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Welcome to Legal Shorts, a short briefing on some of the week’s developments in the financial services industry.
If you would like to discuss any of the points we raise below, please contact me or one of our other lawyers.
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Brexit update
ISDA has published a position paper on Brexit, CCP location and legal uncertainty, which focuses on a possible location policy for euro-denominated swaps to be cleared in the EU and refers to the Commission’s June 2017 proposed Regulation amending the EMIR supervisory regime for EU and third-country CCPs. In the paper, ISDA sets out a number of reasons why an EU CCP location policy will increase costs for market participants and create a more fragmented and less secure clearing house landscape, including: (i) price volatility and execution costs; (ii) increased systematic risk, as a CCP clearing only 25% of euro-denominated interest rate swaps is expected to be a less liquid CCP, subject to higher margin and other costs, and with a greater burden on its members in terms of underwriting risk; (iii) operational risk, due to the location policy involving the movement of such a large amount of derivatives-related risk from one CCP to another; and (iv) reduced CCP access.
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EC consults on removing barriers to post-trade services as part of CMU
The European Commission has published a consultation paper on removing barriers to post-trade market infrastructure as part of its CMU action plan. In the consultation paper, the Commission notes that, among other things, on average, cross-border trades remain more expensive than domestic trades, and a more efficient post-trading environment could reduce these costs. As a result, it is looking to find the best solutions to remove all barriers to efficient and resilient post-trade services. In particular, the Commission is seeking views on: (i) the main trends and challenges faced by post-trade services providers and users; (ii) the existence and scale of remaining or new barriers; (iii) the risks associated with the barriers; and (iv) the best ways to remove barriers, including through financial technology. Comments are invited by 15 November 2017. The results of the consultation will contribute to a Commission communication on post-trade, which is planned for the end of 2017.
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UK payment systems annual review
The Bank of England has updated its news for financial market infrastructures webpage. The Bank, FCA, PRA and Payment Systems Regulator have different mandates in relation to payment systems in the UK. In March 2015, they entered into an MoU, which sets out a high-level framework for managing the risk that the actions of each of the authorities may have implications for the objectives of the others. The Financial Services (Banking Reform Act) 2013 requires the authorities to review the MoU on an annual basis. The annual review concludes that co-operation and co-ordination under the MoU is working well. Areas to further improve co-operation and co-ordination, which are largely procedural in nature, will be implemented over the coming year.
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High Court considers the liability of a principal for its AR
In a recent case the High Court has considered whether a principal is liable for the defaults of its appointed representative under the AR agreement. The AR agreement provided that the AR would not carry on any activity in breach of section 39 FSMA or any other applicable law, nor would it carry on any regulated activities outside the scope of the services set out in the AR agreement. In proceedings brought by a client of the AR (the claimant) that the AR had breached the FCA’s conduct of business rules, the claimant claimed that the principal was liable for the AR’s failures by virtue of section 39(3) under which the principal of an AR “is responsible, to the same extent as if he expressly permitted it, for anything done or omitted by the representative in carrying on the business for which he has accepted responsibility”. The High Court held that the purpose of section 39(3) is to ensure a safeguard for clients who deal with ARs, so that they have a “long stop liability target” (i.e. the principal). The court held that section 39(3) provides a clear and separate statutory route to liability. The principal could not rely as a defence on the clauses in the AR agreement in which the AR accepted the limits on its appointment nor the AR’s agreement not to breach it or applicable legal or regulatory requirements. These clauses regulate the position inter se between the principal and the AR. To construe it otherwise would mean that any time there was any default by an AR that very default would automatically not only take the AR outside the scope of the AR agreement, but would also take the person appointing the AR (the principal) outside the scope of section 39(3). The court rejected this “impossible construction”, which it observed would render worthless the failsafe protection for the client and held that the principal was liable for the defaults of the AR. See Ovcharenko and another v Investuk Ltd and another [2017] EWHC 2114 (QB) (16 June 2017).
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