AFME

AFME Calls on Authorities to Urgently Address Brexit Cliff Edge Risks for Financial Services Sector

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On October 22, the Association for Financial Markets in Europe (“AFME“) published a press release on avoiding a Brexit cliff edge in financial services, these concerns were reiterated in a letter to the European Commission, urging the Commission along with member states and regulators to provide steps that will be taken to address these risks. In particular, it outlined three risks that need addressing urgently:

  1. Continued access to central counterparties (“CCPs“) – It has been suggested that EU27 banks could move positions to EU CCPs, however this seems unrealistic in the time frame and it is questionable whether the market alone could supply sufficient liquidity for such significant shifts of positions between CCPs. Also, there is currently no available alternative for clearing some products in the EU27. In the absence of clarity, there is a risk that UK CCPs may have to start delivering termination notices to their EU27 clearing participants as early as December 2018.
  2. Continued servicing of existing contracts – firms should be able to continue to perform contractual obligations under existing OTC derivatives contracts in most member states, however it might not be possible to perform essential “life cycle” events (such as exercising options or transferring collateral) and transferring legacy clients onto new contracts ahead of Brexit would be hugely challenging, especially in a no-deal scenario.
  3. Cross border data transfers – the ability to transfer data is vital to support cross-border business and essential for maintaining day to day operations.

OTC Derivative Brexit Issues Considered by AFME and ISDA

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A paper was jointly published by AFME and ISDA on July 30, 2018 which considered the potential contractual continuity issues which may influence OTC derivative contracts following Brexit.

As has been widely discussed, Brexit will bring an end to the single market passport. The passport currently allows regulated activities to be carried out by the UK in EU countries without additional local licenses. This however will no longer be in place following Brexit. Given that a number of contracts will have been entered into prior to Brexit and will continue thereafter, there is a risk that entities may be carrying out regulated activities in other jurisdictions without having the relevant local licensing requirements in place following Brexit.

The report, the full version of which is available here, looks at possible solutions both for UK entities, as well as regulators, in order to minimize disruption following Brexit.

ISDA, AFME, ICMA, SIFMA and SIFMA AMG Publish Global Benchmark Report

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The International Swaps and Derivatives Association (“ISDA“), the Association of Financial Markets in Europe (“AFME“), International Capital Market Association (“ICMA“) and the Securities Industry and Financial Markets Association (“SIFMA“) and its asset management group (SIFMA AMG) have published a new report that 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“). Click here to read the full report.

Association for Financial Markets in Europe Publishes Model Clauses for the Contractual Recognition of Bail-In under Article 55 of BRRD

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On August 1, 2016, the Association for Financial Markets in Europe (AFME) published model clauses for the contractual recognition of bail-in for the purpose of satisfying the requirements of Article 55 of the EU Bank Recovery and Resolution Directive (BRRD).

Article 55 requires financial institutions in the EU to include clauses in a range of contracts to give contractual effect to a bail-in of the relevant liability in a resolution of the institution. The package contains model contractual terms that market participants can use to comply with Article 55 when issuing debt instruments and certain other contracts governed by the law of a jurisdiction outside the EU. There are two types of model clause contained within the package: one for use with debt liabilities and one for use with “other liabilities.”

The model clauses are designed to be compliant with the BRRD and with certain relevant EU member state legislation implementing the BRRD, as well as with the BRRD Delegated Regulation. The model clauses therefore seek to support cross-border effectiveness of resolution and assist banks with complying with the requirements of Article 55 BRRD.

AFME has stressed that the model clauses are a starting point only. Users are strongly encouraged to consult counsel in the relevant non-EU jurisdiction to ensure that the clause is appropriately modified to reflect any requirements of that non-EU law, and is both effective and enforceable in that jurisdiction.

In an associated press release, AFME expressed its continued concerns with the scope of Article 55 BRRD which is very broad, and requires banks to include contractual recognition clauses in contracts giving rise to all liabilities governed by non-EEA law, save where these are expressly excluded from bail-in under the BRRD. The requirement gives rise to significant challenges, such as where banks are unable to unilaterally amend contracts, as in relation to trade finance and membership of financial market infrastructures. A number of authorities have acknowledged that, in many cases, inserting such a clause is impracticable. However, while several authorities have sought to adopt a pragmatic approach to implementation, there remains some uncertainty and potential inconsistency in application.

AFME therefore believes that a clear and consistent approach across the EU is required to provide banks and counterparties with a clear and workable solution. It considers that the scope of Article 55 should be amended to align it with that agreed at the international level through the Financial Stability Board (FSB). The FSB’s Principles for Cross-border Effectiveness of Resolution Actions propose that the scope should cover instruments eligible for loss-absorbing capacity requirements and any other “debt instruments.” AFME considers that this would provide a much clearer scope of liabilities and significantly reduce the impact on firms, while meeting the objective of ensuring resolvability. It believes that alignment with the FSB’s key attributes is particularly important where inconsistencies in approach could severely impact on the competitiveness of EU banks operating in global markets.