Posts by: Sejal Patel

LMA Paper on the Consequences of a No-Deal Brexit on the European Loan Market

On December 3, the Loan Market Association (“LMA“) published a paper on the impact of a no-deal Brexit scenario on lending to borrowers located in EU countries by UK lenders, and the wider negative impact on the EU economy. A link to the paper can be found here.

The LMA states that it is vital that transitional arrangements are put in place as soon as possible so that borrowers are adequately protected irrespective of the manner of exit of the UK from the EU. It sets out a number of issues which arise when considering the need for transitional arrangements in a syndicated loan market context, along with proposed solutions, including:

  • Licensing and the ability to do cross-border business in respect of both new and existing customers.
  • Ensuring the continuing validity, effectiveness and enforceability of the loan contract itself, including the extent to which judgments of the English courts will be enforceable in EU member states.
  • Ancillary issues outside of core lending activity but which might impact the decision or ability of an institution to lend.

The paper also sets out a “package” of products and services provided by both syndicate lenders and other specialist providers, which borrowers require access to in addition to the syndicated loan itself. The LMA states that without appropriate transitional arrangements, borrowers may find themselves in a difficult situation if a particular product becomes illegal to provide post-Brexit.

Securitization Regulations 2018 Published


On December 4, the Securitization Regulations 2018 (SI 2018/1288) were published on, together with an explanatory memorandum. A link to the Securitization Regulations 2018 can be found here and a link to the explanatory memorandum can be found here.

The Regulations reflect the application of the Securitization Regulation ((EU) 2017/2402)) in the UK. The Securitization Regulation harmonizes and reforms existing rules on due diligence, risk retention, disclosure and credit-granting that will apply in a uniform way to all securitizations, securitizing entities and all types of EU regulated institutional investors. It also creates a new framework for simple, transparent and standardized long-term securitizations and asset-backed commercial paper programs.

Among other things, the Regulations designate the FCA and PRA as the competent authorities in relation to the Securitization Regulation and require the FCA to maintain and update a register of all persons it has authorized as third-party verification agents. They also amend the Financial Services and Markets Act 2000 (“FSMA“), and other UK legislation, to create the new supervisory, investigative and sanctioning powers required by the Securitization Regulation and ensure UK legislation is compatible with the Securitization Regulation.

The Regulations will come into force on January 1, 2019.

EFDI Guidance on DSGs’ Alternative Funding Policy

On December 5, the European Forum of Deposit Insurers (“EFDI“) published a non-binding guidance paper (dated June 18, 2018) on deposit guarantee schemes’ (“DGSs“) alternative funding policy. The guidance paper can be found here.

Under Article 10(9) of the Deposit Guarantee Schemes Directive (2014/49/EU) (“DGSD“), DGSs are required to have in place adequate alternative funding arrangements to enable them to obtain short-term funding to meet their obligations. EFDI notes that, in practice, DGSs have only a few available options to enable them to implement this requirement: credit lines, bond issuances, repos, ex-post contributions and other private sources.

In the guidance paper, EFDI provides a set of recommendations for DGSs alternative funding arrangements on issues including:

  • The size of the alternative funding reserve.
  • The selection of alternative funding instruments.
  • Alternative funding instruments and ex-post contributions’ terms and parameters.
  • Concentration risks arising from counterparties.

Political Agreement Reached on Relocation of EBA


On October 17, the Council of the EU published a press release announcing that it and the European Parliament have reached political agreement on the proposed Regulation on the relocation of the European Banking Authority (“EBA“) (2017/0326 (COD)). The press release can be found here.

The Regulation amends Article 7 of the EBA Regulation (Regulation 1093/2010) to state that the EBA will have its seat in Paris. The European Commission adopted the legislative proposal for the Regulation in November 2017.

The Council and the Parliament presumably reached agreement on the version of the text of the Regulation (13175/18) published by the Council on October 16 that was stated to be the confirmation of the final compromise text.

The next steps will be for the Regulation to be submitted to the Parliament for a vote at first reading and to the Council for final adoption. The Regulation will apply from March 30, 2019.

EU General Court Considers Meaning of Effective Director Under CRD IV Directive


The EU General Court has ruled that the same person cannot occupy both the post of chairman of the board of directors and that of “effective director” in credit institutions subject to prudential supervision under the CRD IV Directive (2013/36/EU).

Under the Regulation establishing the Single Supervisory Mechanism (Regulation 1024/2013) (“SSM Regulation“), the European Central Bank (“ECB“) is responsible for the prudential supervision of Crédit Agricole (a non-centralised French banking group that is comprised, among others, of regional agricultural credit union branches). In this role, the ECB approved the appointment of certain individuals as chairmen of the board of directors of four of those regional branches, but objected to them carrying out at the same time the function of “effective director”. The branches asked the General Court to annul the ECB’s decision, arguing that the ECB did not correctly interpret the concept of effective director when it said that there must be a separation of the exercise of executive and non-executive functions within a management body.

The General Court rejected the actions of the four regional branches and held that the ECB had correctly interpreted the concept of effective director. The court analysed the concept of effective director of a credit institution in the light of Article 13 of the CRD IV Directive. Its analysis of the textual, historical, teleological and contextual interpretations of Article 13 established that the concept refers to the members of the management body who are part of the senior management of the credit institution. The court held that, as the ECB had correctly interpreted the concept of effective director, it had also correctly applied Article 88 of the CRD IV Directive, which provides that the chairman of the management body in its supervisory function of a credit institution (such as the chairman of the board of directors) may not exercise at the same time (without express authorisation of the competent authorities) the function of CEO in the same institution. The court found that the effectiveness of the supervisory function may be jeopardised if the individual appointed to the non-executive role of chairman of the board of directors, while not formally occupying the role of CEO, was also responsible for the effective direction of the business of the credit institution.

ESMA Asks European Commission to Clarify Scope of Exemptions from EMIR Financial Obligations


On April 27, 2018, the European Securities and Markets Authority (“ESMA“) published a letter from Steven Maijoor, ESMA Chair, to Oliver Guersent, European Commission Director General, Financial Stability, Financial Services and Capital Markets Union, relating to exemptions from the financial obligations under Articles 41 and 42 of EMIR (the Regulation on OTC derivative transactions, central counterparties and trade repositories) (Regulation 648/2012). The letter can be found here.

In the letter, Mr. Maijoor explains that, during its March 2018 meeting, the ESMA Board of Supervisors discussed whether a central counterparty (“CCP“) can exempt certain clearing members (typically public entities such as government entities, central banks and supranational entities) from the financial obligations under Articles 41 and 42 of EMIR. Under these provisions, the CCP is to be provided with initial margin and default fund contributions.

ESMA has noted different practices across EU CCPs. It has also noted different interpretations across the relevant national competent authorities (“NCAs“) of “credit exposures” from clearing members that are public entities among those mentioned above. In particular, NCAs, believing that these public entities should be exempt from EMIR, have authorised their CCPs to consider the zero risk-weight envisaged under the Capital Requirements Regulation (Regulation 575/2013) (“CRR“) for these entities to strike down their respective credit exposures. This implies that no initial margins and no default fund contributions are due from such clearing members. However, other EU CCPs apply no exemptions for this category of clearing member.

ESMA believes that this issue needs to be clarified to ensure supervisory convergence and a level playing field across EU CCPs. As this issue relates to the scope of EMIR, it asks the Commission to clarify whether CCPs are allowed not to collect margin and default fund contributions from these public entities and, if so, whether a specific amendment of EMIR (in the context of the ongoing review process) would be appropriate.

ESMA Speech on Brexit, Transaction Cost Transparency and Review of ESAs


On March 21, 2018, the European Securities and Markets Authority (“ESMA“) published a speech by Steven Maijoor, ESMA Chair, on, among other things, supervisory convergence in the context of Brexit, transaction cost transparency and the review of the European Supervisory Authorities (“ESAs“) (that is, ESMA, EIOPA and the EBA). The speech is available here.

Points of interest in the speech include:

  • Supervisory convergence. While financial centres in the EU27 should be free to compete based on the strengths they can offer firms relocating from the UK as a result of Brexit, the EU rulebook should always be applied consistently. Regulatory or supervisory arbitrage should not feature in firms’ contingency plans. ESMA does not wish to question or undermine the delegation model under the Alternative Investment Fund Managers Directive (2011/61/EU) (“AIFMD“). Instead, it seeks to avoid the creation of “letterbox entities” (whereby an alternative investment fund manager (“AIFM“) delegates its functions to the extent that, in essence, it is no longer the manager of the relevant alternative investment fund (AIF)). To mitigate the risks to supervisory convergence from Brexit, ESMA has created the Supervisory Coordination Network (“SCN“).
  • Transaction cost transparency. In Mr. Maijoor’s view, the changes to cost transparency introduced by MiFID II (that is, the MiFID II Directive (2014/65/EU) and the Markets in Financial Instruments Regulation (Regulation 600/2014) (“MiFIR“)) and the Regulation on key information documents (or “KIDs“) for packaged retail and insurance-based investment products (“PRIIPs“) (Regulation 1286/2014)) are already having a positive impact. For example, the new model of payments for research should help ensure better use of firms’ research budgets, while the KIDs have given investors a complete picture of the costs of the investment product they are buying. ESMA notes the concerns that have been expressed in relation to negative transaction cost figures, but in the absence of evidence to the contrary, believes that these should be extremely rare and that the methodology is sound.
  • Review of the ESAs. Mr. Maijoor expresses confidence that ESMA would be able to deploy the proposed new convergence powers on delegation arrangements efficiently and proportionately. For example, ESMA has used the opinion tool to ensure consistency in the granting of pre-trade transparency waivers to trading venues. Under the proposed new funding model, ESMA would be able to expand its supervisory convergence activities, which would ultimately help to advance the capital markets union (“CMU“) project.

Brexit: UK and EU Negotiators Agree Legal Text for Transition Period


On March 19, 2018, the UK government and the European Commission published a draft withdrawal agreement which includes the legal text agreed by the negotiators on the post-Brexit transition period. The draft agreement is available here.

The transition part of this latest draft is very similar to the European Commission’s previous draft of March 15, 2018, which already contained a number of amendments that appeared to reflect the UK’s position.

The UK government has now agreed that the transition period will end on December 31, 2020.