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The Working Group on Sterling Risk-Free Reference Rates (the Sterling Working Group) is an influential body of the Bank of England formed for the purpose of coordinating an orderly market transition from GBP LIBOR to risk free rates such as SONIA, by the end of 2021. During April 2021, it has published papers to assist derivative market participants with this transition. (For further background on the recommended timing for LIBOR transition see our Eye on IBOR Transition blog post here.)

Continue Reading A LIBOR of love: considerations for use of IBOR fall-backs or active transition

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Following enactment of Dodd-Frank, and resulting changes to the commodity pool definition, more investment vehicles may be commodity pools.

Join Mayer Brown partners Matt Kluchenek and Anna Pinedo for a discussion of the most recent changes to the commodity pool definition, including relief given in late 2020, and much more in Practising Law Institute (PLI)’s webinar on May 7. Register here: https://bit.ly/2PGsouQ

Synthetic Securitisation relies heavily on underlying credit derivatives and similarly structured guarantees, and has had the benefit of two new EU “Amendment Regulations“, both of which came into force on 9 April 2021.

The Amendment Regulations amend the EU Securitisation Regulation and the Capital Requirements Regulation (the “CRR“) and implement, the eagerly-anticipated,  STS (simple, transparent and standardised) framework for balance sheet synthetic securitisations.

CLICK HERE for our detailed analysis of the Amendment Regulation and new STS framework for synthetic securitisations written by Alice Harrison , Robyn Llewellyn , Mariana Padinha Ribiero , Merryn Craske and me, Edmund Parker

In the Legal Update in our  LINK we set out in an annex a comparison between the new STS criteria for balance sheet synthetic securitisations and the established STS criteria for non-ABCP “traditional” securitisations on which the new framework is based.

Key differences which we highlight between the new framework and the established STS criteria for non-ABCP “traditional” securitisations include the following points:

  • Simplicity: criteria relating to true sale are not relevant for synthetic securitisations and so have not been included in the new framework. Instead, the underlying exposures need to have been originated as part of the core business activity of the originator and must be held on its balance sheet, the originator must not hedge its exposure beyond the protection obtained through the credit protection agreement, and additional representations and warranties are required from the originator in relation to the exposures and their origination.
  • Standardisation: criteria relating to the disclosure of hedging and currency risks have been expanded, amortisation requirements have been adapted and the originator is required to maintain a reference register with respect to the underlying exposures.
  • New requirements: specific criteria have been added on credit events, credit protection payments, the verification agent’s role and synthetic excess spread.

Helpfully, the new STS criterion for credit events, which is likely to be a particular area of focus for market participants, simply requires compliance with the requirements of Articles 215(1)(a) and 216(1)(a) of the CRR for a guarantee or credit derivative (as applicable) – rather than anything new or unfamiliar to the market.

The new STS criteria also include a list of items which a verification agent, who must be independent from the originator and the investors, needs to verify in relation to underlying exposures for which a credit event notice is given “as a minimum”.

As with the existing STS framework for traditional securitisations, originator institutions can benefit from preferential regulatory capital treatment as a result of structuring a synthetic securitisation so that it falls within the synthetic STS framework. However, this will only apply with respect to the senior position held by the originator institution and not to other positions which are held by investors.

On 9 April 2021, ESMA published the interim STS templates on which synthetic securitisations may be notified to ESMA as being STS-compliant

The Amendment Regulations are EU regulations and so will not be applicable in the UK, which is now subject to a separate, similar but not identical, securitisation regime .

We are not currently aware of any plans by the UK regulators to make corresponding changes to the EU Securitisation Regulation as it now applies in the UK, or the CRR as it forms part of “retained EU law” in the UK, and so the Amendment Regulations (for now) represent a divergence between the UK and EU regimes.

It’s now almost three months since the 2020 ISDA IBOR Fallbacks Protocol (the “Protocol“) went live.  In April, a US “legislative solution” became law for tough LIBOR legacy derivatives contracts governed by New York law, and in Germany the German Banking Association’s “Supplementary Agreement for IBOR Succession”, is gathering momentum.

In our latest, slide packed, video webinar ( CLICK HERE ) Mayer Brown partners Edmund Parker  and Patrick Scholl Patrick Scholl reflect on:

  • How successful has the ISDA Protocol been?
  • What does the FCA Announcement on the future cessation or loss of representativeness of all 35 LIBOR benchmarks mean in the context of the Protocol?
  • What impact will the US “ Legislative solution” which became law this week have on US tough legacy contracts?
  • How do you prepare for non-standard remediation?
  • What do you need to know about the German Banking Association’s “Supplementary Agreement for IBOR succession”

Please take a look: CLICK HERE on You Tube. We look forward to keeping you updated on future IBOR developments for derivatives, as the cessation process heats up.

Have you met Anna? Well actually, although experts in the market pronounce it Anna, it’s spelt “AANA”.

Annually, or perhaps “AANAually” since 2016, with the notable exception of 2020, the breadth of derivatives counterparties in-scope for posting initial margin under the global margin rules, has expanded.

Back in 2016, a “Phase 1” derivatives counterparty needed a book of EUR 3 trillion of uncleared derivatives to have to post initial margin. By 2017, six “Phase 2” dealer banks, each having at least EUR 2.25 trillion book were caught. They were followed by other banks and one hedge fund, with at least a EUR 1.5 trillion book in 2018 for “Phase 3“. Billions followed trillions in 2019 and the club of counterparty groups with at least EUR 750 billion of uncleared derivatives formed “Phase 4“. Each covered counterparty group in a new phase, has to put in place initial margin documentation and accompanying infrastructure, with all the other counterparty groups in both its phase, and prior ones, where it has a trading relationship: a massive task.

A one year hiatus in 2020, came about with a the delay to “Phase 5“, and the addition of a new “Phase 6“. The “Phase Fiver“, who must comply with the rules from 1 September 2021, now needs a book of uncleared derivatives of at least EUR 50 billion, and the new “Phase Sixers“, one of EUR 8 billion.

So back to Anna/AANA. Under the EU rules, for EU domiciled entities, the AANA or “aggregate average notional amount” refers to the total gross amount of uncleared derivatives a counterparty, at group level, has recorded on the “last business day of March, April and May”. Similar rules apply in post-Brexit UK, and a future post will discuss this.

Well the first AANA measurement point, the last business day of March, is 31 March 2021. The next two measurement points follow in May and June.

This is the “Observation Period” which determines the “aggregate average notional amount” of uncleared derivatives, , and going into it, there are plenty of derivatives counterparties who could either be Phase Fivers or Phase Sixers, depending on how these numbers pan out.

In recent times, market estimates have predicted that over 300 counterparties could fall into Phase 5 and almost 800 into Phase 6. Our market conversations tell us that many counterparty groups are on the edge.

Well for those on that edge, and indeed all Phase Fivers and Phase Sixers, looking for a refresher, here is the first episode of “Initial Margin in 2019 and 2020:”.

It’s from the days before we knew that things would extend to 2022. The episode covers what it is all the new phases are about, and the episode is the third most watched video amongst the hundreds on Mayer Brown’s you tube channel. Here is a link to the full episode: https://youtu.be/FlTy-B2Zgxs

Many Currency

The UK Financial Conduct Authority (FCA), the UK regulator responsible, broadly, for market conduct made an announcement (the FCA LIBOR Announcement) on 5 March 2021, on the future cessation or loss of representativeness of all (35) LIBOR benchmarks.

Continue Reading What the FCA’s announced Index Cessation Event means for the 13,500+ adherents and other users of the 2020 ISDA IBOR Fallbacks Protocol and Fallbacks Supplement

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At the end of 2020, ISDA surveyed its membership to identify its priorities for the growth of derivatives-related environmental, social, and governance (“ESG”) issues. The membership answered that it expected growth in ESG derivatives and communicated a strong desire for documentation standardization.

Continue Reading ESG Derivatives – US Climate Finance Working Group

Cyber security concept with lock

Who wants to see digitalisation of legal contracts? Well certainly the derivatives contingent of the financial services industry which is battling increasingly complex standard documentation, streams of regulatory re-papering projects, and the continuous need to put in place age-old favourites such as the ISDA Master Agreement. Let’s focus on the ISDA Master Agreement, the hugely successful framework document underpinning most OTC derivatives trading.

Continue Reading Digital Derivatives – ISDA Create