The Deputy Chairman's Message

Sean Edwards on Two New Regulatory Challenges

Nobody likes regulation. Full stop. End of. Bankers like the law a little bit more but not much. One of the jobs of the IFA is to help the market find its way through some of these issues. We have published market practice bulletins commenting on topical issues and giving guidance on difficult areas. We have not published any new bulletins for a while but we would like to hear from you with suggestions for fresh bulletins.


As we detail below, we are also taking the fight directly to the regulators. This is an area in which we must operate collaboratively with other associations. Just as importantly, we need input from all members as to where and what we should be pushing and lobbying on.

The financing of trade-related receivables – through forfaiting and other forms of supply chain finance – is a growth industry which we all want to be a success. The aim of the IFA is to help all of you achieve that success.

TWO REGULATORY CHALLENGES – A CALL TO ARMS!

Two regulatory issues which have been lurking in legislation on bank regulation and capital are starting to be felt by the forfaiting and wider trade finance community. In one case, the issue is an unintended consequence of rules designed for quite different purposes but which have, as has proved to be the case on more than one occasion, hurt the provision of trade finance. Your association is working to provide solutions for both these issues.

The first, which has already been the subject of consultation with the membership, regards the need to produce reasoned legal opinions on the effectiveness of credit risk protection under the European Capital Requirements Directive (commonly known as CRD IV) which implements the terms of Basel III into European law. Paragraph 194 of the associated regulations requires affected institutions to ensure that their credit mitigation techniques are "legally effective and enforceable in all relevant jurisdictions." Sub-participation agreements, in particular the BAFT form, are one such form of credit risk protection.

We are consequently looking to produce, possibly with BAFT itself, a market standard opinion to satisfy, so far as possible, this obligation and provide guidance on dealing with questions where this not possible. This opinion would be published on the IFA website for the benefit of all IFA members. Only IFA members will be able to rely on it.

The second issue originating in the United States but is very likely to have consequences for foreign banks directly and indirectly. Under the Dodd-Frank Act the wide definition of swap in the legislation had the potential to cover sub-participation agreements as well as classic swaps. Changes were made to ensure that funded sub-participation agreements would not be caught by the new provisions but those changes left the legal status of unfunded sub-participation unclear. Extension of Dodd-Frank to unfunded risk participation would result in the application of very onerous reporting and other requirements to these agreements which would make them impractical to use.

We are therefore looking to help BAFT in lobbying the US Government to produce clarity on this point. We urge members not yet engaged in lobbying on this point to contact their regulators and express their opinions.

INCREASING USE OF THE URF

Whilst off to a slow start, the popularity of the Uniform Rules for Forfaiting (URF) ICC Publication No. 800, is increasing with more transactions incorporating these rules and using the forms of optional model agreement attached to them.

Interest in the URF is especially notable in Asia one of the world’s largest forfaiting markets where the existence of an internationally recognised standard is appreciated in what is sometimes a fragmented market. Amongst other changes, the URF brings clarity to questions of recourse and examination of documentation.

All members have been sent a free copy of the rules. Further copies are available from the ICC Bookshop.

Happy forfaiting!