Where are we on some current trade-related issues?

Presentation by Geoffrey Wynne

Partner, Sullivan & Worcester UK LLP

on 15 December 2016

At Pinners Hall, 105-108 Old Broad Street,

London, EC2N 1EX

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“We live in interesting times…….!”

2016, a year of surprises

Brexit

Brexit +++

European landscape

World problems

Does this affect potential for (or actual) trade finance deals?

› Opportunities remain

› Same reluctance to commit

So what about the specifics?

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What this talk will cover

Article 55 (Bail-in) – at last some light?

Where are we on US issues?

› Dodd Frank

› FATCA

Current status of treatment of trade debt – another threat to trade?

Developments affecting capital requirements in a trade context

How is the sanctions landscape?

Money laundering and the rest

Industry documentation developments in trade finance business

Pointers from client transactions (good and bad)

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Article 55 BRRD (bail-in)

What is bail-in?

› Enforced write down of liabilities on a bank restructuring

› Obligation to include in contracts governed by law of a third country

Wide scope of liabilities

› Some have no practical possibility of being affected by bail-in

Difficult to comply with

Current ideas focused on relying on “impractical” to meet

Proposed amendments to the rule

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What is the new bail-in rule?

Allow authorities to apply proportionality

Waiver for liabilities not counting towards minimum requirement for own funds (MREL)

Based on determination

› Legally, contractually or economically impractical to include

But still in discretion of authorities

Good news!

Corrects poorly “worded” Article 55

› Has it gone far enough?

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What is coming from the US?

The usual…!

› Dodd Frank

› FATCA

US view on sanctions

› Iran and snap back

OFAC – fines and reputation risk for banks

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Dodd Frank Act (Development)

Enacted in July 2010

› 398 required rules to implement

› Only around 70% achieved

Many comments made and meetings held

› Nearly one million comments

› 23,000 pages of rules

Donald Trump and DFA

› Promise to dismantle

› Not on 100 day list

› Alternative higher bank capital ratios in exchange for freedom to conduct full range of banking

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What concerns about DFA?

Title VII and Volker

› Interpretation of participations as derivative contracts

› Particular concern on risk participations in funded transactions

S&W view on the concerns

› Identified banking products exemption

Can you safely proceed?

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FATCA

Foreign Account Tax Compliance Act

› What is it to do with me?

› Wide ranging effect – extra territorial

Some provisions in effect

› Live issues

Relates to US source interest

Applies to

› FFIs (foreign financial institutions)

› NFFE(non-financial foreign entities)

› Reviewing US source payments

Insert wording allowing party to make deductions required by FATCA with no gross up obligation

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The treatment of trade debt

The original “true trade” debate

› What is true trade debt – determined by reference to how it arose

› Debt incurred for purchase of assets in course of trading would be trade debt

Abengoa and the mood of Moodys

› Reverse factoring has debt-like features

Moodys view that trade payables held by bank should be finance debt not trade debt

Who is affected by this?

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Trade debt as finance debt

Not just balance sheet question

Auditors need to appreciate effect

Why should holder of “debt” (invoice) determine what sort of debt it is?

What problems

› Requirement to do trade debt transactions only

› What about insurers?

› What about rescheduling?

› What about liquidation?

What could be affected

› All supply chain finance?

› All forfaiting transactions?

A work around?

› Make sure variations and payment period is in the original invoice/payment obligation

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Developments affecting capital requirements in a trade context A year of promise but hopes dashed

Mixed message for 2017 and beyond

What will “Basel IV” contain?

Harder line in bank liquidity for

› Increase in leverage ratio

› Limit on banks using internal calculations

But some respite

› Determination of Net Stable Funding Ratio (NSFR)

Better treatment for export finance

Better treatment for “self liquidating products”

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A little more detail

Exposure covered by ECA guarantees to have 0% leverage ratio

Required stable funding (RSF) as applied to trade products

› Short term commitments

› Can it apply to longer term?

Other proposals by EBA (European Banking Authority)

› Assets shorter than six months (like letters of credit, factoring and forfaiting)

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Sanctions landscape Changes but clear what is covered?

More sanctions continue

Iran remains the “unknown” - Trading future

OFAC in US giving some help

OFSI, part of HMT established in March 2016

› Powers to impose monetary penalties and determine level of penalty from April 2017

› Serious breaches could be fined the higher of £1m or 50% of breach

› Details of serious breaches to be published

› Over 100 suspected breaches to financial sanctions dealt with by HMT last year

› Consultation launched in December on approach to imposition of fines

Reputation risk

Fines can be imposed on banks, countries, groups and businesses

Policing and Crime Bill currently going through Parliament

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Money Laundering etc.

Joint Committee of the three European Supervisory Authorities

› Final guidelines on the charteristics of a risk-based approach to anti-money laundering and terrorist financing supervision;

› The identification of ML/TF risk factors, whereby competent authorities obtain information on both domestic and foreign ML/TF threats affecting the relevant markets;

› The risk assessment, whereby competent authorities use this information to obtain a holistic view of the ML/TF risk associated with each credit or financial institution (‘firm’), or group of firms, including the inherent risk to which the firm or group of firms is exposed and the risk mitigants a firm or group of firms has in place;

› The allocation of AML/CFT supervisory resource based on this risk assessment, which includes decisions about the focus, depth, duration and frequency of on‐site and off‐site activities, and supervisory staffing needs, including technical expertise; and

› Monitoring and review to ensure the risk assessment and associated allocation of supervisory resource remains up to date and relevant

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Anti-Money Laundering – 4th Money Laundering Directive Transposition – June 2017

Proposed amendments following “Panama Papers” leak

Consultation on transposition into national law opened 15 September 2016 and closed on 10 November 2016

What are the issues?

› More transactions will be caught

› Greater emphasis on customer due diligence (CDD)

› Entities to be aware of and update ownership information in central registries

› Modification of meaning of ultimate beneficial owner

› Greater need for risk based approach

› Blanket exemption allowing use of simplified CDD removed

› New proposals include virtual currency exchange platforms

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Anti-Money Laundering – 4th Money Laundering Directive - Aims MLD4 aims to:

Provide a proportionate means of deterring money laundering and terrorist financing activity whilst balancing the burdens on businesses

Improve cooperation between Financial Intelligence Units

Take into account the Financial Action Task Force's (FATF) standards

Help ensure consistency across global AML policies

Increase transparency of ownership

Include previously unregistered entities – “obliged entities”

Increase number of firms complying with principles such as CDD

Include previously “Designated Non-Financial Business and Professionals”

Widen scope of “transfer of funds” transactions exceeding EUR 1,000

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Anti-Money Laundering – 4th Money Laundering Directive - Consultation LMA submitted a response to consultation in support of the aims

of proposals but seeking clarification on points to ensure reporting requirements would not be overly burdensome:

› When would it be necessary to report beneficial ownership – want to avoid disrupting entities who legitimately use such structures

› People with significant control regime (PSC) – would a security agent holding more than 25% of shares satisfy the first of the specified conditions to be considered a PSC or will they be exempt?

Joint arrangements and joint interests – will they be caught?

Interaction with financial collateral arrangements

The reasonable steps duty – are there circumstances where a borrower would be required to issue a “restrictions notice”?

What information will need to be provided from financial trusts – will requirements go beyond those imposed by CDD in Directive?

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Industry Documentation Development

BAFT and its MRPAs

Remember the difference between English and New York law BAFT

What could be changed

› updating to cover US law changes like FATCA

› reflect current issues causing problems like restructuring and whether consultation or prior agreement before changes

› others?

No wholesale rewrite

How to implement changes?

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Supply Chain and its Definitions

New Standard Definitions

› Joint industry product – variety of banks and stakeholders took part

What has changed, some examples:

“Buyer-led” “Buyer-centric”

“Supplier-led” “Supplier-centric”

“Double-funding” “Double financing”

Will changes make supply chain and receivables financing easier?

Aim is that market standard definitions will assist in establishment of legal precedents and consistency across geographic regions

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The Industry Standards

UCP 700

› There currently will not be one

URBPO

› Will 2013 rules be updated?

What else should change?

What about Insurance policies post Insurance Act 2015?

What about other credit risk mitigants?

Any ideas for industry guidelines?

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Pointers for Client Transactions

Keep Confidential (of course)

Are standards slipping?

› Effect of industry standard forms

› Documents not always fit for purpose

Are documents flexible enough (or too flexible)?

› Control of goods

› Control of funds

Back to basics

› Have basics been forgotten?

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Problems with Payees

Letters of credit and discrepancies

SWIFT payments and the fraudsters

Are the rules tight enough?

Are the documents tight enough?

Consider some examples

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Opportunities and the future New obligors coming to the market

› They may well agree better documents

Deals still hampered by issues like stamp duty on security documents

Work outs and what to do if something has gone wrong

EBA priorities: liquidity and leverage ratio; credit risk and credit risk modelling; review of CRR; implementation of total loss absorbing capacity (TLAC)

European Commission “Key Initiatives” for 2017: implementation of the “Digital Single Market Strategy” and of the “Trade for All” strategy and data protection package…

Message is still an upbeat one for 2017

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Current dates for your diary:

Breakfast seminars 2017 26 January 2017 23 February 2017

23 March 2017 27 April 2017

25 May 2017 21 June 2017

27 July 2017 28 September 2017

26 October 2017 23 November 2017

14 December 2017

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Geoffrey L Wynne Partner

Geoffrey Wynne is head of Sullivan & Worcester’s London office and also head of its Trade & Export Finance Group. He has extensive experience in banking and finance, specifically trade and structured trade and commodity finance. He also advises on corporate and international finance, asset and project finance, syndicated lending, equipment leasing and workouts and financing restructuring.

Geoff is one of the leading trade finance lawyers and has advised extensively many of the major trade finance banks, multilateral financers and companies around the world on trade and commodity transactions in virtually every emerging market including CIS, Far East, India, Africa and Latin America. He has worked on many structured trade transactions covering such diverse commodities as oil, nickel, steel, tobacco, cocoa and coffee. He has worked on warehouse financings in many jurisdictions and advised on how to structure involving warehouse operators and collateral managers. He has also advised on ownership structures and repos for commodities and receivables financings.

Geoff sits on the editorial boards of a number of publications and is a regular contributor and speaker at conferences. He is also the editor of and contributor to The Practitioner’s Guide to Trade and Commodity Finance published by Sweet & Maxwell and A Guide to Receivables Finance, a special report from TFR published by Ark.

Sullivan & Worcester UK LLP Tower 42 25 Old Broad Street London EC2N 1HQ

T +44 (0)20 7448 1001 F +44 (0)20 7900 3472 gwynne@sandw.com

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Awards & Recognition

TFR “Best Law Firm in Trade Finance”

Trade & Forfaiting Review (TFR) named Sullivan & Worcester "Best Law Firm in Trade Finance" in its 2014, 2015 and 2016 TFR Excellence Awards

GTR “Best Law Firm 2015 Poll”

Sullivan & Worcester UK LLP was top ranked firm in the Global Trade Review (GTR) Best Law Firm 2015 poll

The Legal 500 UK 2016

Sullivan & Worcester UK LLP was ranked in the following category in The Legal 500 UK:

› Trade Finance (Tier 1)

Chambers UK 2016

Chambers UK ranked Sullivan & Worcester UK LLP, along with Geoffrey Wynne and Simon Cook in the following area:

› Commodities: Trade Finance (UK-wide)

www.sandw.com

Offices

Boston Sullivan & Worcester LLP One Post Office Square Boston, MA 02109 Tel: 617 338 2800 Fax: 617 338 2880

London Sullivan & Worcester UK LLP Tower 42 25 Old Broad Street London EC2N 1HQ Tel: +44 (0)20 7448 1000 Fax: +44 (0)20 7900 3472

New York Sullivan & Worcester LLP 1633 Broadway New York, NY 10019 Tel: 212 660 3000 Fax: 212 660 3001

Washington, D.C. Sullivan & Worcester LLP 1666 K Street, NW Washington, DC 20006 Tel: 202 775 1200 Fax: 202 293 2275

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© 2016 Sullivan & Worcester

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This presentation is not designed to provide legal or other advice and you should not take, or refrain from taking, action based on its content. We are providing information to you on the basis you agree to keep it confidential. If you give us confidential information but do not instruct or retain us, we may act for another client on any matter to which that confidential information may be relevant.

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