Welcome to this month’s highlights from the Lexis®PSL Banking & Finance team which cover the key news updates from November 2017.
EU Scrutiny committee examines Brexit’s impact on financial services
The House of Commons European Scrutiny Committee has produced a report on Brexit and the UK’s financial services sector, interim arrangements, and the possibility of a ‘cliff-edge’ departure. The report also discusses the status of EU legislative proposals on resolution and recovery, and capital requirements.
Buyer properly unwinds trade as deadline expires (VR Global Partners LP v Exotix Partners LLP)
The case of VR Global Partners, L.P. v Exotix Partners LLP  EWHC 2620 (Comm) considers the ability of a buyer of a loan participation to insist upon unwinding the transaction where the deadline for meeting a condition to the sale expires. The case examines the extent of the buyer’s obligation to act in good faith and assist the other parties in meeting the deadline. For more information, see News Analysis: Buyer properly unwinds trade as deadline expires (VR Global Partners LP v Exotix Partners LLP).
Law Commission publishes final draft of the Goods Mortgages Bill
The Law Commission has published its final draft of the Goods Mortgages Bill, which is intended to replace the Bills of Sale Acts to govern how individuals use existing goods as security. The Commission recommends the Acts be repealed in their entirety, and recommends among other things that a goods mortgage should be a ‘charge’, rather than a transfer of ownership.
Bills of sale mean individuals can use goods they already own as security for loans or other obligations, while retaining possession of those goods. The two statutes governing such bills date from 1878 and 1882 respectively.
The Commission has recommended that the Bills of Sale Acts be repealed entirely, and replaced by the new draft Goods Mortgages Act which should:
- provide appropriate protection for borrowers, so that goods cannot be taken possession of too readily
- protect innocent purchasers who buy goods without realising that they are subject to a security interest
- remove unnecessary restrictions on secured lending for certain borrowers, such as high net worth individuals and unincorporated businesses, and
- save costs caused by overly complex registration arrangements
For more information on the background to the Goods Mortgages Bill, see News Analysis: Reforming bills of sale—what might the Goods Mortgages Bill look like?
EU Council endorses reform of emissions trading system
The EU Council has endorsed the provisional deal reached between the Estonian presidency and the European Parliament on the reform of the EU emissions trading system (ETS) after 2020. The ETS reform is designed to help the EU to deliver on its target of cutting greenhouse gas emissions by at least 40% by 2030, as agreed under the Paris climate change agreement.
Dana Gas PJSC (a company incorporated under the laws of the UAE) v Dana Gas Sukuk Ltd & Ors  EWHC 2928 (Comm)
Considering construction of the documents and issues of mistake, the court also rejected the argument that public policy precluded the English courts from enforcing a contract alleged to be unlawful under the laws of the United Arab Emirates (UAE) as a friendly foreign state. Dana Gas (DG) had conceded that the obligations at issue did not require anything unlawful to be done in the UAE, as the payment would occur in London. Thus the contract could be enforced against DG.
Inquiry launched into UK’s green finance development
The House of Commons Environmental Audit Committee has launched a new inquiry into green finance. The inquiry will look closely at the government’s strategy to develop ‘world-leading green finance capabilities’, including measures set out in the clean growth strategy. Responses to questions posed by the Committee must be submitted by 3 January 2018.
Largest climate investment to date signed by the Green Climate Fund
The Green Climate Fund (GCF) has signed an agreement with the European Bank for Reconstruction and Development (EBRD) to start finding its largest climate finance investment to date. The joint programme spans three regions and aims to support thousands of individual investments in technologies that reduce emissions and enhance resilience to climate change. The GCF is contributing US$378m to the US$1.4bn programme.
Withdrawal of draft Business Contract Terms (Assignment of Receivables) Regulations 2017
Parliament has announced the withdrawal of the draft Business Contract Terms (Assignment of Receivables) Regulations 2017 (the Regulations). The Regulations proposed to deal with contractual terms which prohibit or restrict the assignment of receivables.
For more information on the background to the Regulations, see News Analysis: Business Contract Terms (Assignment of Receivables) Regulations 2017: Unexpected consequences for lenders.
Taurus Petroleum Ltd v State Oil Marketing Company of the Ministry of Oil, Republic of Iraq  UKSC 64,  All ER (D) 132 (Oct)
In News Analysis: Supreme Court rules on third party debt and receivership orders (Taurus Petroleum Ltd v State Oil Marketing Company), Guy Blackwood QC, of Quadrant Chambers, examines the Supreme Court’s judgment in Taurus Petroleum Ltd and what the principles are for enforcing international arbitral awards by intercepting funds payable under letters of credit.
UK Finance offers model framework for post-Brexit EU and UK financial services
UK Finance has published a report proposing an alternative model for a future trade framework for banking and capital markets services between the EU and the UK. The report says the model is ‘both robust and flexible’.
According to the report, the model relies on the assumption that in the near future the EU and the UK will have separate regulatory jurisdictions, but will still be part of a developed regional market for banking and capital markets that provides critical services for customers, and that the EU and the UK will wish to remain as closely connected as is politically, economically and socially feasible.
Once negotiated, refined and codified as appropriate for both sides, UK Finance says its proposed model could be embedded in a preferential trade agreement or sit alongside such an agreement as a flanking framework. The report suggests that elements of the model could also ‘usefully inform the framework for other industries covered by a future trade agreement between the EU and the UK’.
Debt Capital Markets
FCA sets out new regulatory framework for insurance-linked securities
The Financial Conduct Authority (FCA) has published policy statement PS17/24, which sets out its near-final rule changes required to the FCA Handbook to incorporate the new regulated activity of insurance risk transformation.
Commission recommends ways to improve European corporate bond markets
The European Commission has published the final report of the expert group on corporate bond markets, which looked at ways to improve European corporate bond markets. In the report, the expert group makes 22 recommendations, both policy- and market-focused, intended to improve the functioning of the European corporate bond markets from the perspective of issuers, investors, and intermediaries.
The group’s recommendations support six key objectives:
- making issuance easier for companies
- increasing access and options for investors
- ensuring the efficiency of intermediation and trading activities
- fostering the development of new forms of trading and improving the post-trade environment
- ensuring an appropriate level of information and transparency, and
- improving the supervisory and policy framework
ISDA launches Swiss Module for ISDA Resolution Stay Jurisdictional Modular Protocol
The International Swaps and Derivatives Association, Inc. (ISDA) has announced the launch of a Swiss module to the ISDA Resolution Stay Jurisdictional Modular Protocol (JMP). The new module will allow market participants to comply with Swiss regulations that require contractual stays to be included into certain financial contracts not governed by Swiss law.
The JMP was developed to allow the market to comply with the requirements of the Stay Regulations. It is composed of boilerplate provisions and jurisdictional modules with respect to particular Stay Regulations in particular jurisdictions. Parties may choose to adhere to one or more modules to the JMP.
ESAs announce review of exchange variation margin for physically-settled FX forwards
The European Supervisory Authorities (ESAs) have released a statement saying that in light of challenges for certain counterparties to exchange variation margin for physically-settled FX forwards by 3 January 2018, they are conducting a review of the requirements. However, any changes to the EU rules will need to be implemented through legislation. In the meantime, they encourage national supervisors to enforce the requirements in a proportionate manner.
ISDA calls for further changes on EMIR
ISDA has published a white paper on the European Commission’s review of the European Market Infrastructure Regulation (EMIR). While ISDA says the changes recommended by the Commission in May 2017 go some way towards easing the compliance costs and burdens of the regulation, it believes that additional changes are needed to simplify and strengthen the framework.
Judgment partially annuls decision regarding Icap’s ‘facilitator’ role in the ‘Yen interest rate derivatives cartels’
On 10 November 2017, the General Court issued its judgment in Case T-180/15 Icap and Others v Commission, in which it partially annulled the infringement decision (including the provision imposing a €14.96m fine) issued to Icap, a leading interdealer broker, for its alleged participation in cartels relating to the Yen interest rate derivatives (YIRD) sector (Case AT. 39861 Yen interest rate derivatives). Icap had been charged for allegedly facilitating the illicit activities of five international banks (all of whom had admitted their involvement and settled with the Commission in December 2013) in relation to six of the seven cartels uncovered by the Commission in the YIRD sector. However, the General Court judgment details a number of defects with the Commission’s decision. In particular, the General Court was not satisfied that Icap’s participation could be confirmed in one of the cartels, that Icap’s involvement in three other cartels was as long as stated and, finally, that the Commission had adequately explained the methodology it employed in determining the level of fines imposed (six fines making up the overall €14.96m fine imposed). On the basis of the above considerations, the General Court annulled in part the Commission decision—including the part setting out the calculations of the level of fines imposed.
Regulation of derivatives and capital markets products
Tom Garske, associate partner at Citihub Consulting, discusses what the benefits of using schemes to abide by the provisions of the EU Bank Recovery and Resolution Directive (BRRD) are to banks in News Analysis: Banks now using schemes to comply with BRRD.
Capital Markets Union
The Council of the European Union has adopted rules to develop a securitisation market in Europe, which it says will help create new investment possibilities and provide an additional source of finance, particularly for SMEs and start-ups. The Council set out that the new rules are part of the EU’s plan to develop a fully functioning capital markets union by the end of 2019.
MiFID II and commodity derivatives
Position limits and transparency waiver plan
In News Analysis: Position limits and transparency waiver plan, Carolyn Jackson, partner at Katten Muchin Rosenman UK LLP assesses an arrangement sharing the workload between domestic and European regulators in light of ESMA’s revised approach to position limits and pre-transparency waivers with a compliance deadline looming in January 2018.
Structured products & Securitisation
European Parliament adopts new rules for EU securitisations
The European Parliament has approved new rules to create a European framework for simple, transparent and standardised (STS) securitisations, as well as new rules on preferential capital treatment for STS securitisations. The rules are aimed at reviving securitisations in the EU, which declined after the US sub-prime crisis in 2008.
The first regulation lays down common rules on securitisation in order to protect investors, make markets more transparent, and improve risk management. The second regulation amends the Capital Requirements Regulation ((EU) 575/2013) to provide preferential capital treatment for STS securitisations and introduce a new hierarchy for risk calculation methods, including a differentiation between STS and non-STS. These changes aim to ensure a level playing field for securitisations in the EU, irrespective of their country of origin, while retaining financial stability as the overarching goal.
For more information, see News Analysis: Roller-coaster ride for the securitisation market.
ECB excludes some conditional pass-through covered bonds from purchase programme
On 20 November 2017 the governing council of the European Central Bank (ECB) adopted Decision ECB/2017/37 amending Decision ECB/2014/40 on the implementation of the third covered bond purchase programme (CBPP3). The amendment, which enters into force on 1 February 2018, reflects the decision adopted by the governing council on 4 October 2017 to exclude conditional pass-through covered bonds from purchases under the CBPP3 if they are issued by an entity with a first-best issuer rating below Credit Quality Step 3.
The governing council’s decision reflects the potentially higher risks associated with these instruments, which relate to their complex structure, whereby various pre-defined events may lead to a significant extension of a bond’s maturity and a switch to a payment structure dependent primarily on cash flows generated by the assets in the underlying cover pool.
IOSCO updates securitisation and MMF implementation reports
The International Organization of Securities Commissions (IOSCO) has updated its reports on the peer review of the regulation of money market funds (MMFs), and on the peer review of the implementation of incentive alignment recommendations for securitisation. The reports summarise IOSCO’s ongoing efforts in monitoring implementation of reforms for MMFs and securitisation since the two peer reviews were published in September 2015.
The MMF report covers valuation, liquidity management and MMFs that offer a stable net asset value, and finds that most jurisdictions have implemented the fair value approach for the valuation of MMF portfolios, but progress in liquidity management is less advanced and less even.
The securitisation report covers incentive alignment arrangements and disclosure requirements, and finds that, overall, progress remains mixed across participating jurisdictions in implementing the recommendations for incentive alignment for securitisation.
Companies Court decides on whether an administration application was a ‘foreign proceeding’
In the case of Re Agrokor DD and in the matter of the Cross-Border Insolvency Regulations 2006  EWHC 2791 (Ch),  All ER (D) 83 (Nov), the Companies Court had to decide whether to recognise a Croatian extraordinary administration proceeding as a ‘foreign proceeding’ despite, for the first time in an English court, the recognition application being contested by a creditor. The decision reached and the practical implications of this case are considered further in News Analysis: Croatian company’s application recognised as ‘foreign proceeding’ in UK (Re Agrokor).
Insolvency (Miscellaneous Amendments) Regulations 2017
The Insolvency (Miscellaneous Amendments) Regulations 2017 ensure that the insolvency regime for limited liability partnerships is brought into line with mainstream insolvency procedures, and with the Recast Regulation on Insolvency, Regulation (EU) 848/2015. It also facilitates electronic filing of the prescribed form filed with Companies House when a liquidator is appointed in a voluntary winding up amongst other changes. These changes are effective from 8 December 2017.
How to establish jurisdiction in Scottish insolvency cases (Bank Leumi (UK) plc, petitioner)
In News Analysis: How to establish jurisdiction in Scottish insolvency cases (Bank Leumi (UK) plc, petitioner), Ben Zielinski, senior associate at Shoosmiths, considers the decision in Bank Leumi (UK) plc, petitioner. He says the decision provides a helpful clarification that a company’s centre of main interests (COMI) is irrelevant to determine territorial jurisdiction.
Regulation for banking lawyers
Launch of the next phase of sterling LIBOR transition work announced
The Bank of England and the FCA have issued a press release announcing the next phase of work with market participants on LIBOR transition. From January 2018, the market-led working group on sterling risk-free rates will have an extended mandate and broader participation.
The working group’s mandate (dated June 2017) is to propel a broad-based transition to SONIA over the next four years across sterling bond, loan and derivative markets, so that SONIA is established as the primary sterling interest rate benchmark by the end of 2021. This reflects concerns about the sustainability of LIBOR beyond 2021 and follows a recent public consultation which confirmed strong support for SONIA as the preferred alternative to sterling LIBOR.
FCA confirms panel banks will support LIBOR until 2021
The FCA has announced that all 20 panel banks will continue to support the LIBOR benchmark until 2021, when a transition will be made to alternative rates. Based on this support, the FCA now expects the focus to shift towards developing alternative rates and working towards a smooth transition.
BoE publishes Working Group on Sterling Risk-Free Reference Rates minutes and summary of the responses to the white paper on adoption of SONIA as preferred RFR
The Bank of England has published minutes for its meeting of the Working Group (the Group) on Sterling Risk-Free Reference Rates that took place on 6 October 2017.
In that meeting which related to the sterling overnight index average (SONIA), it was noted that the deadline had passed for interested parties to submit responses to the Group’s White Paper on ‘SONIA as the RFR and approaches to adoption’. Areas of consensus included:
- supporting reformed SONIA as the risk-free reference rate (RFR) (and so the Group will consider how best to promote adoption of reformed SONIA as the Sterling RFR)
- supporting the maximum maturity for cleared sterling overnight index swap (OIS) products being extended beyond the existing 31 years
- adoption being as broad as possible, and
- the merits of exploring conversion of legacy LIBOR portfolios to SONIA
Areas of division included whether term SONIA reference rates were necessary to facilitate adoption.
The Group agreed that it would be important to consider the impact of the White Paper responses in its future work. The Group will also work on developing term SONIA reference rates and look at when it will be possible to begin trading new SONIA futures.
The Group were updated on discussions with other international stakeholders for identifying alternative risk-free rates. He noted that the issues were similar to those faced by the Sterling market and that there would be value in bringing the chairs of the different currency working groups together to help facilitate international coordination.
The ISDA working group had agreed certain criteria for determining any credit spread to the RFR as a LIBOR fall-back and were now consulting on these criteria with a view to reporting back to the Official Sector Steering Group.
In the next meeting, the Group will discuss the regulatory impact of the RFR transition process.
ECON publishes report on BRRD Insolvency Hierarchy Directive
The Committee on Economic and Monetary Affairs of the European Parliament (ECON) has published its report on a proposal to amend the BRRD) as regards the ranking of unsecured debt instruments in insolvency hierarchies (BRRD Insolvency Hierarchy Directive).
The objectives of the BRRD Insolvency Hierarchy Directive include to lay down harmonised rules for the insolvency ranking of unsecured debt instruments for the purposes of the Union recovery and resolution framework especially with regard to ensuring a credible bail-in regime.