces of EU legislation are calibrated appropriately to create the right conditions and incentives to support and encourage securitisation.
Regulation of derivatives & structured products
Council of EU publishes further compromise text on third-country CCPs
The Presidency of the Council of the EU has published a further revised proposal for a consolidated compromise text on the recognition and supervision of CCPs. The revised text includes an adjustment to the conditions for recognition of systemically important CCPs.
The European Commission in June 2017 published a proposal for a regulation amending EMIR as regards the procedures and authorities involved for the authorisation of CCPs and requirements for the recognition of third-country CCPs.
ESMA updates list of third-country CCPs
ESMA has published an updated list of third-country central counterparties recognised to offer services and activities in the EU.
ECON backs central counterparties supervision by the ECB
The European Parliament’s Economic and Monetary Affairs Committee (ECON), together with the Constitutional Affairs Committee, have backed the ECB proposal to bring central counterparties (CCPs) within the scope of the ECB’s regulatory powers.
Transitional periods for CCP exposures extended to December 2018
The European Commission has adopted an implementing regulation extending the transitional periods related to own funds requirements for exposures to central counterparties (CCPs) set out in the Capital Requirements Regulation (EU) 575/2013 (CRR) and European Securities and Markets Authority Regulation (EMIR). The transitional periods under Article 497(2) of CRR and Article 89(5a) of EMIR have been extended until 15 December 2018.
ESMA publishes responses to its consultation on the EMIR clearing obligation
ESMA has published the responses received to its consultation on amendments to the EMIR clearing obligation under the Securitisation Regulation. The consultation closed on 15 June 2018.
Council of the EU confirms European Parliament’s amendments to Commission’s proposal for amendment to EMIR
The General Secretariat of the Council of the EU (the Council) has issued an information note to the Permanent Representatives Committee (COREPER) confirming the outcome of the European Parliament’s proceedings (in Strasbourg from 11 to 14 June 2018) concerning the European Commission’s proposal for a regulation amending Regulation (EU) No 648/2012 (EMIR) as regards the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk-mitigation techniques for OTC derivatives contracts not cleared by a central counterparty, the registration and supervision of trade repositories, and the requirements for trade repositories.
European Parliament adopts EMIR amendment
The European Parliament has voted to adopt the proposed Regulation amending the European Market Infrastructure Regulation (EU) 648/2012 (EMIR) as regards the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk-mitigation techniques for over-the-counter derivatives contracts not cleared by a central counterparty, the registration and supervision of trade repositories and the requirements for trade repositories.
No further extension of MiFID II temporary period for LEIs
ESMA has announced that the temporary period allowing for a smooth introduction of the use of legal identity identifiers (LEIs), originally brought-in in December 2017, will not be further extended. It will cease on 2 July 2018.
Lehman Brothers’ proposed scheme of arrangement has been sanctioned by the High Court
The Joint Administrators have announced the High Court has sanctioned the Lehman Brothers International (Europe) proposed scheme of arrangement, in which the Joint Administrators will now seek Chapter 15 recognition of the scheme in the US. This ground-breaking scheme deals with the surplus remaining in the Lehman Brothers International estate. The scheme will likely be effective on 20 June 2018 after the order of the High Court is delivered for registration to the Registrar of Companies for England and Wales.
Regulation for banking lawyers
Financial organisations publish global benchmark report
A new report assesses the issues involved with benchmark reform and makes recommendations on steps firms can take to prepare for the transition from interbank offered rates (IBORs) to alternative risk-free rates (RFRs). The report has been published by ISDA, the Association of Financial Markets in Europe, ICMA and the Securities Industry and Financial Markets Association (SIFMA) and its asset management group (SIFMA AMG).
ICE Benchmark Administration updates LIBOR Code of Conduct
ICE Benchmark Administration published issue 5 of its LIBOR Code of Conduct on 18 June 2018. Issue 5 supersedes issue 4, which was published on 17 March 2017.
Working group on sterling risk-free reference rates agrees RFR transition in sterling markets timeline
The working group on sterling risk-free reference rates (RFRWG), which was initiated by the Bank of England in 2015, has published a provisional timeline setting out milestones for the transition to risk-free reference rates (RFRs) in sterling markets. The timeline will be updated on a regular basis with amendments and additional detail to reflect ongoing progress on plans for benchmark transition.
EMMI announces cessation of two-week, two-month and nine-month Euribor
The European Money Markets Institute (EMMI) has announced that two-week, two-month and nine-month Euribor will not be published from 3 December 2018 onwards. Following EMMI’s announcement, ISDA reminded its members of the effects of the 2013 ISDA Discontinued Rates Maturities Protocol.
HSBC gets court ok for plan to ring fence £200bn arm
On 1 June 2018, HSBC became the fourth major UK bank to win judicial backing for plans to split its retail operation from its riskier investment arm under sweeping new ‘ring-fencing’ rules, leaving Santander the only big high street name still awaiting judgment.
Sir Geoffrey Vos, chancellor of the High Court in London, gave the green light for the bank to move approximately 12 million retail customers from HSBC Bank PLC to the new ring-fenced division known as HSBC UK Bank PLC. These customers represent around £120bn (US$160bn) of the banking group’s overall deposits.