Welcome to this month’s highlights from the Lexis®PSL Banking & Finance team which cover the key news updates from March 2018.
Bank of England and FCA updates on the regulatory approach to preparations for Brexit
The Bank of England (BoE) and the Financial Conduct Authority (FCA) have each separately provided updates on their respective approaches to preparations for EU withdrawal. Both the BoE and the FCA welcome the agreement between the UK and EU27 that there should be an implementation period until the end of 2020 as part of the UK’s withdrawal agreement with the EU.
FCA launches survey for EEA inbound passported firms in advance of Brexit
The FCA has issued a survey following the government’s announcement in December 2017 that, if necessary, it will legislate to provide a temporary permission scheme for European Economic Area (EEA) firms and funds passporting into the UK prior to the UK exiting the EU. The FCA is asking firms which passport into the UK (either via a branch or on a cross-border services basis) or market funds in the UK to complete the short online survey by 11 May 2018.
LMA publishes Green Loan Principles to provide consistent green loan methodology
The Loan Market Association (LMA) has, together with the Asia Pacific Loan Market Association (APLMA), has launched the Green Loan Principles (GLP) with the support of the International Capital Market Association (ICMA). The GLP aim to create a high-level framework of market standards and guidelines, providing a consistent methodology for use across the wholesale green loan market, whilst allowing the loan product to retain its flexibility, and preserving the integrity of the green loan market while it develops. The GLP build on and refer to the Green Bond Principles (GBP) of the ICMA, with a view to promoting consistency across financial markets.
LMA updates confidentiality and front running letter for primary syndication
The Loan Market Association (LMA) has released an updated confidentiality and front running letter for primary syndication. The updated version includes two new disclosure permissions and makes formatting clarifications.
The key changes include:
- two new disclosure permissions to help facilitate a potential lender’s ability to manage its loan participation ahead of it entering into the facility documentation—these are based on:
- where permitted under the front running restrictions, disclosure to providers of credit protection (such as credit default swaps or credit risk insurance) subject to that provider entering into a new dedicated LMA form of confidentiality agreement (based on the LMA secondary trading confidentiality agreement). This permission is also being added to the Confidentiality Agreement for Pan-European Private Placement Transactions
- following finalisation of allocations and the front running restrictions ceasing to apply, disclosure to a potential secondary trading counterparty, subject to that counterparty entering into an LMA secondary trading confidentiality agreement
- formatting clarifications and adding a footnote to the definition of ‘front running’
As well as these changes, the LMA has also released:
- a new form of confidentiality agreement for use by potential lenders making disclosures to providers of credit protection, and
- a new user guide to the LMA suite of confidentiality undertakings
Members can log into the LMA website with their username and password to access the letter.
LMA and ACT produce joint guide on ‘The future of LIBOR: what you need to know’
The LMA and the Association of Corporate Treasurers (ACT) have produced a joint guide on LIBOR benchmark reform entitled ‘The future of LIBOR: What you need to know’.
The guide is intended to provide an overview of developments and key issues with respect to the proposed transition away from LIBOR benchmarks. In particular, it covers:
- the background to LIBOR reforms
- the alternatives being proposed
- key issues for financial markets
- LIBOR and the LMA documents, and
- national working groups and how to get involved
Members can log into the LMA website with their username and password to access the guide.
LMA launches a new LIBOR microsite
The LMA have launched a new microsite which contains all content related to the discussions around the potential discontinuation of LIBOR.
The LMA is working with the market, other trade associations and the regulators on contingencies should LIBOR cease to exist. The microsite will be updated regularly for the latest developments.
Members can log into the LIBOR microsite with their username and password.
ECB publishes speech and consultation feedback on euro interest rate benchmark reforms
The European Central Bank (ECB) has published a summary of the responses it received to its public consultation on developing a euro unsecured overnight interest rate, which closed on 12 January 2018. The ECB received responses from 54 market participants, with ‘the vast majority’ agreeing with the definition suggested in the public consultation document and expecting the rate to be generally accepted by the public as a reference rate.
Can a majority noteholder have ‘control’ over the issuer so as to preclude it from giving direction to the agent? (Citibank, NA, London Branch v Oceanwood Opportunities Master Fund and Others)
The case of Citibank, NA, London Branch v Oceanwood Opportunities Master Fund and Others  EWHC 448 (Ch) considers whether a majority note holder had sufficient ‘control’ over the issuer of the loan notes, in accordance with the terms of an indenture, so as to preclude it from giving direction to the agent and trustee under an intercreditor agreement. For more information, see News Analysis: Can a majority noteholder have ‘control’ over the issuer so as to preclude it from giving direction to the agent? (Citibank, NA, London Branch v Oceanwood Opportunities Master Fund and Others).
Consultations suggest UK wants compliance with EU Emissions Trading System 2018
Two consultations on the EU emissions trading system 2018 have recently concluded and the government has published the results. The results show broad support for compliance with the EU Emissions Trading System (ETS) 2018.
The consultation on proposed amendments to the aviation EU ETS legislation found that all respondents either agreed with the government approach or said they welcomed the EU agreement to continue the current scope of the aviation EU ETS, which is being implemented through the UK regulations.
The consultation on compliance with the EU ETS 2018 compliance deadlines in the UK found there was strong support for the proposal to bring forward the EU ETS 2018 compliance deadlines to before Brexit actually takes place.
In addition, EU Regulation (EU) 2017/2392 has been implemented so as to continue current limitations of the geographical scope for aviation activities and to prepare to implement a global market based measure from 2021. These changes come into effect on 31 March 2018.
IFSB consults on Islamic banking, capital markets and insurance
The Islamic Financial Services Board (IFSB) has published three exposure drafts for a two-month public consultation covering standards in Islamic banking, Islamic capital markets and Islamic insurance. The IFSB invites comments from regulatory and supervisory authorities, international organisations, institutions offering Islamic financial services, academics, and interested members of the public. Feedback is sought by 28 May 2018.
Green Finance Taskforce report: ‘Accelerating green finance’
In September 2017, the government asked leading finance expert and former Mayor of London Sir Roger Gifford to chair an independent taskforce to accelerate the growth of green finance and the UK’s low carbon economy. This became the Green Finance Taskforce, which has now set out a series of recommendations in an independent report looking at how the government and the private sector can work together to make green finance an integral part of the UK’s financial services.
Green Investment Bank ‘failed to live up to original expectations’
The Public Accounts Committee has found that the Green Investment Bank (GIB) failed to live up to the original ambitions of encouraging investment in the green economy and creating an institution that lasts, to meet the UK’s climate change obligations. The Committee has said that the GIB’s intentions were not adequately protected in the sell-off to Macquarie in August 2017. The Committee deputy chair, Sir Geoffrey Clifton-Brown, said the manner in which the GIB was sold off is ‘deeply regrettable’.
Debt Capital Markets
AFME publishes report on utilities use across capital markets
The Association for Financial Markets in Europe (AFME) has published a report entitled ‘Industry utilities: A perspective for capital markets’ setting out potential future opportunities for utilities use across capital markets, as well as the challenges preventing utilities from coming to market. The report lays out best practice principles for developing utilities for the industry, providing guidance for market participants as well as supervisors and regulators.
ICMA proposes Rule 407 revision
The International Capital Market Association (ICMA) has opened a consultation seeking views on a proposed revision of Rule 407 (claims against the seller) of its secondary market rules and recommendations. The results of the consultation will be shared with the secondary market practices committee (SMPC) and interested members in early April 2018, and any recommendations to revise the rule may be taken ahead of the next scheduled SMPC meeting on 29 May 2018. The deadline for responses is 23 March 2018.
Rule 407 was introduced in response to a low or negative interest rate environment in a number of markets, in order to create symmetry with Rule 405 (interest claim against buyer) in the event of losses incurred due to settlement fails, following requests by members and approval by the SMPC and ICMA Executive Committee.
The review of Rule 407 follows suggestions by members that it is becoming less relevant as firms have adapted to negative interest rates and become more efficient at managing their cash.
FIA raises questions over CFTC’s position on virtual currencies
The Futures Industry Association (FIA) has written to the Commodity Futures Trading Commission (CFTC) responding to the CFTC’s proposed interpretation of how its rules apply to retail trading in bitcoin and other virtual currencies. The FIA said any interpretation adopted by the CFTC should not inhibit innovation in new cash commodity markets or call into question customary practices in other cash commodity markets.
FIA publishes eight sets of contractual indirect clearing terms
The FIA has published eight sets of contractual indirect clearing terms, which aim to assist clearing firms with documenting indirect clearing arrangements under the Markets in Financial Instruments Regulation (EU) No 600/2014 (MiFIR) and the European Markets Infrastructure Regulation 648/2012 (EMIR).
ISDA responds to supervisory reporting requirements ‘fitness check’
The International Swaps and Derivatives Association (ISDA) has responded to the European Commission’s ‘fitness check’ of supervisory reporting requirements with several key recommendations, including suggesting a ‘report once/permission access to data once’ regime, where firms would produce a single dataset which the relevant regulators could ‘cut to suit their particular regulatory objectives’.
The ISDA Master Agreement and the new European governing law and jurisdiction options
The Banking & Finance team has been speaking with Katherine Tew Darras, ISDA general counsel and Alban Caillemer du Ferrage, co-chair of Jones Day’s global Banking & Finance practice, French counsel to ISDA and member of the P.R.I.M.E. Finance Panel of Experts. In News Analysis: The ISDA master agreement and the new European governing law and jurisdiction options, they discuss ISDA’s 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.
Calculating Close-out Amounts under the 2002 ISDA Master Agreement (Lehman Brothers Special Financing Inc v National Power Corporation and another)
Lehman Brothers Special Financing v National Power Corporation  EWHC 487 (Comm)
The case discusses the question of what is commercially reasonable when calculating the Close-out Amount under an ISDA master agreement. Knowles J concluded that the calculation requires objective reasonableness. For more information, see News Analysis: Calculating Close-out Amounts under the 2002 ISDA Master Agreement (Lehman Brothers Special Financing Inc v National Power Corporation and another).
Structured products & Securitisation
European repo market baseline at record €7,250bn
ICMA published its 34th semi-annual survey of the European repo market which identified growth of contracts outstanding on 6 December 2017 from the returns of 64 offices of 60 financial groups. The survey has recorded a 12.3% growth since the last survey in June 2017 and 28.2% year on year. It sets the baseline figure for European market size at €7,250bn.
ICMA to halt coverage of 1995 global master repurchase agreement in 2019
ICMA’s European Repo and Collateral Council has announced that it will cease to cover the 1995 global master repurchase agreement (GMRA) in its ICMA GMRA legal opinions from 2019 onwards.
Since 1992, ICMA has updated its members annually with opinions on GMRA 1995, 2000 and 2011 versions from different jurisdictions around the globe.
Regulation of derivatives and capital markets products
The European Securities and Markets Authority (ESMA) has updated its Q&As on the implementation of the Central Securities Depository Regulation (EU) No 909/2014 (CSDR). The updated Q&As provide guidance on central securities depository (CSD) links and communication with participants and other market infrastructures.
Market Abuse Regulation
ESMA has updated its Q&As on the implementation of the Market Abuse Regulation (EU) No 596/2014 (MAR). The purpose of the Q&A document is to promote common supervisory approaches and practices in the application of MAR and its implementing measures.
ESMA has issued an opinion providing further guidance on the treatment of packages under the trading obligation for derivatives which the Markets in Financial Instruments Regulation (MiFIR) introduced on 3 January 2018. Packages allow investment firms and their clients to conduct trades for risk management and hedging purposes.
ESMA updates its MiFID II/MiFIR Q&As
ESMA has updated its Q&As on MiFID II and MiFIR regarding commodity derivatives topics. The Q&As cover position limits and position reporting.
In the Q&A on position limits, ESMA clarifies the circumstances under which less liquid contracts may receive bespoke position limits established by the relevant national competent authority (NCA), and introduces a tailored approach to the development and application of commodity position limits for spread contracts (ie spread positions are disaggregated, and the subsequent individual constituent positions are added to the relevant overall position for the relevant contract).
The Q&A on position reporting clarifies to which NCA positions in an OTC commodity derivative contract, which is economically equivalent to more than one EU exchange-traded derivative (ETD) contract, must be reported when the ETD contracts are not the same contract as defined in Article 5(1) of Commission Delegated Regulation (EU) 2017/591.
ESMA updates its investor protection Q&As
ESMA has included seven new or updated items in its Q&A documents on the implementation of investor protection topics under MiFID II/MiFIR. The new Q&As provide guidance on inducements, research, post-sale reporting, costs and charges information, and other issues.
ESMA updates its transparency and market structure Q&As
ESMA has published two consultation papers on draft technical standards implementing the Securitisation Regulation (SR), which was published in the Official Journal of the EU on 28 December 2017. The consultation is open for feedback until 23 May 2018.
ESMA’s consultation papers seek stakeholder feedback on:
- the application requirements for firms seeking to register with ESMA as securitisation repositories. This consultation paper also includes draft guidelines on the transfer of data between securitisation repositories, and
technical advice to the European Commission on securitisation repository fees: the type of supervisory fees, the matters for which fees are due, the amount of the fees and the manner in which they are to be paid
Capital Markets Union
The European Commission has sent a communication to the European Parliament, the European Council, the Council, the European Economic and Social Committee and the Committee of the Regions, saying it is time to ‘accelerate delivery’ on completing the capital markets union (CMU) by 2019. The Commission says that the need to progress with the CMU is made even more urgent by Brexit, which calls for ‘an even stronger push for more developed, integrated and better supervised capital markets’.
The Commission says that, by May 2018, it will have presented all the legislative initiatives that were announced in the 2015 CMU action plan and in the 2017 mid-term review. It calls on all stakeholders at the national and European level to also do their part and says, as an immediate next step, it looks forward to the discussion in the European Council on 22-23 March 2018. It calls on the European Parliament and the Council to accelerate work on all pending legislative proposals relevant for the completion of the CMU, to ensure their adoption before the elections to the European Parliament in mid-2019 at the latest.
The Commission has also published an annex to the communication, which lists the legislative initiatives and priority actions that have been undertaken to complete the CMU.
Regulation for Banking lawyers
PRA proposals could impact capital treatment of UKEF guaranteed loans
UK Export Finance (UKEF) has said that proposals recently announced by the Prudential Regulation Authority (PRA) regarding the eligibility of guarantees as unfunded credit protection could impact the capital treatment of UKEF guaranteed loans. The PRA’s proposals are set out in a consultation paper (CP6/18) that was published on 16 February 2018. The consultation ends on 16 May 2018.
AFME welcomes Commission’s proposals on tackling NPLs
The AFME has welcomed the European Commission’s proposals for the development of a secondary market for NPLs, saying it is an important initiative which should enable banks to accelerate the reduction of NPLs on their balance sheets. AFME said high levels of NPLs have ‘long tied up valuable bank financing which might otherwise have been deployed in supporting economic growth’.
FCA issues policy statement on its powers in relation to LIBOR contributions
The FCA has issued a policy statement (PS18/5) setting out the approach, criteria and methodology that it proposes to apply if it needs to use powers to compel banks to contribute to LIBOR. The PS is primarily relevant to banks that are current or potential submitters to LIBOR, and the administrator of LIBOR, ICE Benchmark Administration Limited. Parties who use LIBOR, for example in hedging products or loan agreements, may have an interest. No action needs to be taken in response to the PS.
Commission unveils sustainable finance and FinTech action plans, and proposals for a Regulation on crowdfunding and directive amending MiFID II
During a speech given in Brussels, European Commission Vice-President Dombrovskis unveiled action plans on sustainable finance, FinTech and a proposal for a regulation on crowdfunding. The action plan on sustainable finance is aimed at steering the financial sector to help reach Europe’s climate change goals. The action plan on Fintech is aimed at making sure innovative financial companies can access capital, scale up in Europe and compete globally. The Commission has also published a proposal for a Directive amending the MiFID II Directive.