Legal Shorts 16.08.19 including ECB calls on banks to accelerate no-deal Brexit preparations

SFTR and EMIR reporting – ISLA press release today relating to new Master Reporting Agreement

ISLA has announced that it has partnered with the FIA, ICMA and ISDA to create a new Master Reporting Agreement. The purpose of the new agreement is to provide for both mandatory and delegated reporting of securities financing transactions under SFTR, and derivative transactions under EMIR, entered into under standard industry documentation. The four trade associations will be advised by Linklaters, who will hold the pen on the new agreement. Before drafting begins, the four associations are seeking feedback regarding a number of threshold questions on scope, structure, approach and process and have published a supporting paper that includes the following:


  • An outline of the relevant reporting requirements/changes under SFTR and EMIR;
  • A summary of the expected content of the agreement;
  • An outline of the intended approach.

FCA agrees plan for a phased implementation of Strong Customer Authentication

On 13 August 2019, the FCA agreed a plan that gives the payments and e-commerce industry extra time to implement Strong Customer Authentication (SCA). From 14 September 2019, new EU rules will apply and impact the way in which banks or payment services providers verify their customers identity and validate specific payment instructions. The new rules, called Strong Customer Authentication (SCA), are intended to enhance the security of payments and limit fraud during this authentication process.

The FCA has agreed an 18-month plan to implement SCA with the e-commerce industry of card issuers, payments firm and online retailers. The plan reflects the recent opinion of the European Banking Authority (EBA) which set out that more time was needed to implement SCA given the complexity of the requirements, a lack of preparedness and the potential for a significant impact on consumers.

Jonathan Davidson, Executive Director for Supervision – Retail and Authorisations, said:

‘The FCA has been working with the industry to put in place stronger means of ensuring that anyone seeking to make payments is not a fraudster. While these measures will reduce fraud, we want to make sure that they won’t cause material disruption to consumers themselves; so we have agreed a phased plan for their timely introduction’.

The FCA will not take enforcement action against firms if they do not meet the relevant requirements for SCA from 14 September 2019 in areas covered by the agreed plan, where there is evidence that they have taken the necessary steps to comply with the plan. At the end of the 18-month period, the FCA expects all firms to have made the necessary changes and undertaken the required testing to apply SCA.

The FCA will also continue to monitor the extent to which banks and payment service providers are meeting its expectation that they consider the impact of SCA on different groups of consumers, and provide alternative means of authentication where needed.

ECB calls on banks to accelerate no-deal Brexit preparations

On 14 August 2019, the ECB published an article on banks’ preparations for a no-deal Brexit on 31 October 2019. The ECB has found that banks have transferred significantly fewer activities, critical functions and staff to eurozone entities than originally foreseen as part of their plans for Brexit. It now expects banks to accelerate the implementation of their plans.

The ECB expects banks to:

  • follow up on agreed commitments, in particular the build-up of local risk management capabilities and governance structures. The ECB is concerned that delays to implementing plans may mean that banks cannot fully implement their target operating models within the timelines agreed with their supervisors;
  • be prepared for differences in the application of provisions in the CRD IV Directive (2013/36/EU) and the Capital Requirements Regulation (575/2013) (CRR) relating to the UK, or UK-linked exposures or assets, as a consequence of the UK becoming a third country;
  • implement effective mitigating actions, including novations, concerning uncleared cross-border derivatives contracts to address continuity issues arising from the loss of passporting rights relating to the UK; and
  • ensure that they have sufficient “onshore” capacity to originate business and access key financial market infrastructures.

The ECB also stated that some eurozone banks must make further adjustments to their business and booking models. In particular, it expects banks to adjust the practice of “back-branching” (that is, servicing EU clients from UK branches after Brexit, even when there is no local business need for them to do so). It also states that some banks have not yet aligned their remote booking practices and back-to-back hedging strategies with supervisory expectations.

ASA upholds complaint and finds Bitcoin advertisement breached CAP code

On 14 August 2019, the Advertising Standards Authority (ASA) published a ruling against HDR Global Trading Ltd (trading as BitMEX). On 3 January 2019, HDR, placed a newspaper advertisement for the cryptocurrency trading platform BitMEX, which showed a graph spread across two pages depicting the value of Bitcoin against the US dollar since January 2009. The y-axis of the graph, labelled “Bitcoin price in US Dollars”, used a logarithmic scale (which meant that the equally spaced values on the scale did not increase by the same amount each time and instead increased by orders of magnitude). The graph depicted a sudden rise in the value of Bitcoin after July 2010.

The complainants challenged whether the advertisement was misleading as it exaggerated the return on the investment and failed to illustrate the risk of the investment. The ASA upheld the complaint. It accepted that use of logarithmic scales was a valid and useful way of presenting data. However, it also noted that specialist knowledge was required to understand the graph which, in the absence of clear explanatory information, was unlikely to be familiar or readily understandable to the national newspaper audience to whom the ad was directed. Readers were likely to interpret the line of the graph to mean that there had been a sharp then steady rise in Bitcoin’s value in its early years up to its peak in November 2017 followed by a gentle decline in recent years. This meant that readers were likely to be misled about Bitcoin’s value and stability in recent and therefore about what any investments they might previously have made would have yielded.

The ASA did not accept that text alongside the graph which stated that Bitcoin was “still very much an experiment”, that “the road ahead will be challenging” or “price volatility” mitigated the overwhelming impression about Bitcoin’s value created by the graph. The ASA also concluded that the full text alongside the graph included a clear promotional statement of Bitcoin’s merits and did very little to warn consumers of any risks.

Memorandum of understanding between European Commission and SRB

On 13 August 2019, the Single Resolution Board (SRB) published a memorandum of understanding between it and the European Commission in respect of co-operation and information exchange. In the MoU, the EC and the SRB set out their approach to co-operation and the exchange of information relating to their respective functions under the Regulation for the Single Resolution Mechanism (SRM) (806/2014) (SRM Regulation).

The MoU addresses issues including:

  • communications between the EC and the SRB, including co-operation on external communications;
  • co-operation and information exchange relating to the various phases of the resolution of a bank and for other activities envisaged under the SRM Regulation;
  • co-operation on regulatory initiatives relating to resolution and the banking union; and
  • the permissible use of information and confidentiality.

The MoU does not cover co-operation on EC decisions related to state aid in resolution under Article 19 of the SRM Regulation. The text of the MoU states that it was signed by both parties on 1 August 2019 and consequently it presumably came into force on that date. The EC and the SRB are expected to review the MoU at least every five years.

International Swaps and Derivatives Association, Inc publishes statement on pre-cessation issues for IBORs consultation

On 9 August 2019, ISDA published a statement of the preliminary results of its benchmark fallbacks consultation on pre-cessation issues for derivatives contracts referencing LIBOR and certain interbank offered rates (IBORs).

The consultation had invited feedback on how derivatives contracts should address the regulatory position that LIBOR or certain other IBORs are no longer representative of an underlying market. The statement reports that responses (to the question of whether and how to implement a pre-cessation trigger related to “non-representativeness” for derivatives) were in three categories:

  • those who supported adding a pre-cessation trigger to the permanent cessation triggers in the “hard wired” amendment to the 2006 ISDA Definitions and related protocol.
  • those who supported use of the pre-cessation trigger, provided that it was implemented with optionality and flexibility (or indicated that their support for the trigger depended on a number of factors).
  • those who opposed the pre-cessation trigger.

The statement adds that ISDA aims to publish a consultation proposing a documentation solution to the incorporation of pre-cessation fallback triggers.