Spanish Spotlight, Edition 1: Brexit, margin lending and LMA update

Welcome to the first edition of "Spanish Spotlight", a quarterly update on the Spanish loan market prepared by the English law team in the banking and international finance department of Ashurst Spain.

Spanish Loan Market

Margin lending

Margin lending refers to the provision of secured financing where the security is granted over market traded assets such as listed shares and cash. This type of financing has been extended to individuals or corporate borrowers for the purposes of financing the purchase of investments being, in most cases, the purchase of the collateral over which the margin lender ultimately takes security. This type of financing can also be provided for more general corporate purposes to the extent that security includes listed shares which the Borrower already holds. The latter is becoming more common as it allows certain companies to monetise their stake in listed shares.

For more details on margin lending, in particular the key considerations to be taken into account when dealing with Spanish assets, read our briefing note prepared by the banking and international finance department of Ashurst Spain.

Regulation on transparency of Securities Financing Transactions and of Reuse (2015/2365) (SFTR)

The SFTR entered into force on 12 January 2016 and includes a number of details that are relevant to margin lending.

The SFTR aims to improve transparency in securities and commodities lending, including margin loans. The regulation introduces new reporting obligations, likely to become effective in mid-2018, for all securities financing transactions, which shall include margin lending transactions. ESMA are currently preparing the regulatory technical standards which shall set out the information that counterparties to a securities financing transaction will have to provide to a recognised trade repository when reporting on the transaction.

The SFTR also restricts the instances in which counterparties have the right to reuse "financial instruments" received as collateral. It is common in collateral arrangements securing Margin Loan transactions that rights of use are granted over the shares in favour of the Lender. From July 2016 onwards, certain changes will have to be made to the relevant security documents to ensure that they reflect the fact that the borrower (or collateral provider) in a margin lending transaction is properly informed of the "rights of use" being granted over the collateral and to obtain its prior consent.

For more information about the Securities Financing Transactions Regulation read our briefing note prepared by the Ashurst derivatives and structured products team.

Hot Topic

Brexit - The economic impact of Brexit

Following the announcement that there will be a UK referendum on 23 June 2016, "Brexit" and its potential consequences has been the focus of much discussion and analysis. There is a concern that Brexit may have a disproportionate effect on providers of financial services, with the potential loss of the benefit of the European passporting regime being particularly damaging. You can read a translation of an article titled "The Economic Impact of Brexit" written by Nick Pawson and Sam Tetlow which was published in Expansión on 4 March 2016.

LMA updates

LMA publishes recommended form of contractual recognition of bail-in clause for non-EEA law governed contracts with an EEA financial institution

In January 2016, the LMA published a recommended form of bail-in clause for use in loan documentation to the extent required by the EU Bank Recovery and Resolution Directive 2014/59 (BRRD).

For a wide range of non-EEA law governed contracts entered into by EEA financial institutions, Article 55 of the BRRD requires the inclusion of a bail-in clause under which the counterparties must acknowledge and accept that the financial institution's obligations under that document are subject to an EEA regulator's power to write-down and/or convert into equity that institution's liabilities. In addition, it has been reported that some institutions have been taking the approach of including bail-in language in English law facility agreements or intercreditor agreements, with incorporation by reference to the relevant local law documents in the transaction.

Read the LMA Recommended Form of Bail-in Clause and Users Guide.

Changes to LMA Secondary Debt Trading documents

Revised versions of the LMA Trade Confirmations, Standard Terms and Conditions, Participation Agreements and Secondary Debt Trading Users Guide were made available on 16 December 2015. In particular, the revised documents include:

• Clarification of the allocation of responsibility for notarial fees. Any notarial fees incurred pursuant to an express requirement in the Credit Agreement which are attributable to the transfer/assignment of the Traded Portion are to be shared equally between Buyer and Seller. All other notarial fees, including in respect of any collateral, are to be paid by the Buyer. As is always the case, parties can agree otherwise and we have continued to see examples of all fees being attributable to the Buyer. It should be noted that this, and all other commercial terms, should be agreed at the time of the trade, not during the negotiation of the Trade Confirmation.
• Updates to Condition 15.9 of the Standard Terms and Conditions which covers the allocation of interest and recurring/non-recurring fees between Buyer and Seller. In particular, if either the Buyer or Seller receives fees or interest which are for the account of the other, there is now an obligation to pay the relevant amount within two Business Days of receipt.
• Updates to the User Guide to explain how a negative IBOR could impact payments of delayed settlement compensation. The guidance now includes "zero IBOR floor" drafting that can be agreed by the parties at the time of trade and inserted in the "Other Terms of Trade" section of the Confirmation.

Read the updated LMA Secondary Debt Trading documents.