Banking Law News - Abreu Advogados · PDF fileA conference co-presented by the IBA Banking Law Committee and the IBA Securities Law Committee, ... contribution to the Banking Law Committee

Banking Law News Newsletter of the International Bar Association Legal Practice Division

Vol 19 No 2 December 2012

i n t e r n a t i o n a l b a r a s s o c i a t i o n c o n f e r e n c e s

CPD/CLE HOURS

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London São Paulo Seoul

Inaugural Asia-based International Financial Law Conference: West meets East

28 February – 1 March 2013 Waldorf Astoria Shanghai, Shanghai, China

A conference co-presented by the IBA Banking Law Committee and the IBA Securities Law Committee, with the support of the IBA Asia Pacific Regional Forum

The Asia-based IFLC aims to review, from the Asian, European and American perspectives, the changing legal environment in which the Asian financial market operates, through the use of comparisons and case studies.

Conference attendees can expect to:

•Meetforefrontsecuritiesandfinanciallawyers,bankers,in-house counsels and other legal professionals in Asia

•LearnhowAsiancountriesseetheirchallengesandopportunities in the global securities and financial market

•UnderstandhowtheWesternfinanciallegalupdatesaffectAsian market practice and trends

•DiscoverhowAsianfinancialmarketstructuresinspiretheWestandtheworld

•LearnhowtocopewithregulatoryscrutinyinAsia

•Discoveruniqueopportunitiesinfinanciallegalpracticeforyoung Asian lawyers

Topics include:

•InternationalisationoftheRenminbi(RMB)

•SecuritiesandFinancialLitigationandArbitration

•RecentTrendsinAcquisitionFinanceinAsia

•ImpactoftheDodd-FrankAct,andinParticulartheVolckerRule, on the Asian Banking Regime

•TheAttractionsandChallengesinTappingtheIPOMarketin Asia

•PrivatisationofPublicCompanies

•OpportunitiesforYoungLawyersintheFinancialMarkets

Banking Law nEwSLETTER december 2012 3

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in this issue

From the Co-Chairs 4

Committee officers 4

Dublin content 7

Conference reports: international Financial Law Conference, 23–25 May 2012, istanbul, turkey 8

Central clearing of derivatives: what is it and how will it affect you? 8

Enforcement of different security agent structures: parallel debt, trusts, and alternative solutions 9

Country updates

BraziL

Recent developments affecting the Brazilian financial market Walter Stuber 10

inDia

Development in the Indian banking sector for the recovery of debts due to banks and financial institutions Deepak M Thakkar 13

itaLy

Jurisdiction over derivatives: a reversal of the Italian case law? Giuseppe De Falco 16

New provisions of issuance of bonds from unlisted companies Carmelo Raimondo and Marco Pagani 17

Further than we wanted to go: a debatable Italian reform of banking commissions Luigia Giuliani Thompson 20

PortugaL

Facing new challenges in close-out netting and set-off arrangements in derivatives markets in Portugal Ana Margarida Frazão 22

turkey

Treasury sukuk certificates in Turkey Serra Basoglu Gurkaynak and Alisya Bengi Danisman 25

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All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or stored in any retrieval system of any nature without the prior permission of the copyright holder. Application for permission should be made to the Head of Publications at the IBA address.

Publications officerRodger MurrayZu’bi & Partners, ManamaTel: +973 (17) 549 608Fax: +973 (17) 532 [email protected]

This newsletter is intended to provide general information regarding recent developments in banking law. The views expressed are not necessarily those of the International Bar Association.

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i n t e r n a t i o n a l b a r a s s o c i a t i o n c o n f e r e n c e s

CPD/CLE HOURS

AVAILABLE

4th Floor, 10 St Bride Street, London EC4A 4AD, United Kingdom Tel: +44 (0)20 7842 0090 Fax: +44 (0)20 7842 0091 www.ibanet.org

London São Paulo Seoul

Inaugural Asia-based International Financial Law Conference: West meets East

28 February – 1 March 2013 Waldorf Astoria Shanghai, Shanghai, China

A conference co-presented by the IBA Banking Law Committee and the IBA Securities Law Committee, with the support of the IBA Asia Pacific Regional Forum

The Asia-based IFLC aims to review, from the Asian, European and American perspectives, the changing legal environment in which the Asian financial market operates, through the use of comparisons and case studies.

Conference attendees can expect to:

•Meetforefrontsecuritiesandfinanciallawyers,bankers,in-house counsels and other legal professionals in Asia

•LearnhowAsiancountriesseetheirchallengesandopportunities in the global securities and financial market

•UnderstandhowtheWesternfinanciallegalupdatesaffectAsian market practice and trends

•DiscoverhowAsianfinancialmarketstructuresinspiretheWestandtheworld

•LearnhowtocopewithregulatoryscrutinyinAsia

•Discoveruniqueopportunitiesinfinanciallegalpracticeforyoung Asian lawyers

Topics include:

•InternationalisationoftheRenminbi(RMB)

•SecuritiesandFinancialLitigationandArbitration

•RecentTrendsinAcquisitionFinanceinAsia

•ImpactoftheDodd-FrankAct,andinParticulartheVolckerRule, on the Asian Banking Regime

•TheAttractionsandChallengesinTappingtheIPOMarketin Asia

•PrivatisationofPublicCompanies

•OpportunitiesforYoungLawyersintheFinancialMarkets

InternatIonal Bar assocIatIon legal PractIce DIvIsIon4

FroM the Co-Chairs

this year has proved to be eventful, with our first International Financial Law Conference (IFLC) held in a Muslim country – Istanbul in May. It was

great to see so many of you supporting both that conference and the very successful IBA Annual Conference in Dublin in October. The Banking Law Committee were involved in no less than five sessions, including joint sessions with the Corporate Social Responsibility Committee, the Tax Committee and the Litigation Committee. Our solo efforts in the Banking Law Committee looked at the loan facility agreements and the support of banks. Thank you to all who spoke at our sessions and attended them in such numbers.

We hope that 2013 will be an equally exciting year. The conference year starts for the Banking Law Committee in February

when, on 28 February and 1 March, the inaugural Asian-based IFLC will be held in Shanghai. All the officers of the Committee would very much encourage you to attend this exciting new conference. In Europe, the European-based IFLC will take place in Copenhagen on 22 –24 May 2013. This will be the 30th such conference, to which we are very much looking forward. We hope to see many of you there.

Finally, as your continuing Co-Chair this year, Stephen Powell would very much like to thank Michel Molitor on behalf of all of you. Michel is stepping down as Co-Chair at the end of 2012. He has made a huge contribution to the Banking Law Committee and we are grateful for his efforts. He will be replaced by Thomas Schirmer, who starts his two-year term on 1 January 2013.

Michel Molitor

MOLITOR, Luxembourg

[email protected]

stephen Powell

Slaughter and May, London

[email protected]

From the co-chairs

committee officers

co-chairsMichel MolitorMolitor Avocats à la Cour, LuxembourgTel: +352 297 2981Fax: +352 272 [email protected]

Stephen PowellSlaughter & May, LondonTel: +44 (20) 7090 3131Fax: +44 (20) 7090 [email protected]

Vice-chairsThomas SchirmerBinder Grösswang Rechtsanwälte GmbHTel: +43 (1) 5348 0340Fax: +43 (1) 534 [email protected]

William JohnstonArthur Cox, DublinTel: +353 1 618 0560Fax: +353 1 618 [email protected]

Publications officerRodger MurrayZu’bi & Partners, ManamaTel: +973 (17) 549 608Fax: +973 (17) 532 [email protected]

SecretaryRoberto Emilio SilvaMarval, O’Farrell & Mairal, Buenos AiresTel: +54 (11) 4310 0100Fax: +54 (11) 4310 [email protected]


CoMMittee oFFiCers

Website officerGiuseppe SchiavelloCDP Studio Legale AssociatoTel: +39 06 4522401Fax: +39 06 [email protected]

corporate counsel Forum liaison officerJoerg Andreas WitmerCredit Suisse AG, ZurichTel: +41 44 333 52 92Fax: +41 44 332 83 [email protected]

Young lawyers liaison officerJohan HagerRoschier, StockholmTel: + 46 (8) 553 190 00Fax: + 46 (8) 553 190 [email protected]

Academic liaison officerKlaus LöberEuropean Central Bank, FrankfurtTel: +49 (69) 1344 7225Fax: +49 (69) 1344 [email protected]

UNIDroIT liaison officerAlban Caillemer du FerrageGide Loyrette Nouel, ParisTel: +33 (0)1 40 75 36 50Fax: +33 (0)1 40 75 37 [email protected]

Asia Pacific Forum liaisonDina WadiaJSA Advocates and Solicitors, MumbaiTel: +91 22 4341 8506Fax: +91 22 4341 [email protected]

european Forum liaison officerHannes VallikiviTark Grunte Sutkiene, TallinnTel: +372 611 0900Fax: +372 611 [email protected]

latin American regional Forum liaison officerCarlos AlbarracínChadbourne & Parke, New YorkTel: +1 (212) 408 1081Fax: +1 (646) 710 [email protected]

SIrc liaison officerBenoît FeronNautaDutilh, BrusselsTel: +32 2 566 81 44Fax: +32 2 566 81 [email protected]

Subcommittee officers

banking regulation chairFernando Azofra VegasUria Menendez Abogados, MadridTel: +34 915 864 564Fax: +34 915 860 [email protected]

Vice-chairWillem JarigsmaLoyens & Loeff, AmsterdamTel: +31 20 578 57 62 Fax: +31 20 578 58 [email protected]

clearing and Settlement of Financial Securities Transactions chairJohn M EliasFasken Martineau Dumoulin, TorontoTel: +1 (416) 868 3334Fax: +1 (416) 364 [email protected]

Financial and banking law conferences chairRussell J DaSilvaHogan Lovells, New YorkTel: +1 (212) 909 0668 - (212) 909 0668Fax: +1 (212) 909 0660 - (212) 909 [email protected]


CoMMITTEE oFFICERS

Vice-chairEwa ButkiewiczWardynski & Partners, WarsawTel: +48 (22) 437 8200/537 8200Fax: +48 (22) 437 8201/532 [email protected]

Innovations in Financing Transactions chairBenedikt MaurenbrecherHomburger, ZurichTel: +41 (43) 222 1000Fax: +41 (43) 222 [email protected]

Vice-chairMichael Steen JensenGorrissen Federspiel, CopenhagenTel: +45 3341 4141Fax: +45 3341 [email protected]

International Financial law reform chairLiam FlynnBank for International Settlements, BaselTel: +41 (61) 280 [email protected]

Vice-chairDirk H BliesenerHengeler Mueller, FrankfurtTel: +49 (0)69 1 70 95-559Fax: +49 (0)69 1 70 [email protected]

legal opinions chairDavid Dali LiuJun He Law Offices, ShanghaiTel: +86 (21) 5298 [email protected]

Vice-chairAnders M HansenDanders & More, CopenhagenTel: +45 33 12 95 12Fax: +45 33 12 95 [email protected]

Project Finance chairRobert L Nelson JrAkin Gump Strauss Hauer & Feld, San FranciscoTel: +1 415 765 9588Fax: +1 415 765 [email protected]

Vice-chairHalide Gul CetinkayaÇetinkaya Avukatlık Ortaklığı, IstanbulTel: +90 212 349 50 22Fax: +90 212 349 50 [email protected]

Islamic Finance chairFarhaz KhanOuter Temple Chambers, LondonTel: +44 (0) 7976 093527Fax: +44 (20) 7583 [email protected]

Vice-chairAlan RodgersHadef & Partners, DubaiTel: +971 4 429 2999Fax: +971 4 429 [email protected]

lPD AdministratorCharlotte [email protected]

Muhammad YunusThe Nobel Peace Prize winner and leading banker on the failure of the Western fi nancial system and how to tackle global poverty.

Patrick HonohanThe Governor of the Central Bank of Ireland on the errors that led to the abrupt end of the ‘Celtic Tiger’ years and negotiating with the Troika.

Selected fi lms from the 2012 Annual Conference in Dublin

IBA Global Insight interviewed a range of bankers and economists at the Annual Conference, Dublin 2012. To view in-depth analysis and expert

opinion from the fi gures below, including the fi nancial crisis, its causes and potential solutions, please visit www.tinyurl.com/dublinfi lms

Joseph StiglitzThe Nobel Prize-winning economist and former Senior Vice-President of the World Bank on the fi nancial crisis, inequality and why austerity won't work.


29TH INTERNATIoNAL FINANCIAL LAW CoNFERENCE MAy 2012 SESSIoN REPoRT

29Th INTerNATIoNAl FINANcIAl lAW coNFereNce mAY 2012 SeSSIoN rePorTS

ChairStephen Powell Slaughter and May, London

SpeakersLiam Flynn Bank for International Settlements, BaselMatthias Bock Managing Director and General Counsel, Goldman Sachs, FrankfurtMarc Benzler Clifford Chance, FrankfurtSusanne Schjølin Larsen Kromann Reumert, CopenhagenGünsel Topbaş Head of Securities and Fund Services, Turkey, Global Transaction Services, Citibank, Istanbul

stephen Powell introduced the topic and the speakers. He noted that we would not be debating why central clearing is being introduced in many

countries, but rather identifying what shape it will take and how it will affect you.

Liam Flynn gave a general introduction to clearing of derivatives around the world. He looked at the G20 commitments, the international implementation landscape in various jurisdictions and the challenges to implementation. Along the way, Liam gave us some background on the Bank for International Settlements and its involvement in this process.

Matthias Bock then presented the key parts of the European Market Infrastructure

stephen Powell

Slaughter and May, London

stephen.powell@ slaughterandmay.com

central clearing of derivatives: what is it and how will it affect you?

Regulation (EMIR) and its implementation, giving a masterful summary of a hugely complex regulatory framework.

Marc Benzler looked in more detail at the complex picture that EMIR presents in some areas. By way of illustration, he focused on some particular issues around segregation of collateral and the so-called ‘porting’ of derivatives and their collateral from a clearing member (where such clearing member becomes insolvent).

Susanne Schjølin Larsen presented aspects of the view from end-users on central clearing and the move away from over-the-counter (OTC) derivatives. In particular, she picked up on some factors (and many unknowns) for non-financial counterparties, pension funds and others as the regulatory framework develops.

Günsel Topbaş had the final say. He noted the purpose of regulation, in particular when set against the tendency of markets to create bubbles, which have a tendency to burst. Then he led us back through Turkish history in this area over the last decade or so. Turkey is ahead of many other jurisdictions in that many products were shifted from the OTC market on to exchanges in around 2001. Here a segregated approach to collateralisation prevails. Günsel improved our linguistic abilities in noting that ‘emir’ means ‘order’ or ‘instruction’ in Turkish.

Clearly, this is a developing topic, which no doubt will need further debate.


29TH INTERNATIoNAL FINANCIAL LAW CoNFERENCE MAy 2012 SESSIoN REPoRT

Co-ChairsJean-François Adelle JeantetAssociés, ParisLukasz Szegda Wardynski & Partners, Warsaw

SpeakersFranz Fayot Elvinger, Hoss & Prussen, LuxembourgMichael Josennans Freshfields Bruckhaus Deringer, FrankfurtÖzge Okat Pekin & Pekin Law Firm, IstanbulProfessor Teun Struycken NautaDutilh, Amsterdam

the session was held on Thursday 24 May 2012, and the panel of speakers included experienced banking and finance practitioners from selected

civil law jurisdictions. The panel explored recent market

developments concerning the use of different security agent structures in civil law countries and, specifically, enforcement and recognition of claims and security, based on parallel debt, trusts or similar concepts.

By way of introduction to the topic, there was an explanation of the challenges in implementing the concept of a security agent in financing transactions in civil law jurisdictions, and the solutions that are used in practice to implement effective security agent structures (both by using existing legal concepts and by describing specific local legislation). Parallel debt – whereby a separate covenant to pay to a security trustee is created

enforcement of different security agent structures: parallel debt, trusts, and alternative solutions

Lukasz szegda

Wardynski & Partners, Warsaw

EMAIL

to enable the security agent to hold a security interest in own name – was mentioned as one of the techniques in common use in many civil law countries.

The panellists discussed in more detail recent examples of court cases in France and Poland, where the concept of parallel debt has been tested and recognised in local courts. Emphasis was put on the landmark decision of the French Supreme Court in the Belvédère case. In September 2011, the French Supreme Court confirmed the legality of parallel debt created under foreign law and recognised the use of trusts in international debt financing. The court concluded that the structure of parallel debt complies with French public policy, as long as the parallel debt is structured to avoid the risk of double recovery by lenders. Furthermore, a mechanism, whereby payment to a security agent discharges underlying debt to lenders, was found to be similar to joint and several liability under French law.

The technique of parallel debt was also recognised by a bankruptcy court in Poland and the arguments were in fact similar to those presented in the Belvédère case; specifically, parallel debt does not conflict with Polish public order if it is construed to avoid double recovery.

The panellists finally discussed whether the arguments in the above cases could also be used by practitioners in other civil law jurisdictions to provide more certainty in financing transactions.


RECENT DEVELoPMENTS AFFECTING THE BRAzILIAN FINANCIAL MARKET

recent developments affecting the brazilian financial market

BraziL

Walter stuber

Walter Stuber Consultoria Jurídica, São Paulo

[email protected]

the two most important regulatory issues affecting the Brazilian financial market which need to be highlighted and have been recently enacted are

the following: the Central Bank of Brazil (Banco Central do Brasil – ‘Bacen’) must now approve the purchase of non-financial entities by Brazilian financial institutions and/or other entities authorised to operate by Bacen (FIs); and there are new rules for merger and acquisition (M&A) transactions involving two or more FIs.

acquisition of non-financial entities

On 29 March 2012, the Brazilian Monetary Council (Conselho Monetário Nacional – CMN) decided to amend the provisions of CMN Resolution No 2723, of 31 May 2000 (CMN Res 2723/2000), which sets forth detailed rules, conditions and procedures for installing dependencies abroad and for the direct or indirect equity interest in Brazil or abroad by FIs. The change has been introduced by means of CMN Resolution No 4062, of 30 March 2012 (CMN Res 4062/2012).

Formerly, according to the original wording of Article 8 of CMN Res 2723/2000, FIs should inform Bacen, in the form and within the time established by Bacen, about any equity investments held in the capital of other companies located in Brazil, as well as the total or partial disposal of such investments.

Now, with the new wording of Article 8 approved by CMN Res 4062/2012, the applicable rules are the following:• theparticipationofFIseitherdirectlyor

indirectly in any companies headquartered in Brazil or abroad is subject to the prior

authorisation of Bacen, except for the typical equity investments portfolios of investments held by investment banks, development banks, development agencies (agências de fomento) and multiple-service banks with investment or development portfolios, which are expressly admitted. Any of these banks will be able to acquire a non-financial company with the aim to proceed with its corporate reorganisation for later resale and this type of transaction is not subject to the prior authorisation of Bacen;

• thepriorauthorisationfromBacenappliesto the initial participation, any percentage increase of such participation and the situations for which it is mandatory to draw up financial statements in a consolidated manner. This authorisation is not required in the case of equity investments made in Brazil on a temporary basis, not recorded in the permanent assets and non-consolidated in accordance with the regulation in force;

• equityinvestmentswillonlybeadmittedoncompanies carrying out complementary or subsidiary activities to the corporate purpose of the participating institution;

• applicationsforauthorisationtotheparticipation (equity investment) and to increase the percentage of participation should be instructed with information and detailed justifications covering at least the description of the corporate purpose and activities of the participated company, the analysis of the synergy resulting from the participation and the appropriateness of the stake (shareholding) to the business strategy of the participating institution.

Bacen may: determine at any time that FIs must present the above-mentioned information and justifications, as well as the implementation of adjustment measures

coUNTrY UPDATeS



considered appropriate; and establish the conditions for the remittance of such information and justifications.

The new rules introduced by CMN Res. 4062/2012 intend to give more security to the Brazilian financial system, reducing the systemic risks that can be magnified when a FI whose end-activity is the financial intermediation, decides to act on another segment. To participate in a different business, the FI must first consult Bacen.

The situations for which it is mandatory to draw up financial statements on a consolidated basis continue the same. Pursuant to Article 3 of CMN Res 2723/2000, FIs must prepare their consolidated financial statements. This requirement includes participations in companies located in Brazil and abroad in which FIs hold directly or indirectly, alone or in conjunction with other partners, including by force of the existence of voting agreements, rights of partners that provide them, individually or cumulatively, with: preponderance on the social deliberations; ability to elect or dismiss most administrators; effective operational control, characterised by common management or administration; corporate control represented by the sum of the shares held by the institution, regardless of the percentage of ownership of its managers, controllers and related companies, as well as those purchased, directly or indirectly, via investment funds.

In the preparation of the consolidated financial statements, it should be included, even if there is no equity investment, the FIs linked by effective operational control, characterized by common management or administration, or for acting in the market under the same trademark or trade name. Investments in shares held indirectly via investment funds shall also be treated as equity investments.

It must be consolidated on a pro rata basis the participation of FIs: (i) in companies located in Brazil, except: (a) institutions where there is a shared control with other conglomerates, financial or not; or (b) institutions belonging to the public sector; (ii) in institutions where there is a shared control with distinct institutions belonging to financial conglomerates, subject to the supervision of Bacen; and (iii) companies located abroad, where there is a shared control with other conglomerates, financial or not.

Article 4 of CMN Res 2723/2000 clarifies that it is possible to consolidate the financial

statements in proportion to the equity interest owned, in the event of absence of corporate control (as defined by Article 3), provided that this possibility has been previously authorised by Bacen.

In conclusion, the need for prior authorisation by Bacen established by CMN Res 4062/2012 may reduce the agility of FIs to purchase certain non-financial companies. There was no fixed deadline for Bacen to release or not such authorisation. Bacen will examine the operation within the time frame and in accordance with its own criteria. This is a variable that must be inserted in the negotiations from now on. This requirement, however, applies only to permanent investments and not to temporary investments.

new M&a rules

On 24 April 2012, the Board of Directors of Bacen decided to adopt new rules for M&A transactions involving two or more FIs, and from now on Bacen may require that the efficiency gains resulting from this type of operation be shared with the consumers. It is expected that this would result in the reduction of the fees charged by FIs from their customers, for example.

The new rules have been announced by means of Bacen Circular No 3950, of 26 April 2012 (Circular 3950/2012), which deals with the analysis by the Brazilian regulator (Bacen) of certain concentration acts in the Brazilian Financial System and the delivery of information by FIs to Bacen.

These concentration acts will be examined by Bacen from the point of view of their effect on competition, subject to consideration concerning the stability of the Brazilian Financial System.

For the purpose of Circular 3950/2011, ‘concentration acts’ means any of the following transactions: transfer of controlling shareholding, whereby the shares representing the company’s control are negotiated; merger, whereby one of more companies are absorbed by another, which succeeds in all their rights and obligations; consolidation, whereby two or more companies unite to form a new company, which shall succeed the existing companies in all their rights and obligations; transfer of business, whereby only the structure generating the financial operations or services is assigned; and any other concentration act, which comprises



any transaction that results in the increase of participation of FIs in the segments of market in which they operate. These rules do not apply to transactions between FIs of the same conglomerate or credit assignments that do not involve transfer of business.

In order to permit the analysis of the Concentration Act, the FIs involved in the transaction must indicate one institution (the leading institution) to provide the following information and documents to the Department of Organization of the Financial System (Departamento de Organização do Sistema Financeiro – ‘Deorf’) of Bacen:(i) indication of the markets of financial

products and services and customer profile of each institution involved, as well as their geographical areas of operation, demonstrating through comparative tables the respective contribution of each FI, before and after the intended transaction;

(ii) a copy of the contractual instruments signed by the FIs which are related to the transaction;

(iii) a detailed description of the nature, the characteristics and the strategic objectives of the transaction;

(iv) a reasoned description of the financial and economic performance of the FIs in the respective segments of the financial market in which they operate in the past three years, showing: (a) the organisational and operational structures; (b) the offered products and services and the technology used; and (c) the customer profile; and

(v) the factors that motivate the transaction, describing: (a) adherence to the strategic objectives defined in the business plan of the acquiring institution, in the event of transfer of control or merger, or of the other institutions involved in any other case; (b) the characteristics of the transaction that add value to the acquiring institution, in the event of transfer of control or merger, or to the other institutions involved in any other case; and (c) reflections of the transaction on the organisational and operational structures of the acquiring institution, in the event of transfer of control or merger, or of the institutions involved in any other case, and its impact on the products and services offered to customers, indicating possible measures designed as a result of the transaction,

including restructuring plans and relocation of dependencies.

In the event of transfer of control or merger, the following additional information shall be provided to Deorf: economic and financial evaluation of the acquired or merged institution, justifying the price paid, the criteria for fixing the value of goods or intangible rights related to the transaction, as well as any adjustments in price arising out of the due diligence (if any); and analysis of the price paid based on market multiples method referenced at least to Net Worth Reference values, credit operations, network of dependencies and customers.

The quantitative information must correspond to the same base date. The information, including any calculations and projections, should be accompanied by study and evidentiary documents, containing the methodology used for the estimates, as well as reference to their sources.

The leading institution is responsible for providing to Deorf documents and information pertaining to all the legal entities involved in the transaction, including those that do not fall into the category of FI, that is, the ones that do not depend on Bacen’s authorisation to operate.

Deorf can request other documents and information, including to institutions of the Brazilian Financial System which are not engaged in the transaction but may be deemed relevant to the analysis of the Concentration Act by Bacen.

The analysis by Bacen of the Concentration Act will cover the following steps: definition of the relevant market of the participating institutions; determination of the market share under control of the participating institutions; analysis as to the likelihood of the exercise of market power by the institution or institutions resulting from the proposed transaction; analysis of the economic efficiencies that can be generated by the transaction; and evaluation of the cost/benefit relationship of the transaction.

At the time of approval of the Concentration Act, Bacen can establish restrictions in order to mitigate the effects that might reduce the well being of the users of financial products or services or the economic efficiency. In this regard, Bacen may require that the institutions involved in the transaction sign a formal contract, known as ‘Agreement on Concentration Control’, setting forth commitments relating to sharing of the efficiency gains resulting


DEVELoPMENT IN THE INDIAN BANKING SECToR

Development in the Indian banking sector for the recovery of debts due to banks and financial institutions

inDia

Deepak M thakkar advocate

Pragna Thakkar and Co, Mumbai

deepak@ pragnathakkar.com

the success or failure of an economy is seen from the growth in the real Gross Domestic Product (GDP). The finance sector is one of the ways to

achieve success in economy.From time to time the government of India

(GOI) has considered reform in the Banking Sector. In 1981, the Tiwari Committee suggested setting up special tribunals for the recovery of the debts due to the banks and financial institutions.

The balance of payment crisis in 1991 was the eye opener, and consequently opened up the door for the reform in the banking sector in India. It was during this time that the GOI took further initiative to identify the issues and explore the prospect of reform. The Finance Ministry of the GOI decided to set up the committee for reform in the banking sector. It was proposed to form a committee headed by M Narasimham, former Governor of the Reserve Bank of India (RBI).

The Narasimham Committee presented the report to the then Finance Minister. One of the recommendations made by the Narasimhand Committee-I report was the setting up of special tribunals to speed up the process of recovery of the loans.

supreme Court of india on Drt act and sarFaesi act

With a view to give impetus to the industrial development of the country, the central and state governments encouraged the banks and other financial institutions to formulate

liberal policies for grant of loans and other financial facilities to those who wanted to set up new industrial units or expand the existing units. Hundreds of thousands of people took advantage of easy financing by the banks and other financial institutions but a large number of them did not repay the loans, and in many cases instituted frivolous cases, succeeding in persuading civil courts to pass orders of injunction against the steps taken by banks and financial institutions to recover their dues.

Due to lack of adequate infrastructure and non-availability of manpower, the regular courts could not accomplish the task of expeditiously adjudicating the cases instituted by banks and other financial institutions for recovery of their dues. As a result, several billion rupees of public money was blocked in unproductive ventures.

In order to redeem the situation, the GOI constituted a committee under the chairmanship of Shri T Tiwari to examine the legal and other difficulties faced by banks and financial institutions in the recovery of their dues and suggest remedial measures.

The Tiwari Committee noted that the existing procedure for recovery was very cumbersome, and suggested that special tribunals be set up for recovery of the dues of banks and financial institutions by following a summary procedure. The Tiwari Committee also prepared a draft of the proposed legislation, which contained a provision for disposal of cases in three months and conferment of power upon the Recovery Officer for expeditious execution of orders made by adjudicating bodies.

from the transaction. The breach of the commitments formalised through this type of contract, which will be available to the public, shall subject the infringing

institutions and their administrators to the appropriate administrative penalties to be imposed by Bacen.



The issue was further examined by the Committee on the Financial System headed by Shri M Narasimham. In its First Report, the Narasimham Committee also suggested setting up special tribunals with special powers for adjudication of cases involving the dues of banks and financial institutions.

After considering the reports of the two Committees and taking cognisance of the fact that as at 30 September 1990, more than 15 lakh cases filed by public sector banks and 304 cases filed by financial institutions were pending in various courts for recovery of debts, etc, amounting to INR60bn, the Parliament enacted the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (the ‘DRT Act’).

The new legislation facilitated creation of specialised forums, that is, the Debts Recovery Tribunals and the Debts Recovery Appellate Tribunals for expeditious adjudication of disputes relating to recovery of the debts due to banks and financial institutions. Simultaneously, the jurisdiction of the Civil Courts was barred and all pending matters were transferred to the Tribunals from the date of their establishment.

An analysis of the provisions of the DRT Act shows that the primary object of that Act was to facilitate the creation of special machinery for speedy recovery of the dues of banks and financial institutions. This is why the DRT Act not only provides for establishment of the Tribunals and the Appellate Tribunals with the jurisdiction, powers and authority to make summary adjudication of applications made by banks or financial institutions, and specifies the modes of recovery of the amount determined by the Tribunal or the Appellate Tribunal, but also bars the jurisdiction of all courts, except the Supreme Court and the High Courts, in relation to the matters specified in section 17.

The Tribunals and the Appellate Tribunals have also been freed from the shackles of procedure contained in the Code of Civil Procedure. To put it differently, the DRT Act has not only brought into existence special procedural mechanisms for speedy recovery of the dues of banks and financial institutions, but also made provisions for ensuring that defaulting borrowers are not able to invoke the jurisdiction of civil courts for frustrating the proceedings initiated by the banks and other financial institutions. For a few years, the new dispensation worked well, and the officers appointed to man the tribunals worked with great zeal to ensure that cases involving

recovery of the dues of banks and financial institutions were decided expeditiously.

However, with the passage of time, the proceedings before the tribunals became synonymous with those of the regular courts, and the lawyers representing the borrowers and defaulters used every possible mechanism and dilatory tactics to impede the expeditious adjudication of such cases. The flawed appointment procedure adopted by the government greatly contributed to the malaise of delay in disposal of the cases instituted before the tribunals.

In a survey conducted by the Ministry of Finance, the GOI revealed that as of 2001, a sum of more than INR 12tn was due to the banks and financial institutions, and this was adversely affecting the economy of the country. Therefore, the GOI asked the Narasimham Committee to suggest measures for expediting the recovery of debts due to banks and financial institutions.

In its second report, the Narasimham Committee noted that the non-performing assets of most of the public sector banks were abnormally high and the existing mechanism for recovery of the same was wholly insufficient. In Chapter VIII of the report, the Committee noted that the evaluation of the legal framework has not kept pace with the changing commercial practice and financial sector reforms, and as a result of that, the economy could not reap the full benefits of the reform process. The Committee made various suggestions for bringing about radical changes in the existing adjudicatory mechanism. By way of illustration, the Committee referred to the scheme of mortgage under the Transfer of Property Act and suggested that the existing laws should be changed, not only for facilitating speedy recovery of the dues of banks, etc, but also for quick resolution of disputes arising out of the action taken for recovery of such dues.

The Andhyarujina Committee, constituted by the central government for examining banking sector reforms, also considered the need for changes in the legal system. Both, the Narasimham and Andhyarujina Committees suggested the enactment of new legislation for securitisation and empowering the banks and financial institutions to take possession of the securities and sell them without intervention of the court. The GOI accepted the recommendations of the two committees and that led to enactment of the Securitisation and Reconstruction of



Financial Assets and Enforcement of Security Interest Act, 2002 (the ‘SARFAESI Act’), which can be termed as one of the most radical legislative measures taken by the Parliament for ensuring that dues of secured creditors, including banks and financial institutions, are recovered from defaulting borrowers without any obstruction. For the first time, secured creditors have been empowered to take steps for recovery of their dues without intervention of the Courts or Tribunals.1

In Allahabad Bank v Canara Bank,2 which arose before the Honourable Supreme Court with respect to the issues relating to the impact of the provisions of the DRT Act on the one hand and the provisions of the Companies Act, 1956, on the other hand. The Honourable Supreme Court held that Canara Bank cannot rely on the words in section 19(19) viz, ‘to be distributed among its secured creditors’ for claiming any amount lying in the Tribunal towards its security nor can it claim priority as against the Allahabad Bank.

The Constitutional validity of the SARFAESI Act was challenged before the Supreme Court in the case of Mardia Chemicals reported in AIR 2004 SC 2371.3 The Honourable Supreme Court upheld the validity of the Act and its provisions except that of sub-section (2) of section 17 of the Act, which it declared ultra vires of Article 14 of the Constitution of India.

With the DRT Act and SARFAESI Act in force simultaneously, in the case of Transcore v Union of India,4 the Honourable Supreme Court held that withdrawal of the Original Application is not a condition precedent before taking recourse to the SARFAESI Act.

In another case before the Honourable Supreme Court, Narayan Chandra Ghosh v UCO Bank,5 the issue that arose was whether the Appellate Tribunal has jurisdiction to exempt the person filing Appeal under section 18 of the SARFAESI Act from making any pre-deposit. It was held that pre-deposit is mandatory and therefore, complete waiver of deposit was beyond the provisions of the SARFAESI Act.

the reserve Bank of india’s perspective in the banking sector

The Reserve Bank of India (RBI) has, from time to time, come out with various policies and schemes to strengthen the banking sector in India. It has recommended that

the balance sheet of banks and financial institutions must make full disclosure and should be transparent.

Apart from the recoveries of loans through the DRT and SARFAESI Acts, the RBI and GOI Corporate Debt Restructuring (CDR) Scheme should be noted. The objective of the CDR framework is to ensure timely and transparent mechanism for restructuring and rescheduling corporate debts of viable entities facing problems, outside the purview of BIFR, DRT and other legal proceedings.

The RBI also suggested other reforms of financial inclusion and financial literacy. By financial inclusion, RBI means to deliver financial services at affordable costs to the poor and vulnerable groups of the society. The objective of the financial inclusion was to have an organised and timely financial system, which would include people of low-income groups.

The Committee set up by RBI recommended setting up the Banking Codes and Standards Board of India. This is a Society registered under the Societies Registration Act, 1860. It functions as an independent and autonomous body – a watchdog to monitor and ensure that the Banking Codes and Standards adopted by the banks are adhered to in true spirit while delivering their services. In substance, the Board has been set up to ensure that the common person, as a consumer of financial services from the banking industry, is in no way at a disadvantageous position and gets what he or she has been promised.6

Conclusion

It would be fair to say that the regulatory framework of banks and financial institutions in India are now on a par with banks internationally. With the constant reforms in banking sector, India is expected to influence and retain its place globally in near future.

Notes1 Supreme Court of India, United Bank of India versus

Satyawati Tandon & others (26 July 2010).2 AIR 2004 Supreme Court 1535 (Allahabad Bank v Canara

Bank).3 AIR 2004 Supreme Court 2371 (Mardia Chemicals v Union of

India)4 Supreme Court of India, Civil Appeal No 3228 of 2006,

M/s. Transcore v Union of India, (29 November 2006).5 Supreme Court of India, Civil Appeal No 2681 of 2011,

Narayan Chandra Ghosh v Uco Bank (18 March 2011).6 www.bcsbi.org.in.


JuRISDICTIoN oVER DERIVATIVES: A REVERSAL oF THE ITALIAN CASE LAW?

Jurisdiction over derivatives: a reversal of the Italian case law?

itaLy

giuseppe De Falco

Ughi e Nunziante Studio Legale, Rome

[email protected]

the Italian Court of Cassation (decision no 2926 of 27 February 2012, ‘Decision 2926/2012’) has recently construed the scope of

application of the exclusive jurisdiction clause set forth under Article 13 of the standard ISDA Master Agreement.

the facts

A Italian municipality with the intention of reducing its financial exposure towards the banks, granted a mandate (governed by Italian law) to four international banks, in order to obtain advice and the arrangement of a suitable solution.

A complex financial transaction was set up. The municipality issued 30-year maturity bonds and, at the same time, entered into some amortising swaps and into a collar IRS swap, which were governed by the ISDA Master Agreement, aimed at hedging the bonds repayment obligations. All this took place in 2005, even though the derivatives were renegotiated five times between 2005 and 2008.

In 2008, an expert ad hoc committee appointed by the municipality carried out due diligence on the contracts and came to the conclusion that the banks had intentionally set up a uneven, iniquitous financial structure.

Therefore, a controversy arose between the Italian municipality and a group of banks,1 whereby the former summoned the latter, seeking compensation for damages caused to the municipality as a consequence of the banks’ alleged violation of the conduct rules relating to the pre-contractual phase preceding the conclusion of derivatives, as well as for the violation of the contractual obligations set forth under the mandate (governed by Italian law) granted to some of the banks by the municipality.

Some of the banks requested that the Court of Cassation issue a preliminary ruling on the competent jurisdiction, thus suspending the main proceedings. The banks advocated the jurisdiction of the English courts since all derivatives were governed by the standard ISDA Master Agreement, which contains, at

Article 13, an exclusive jurisdiction clause submitting ‘any suit, action or proceedings relating to the Agreement’ to the English courts. The claimant opposed affirming Italian jurisdiction.

the decision of the italian Court of Cassation

The legal grounds in favour of Italian jurisdiction

The Court’s decision is long and deploys a lot of complex technical reasoning; this article will give a succinct summary.

The Italian Court of Cassation has reiterated that, according to the consistent Italian case law, the competent jurisdiction shall be identified on the basis of the legal claims of the plaintiff.

The main claim of the municipality concerns the alleged torts committed by the banks, which misleadingly induced the municipality to enter into risky, damaging and inadequate financial transactions.

Based upon the type of claim brought by the municipality, the Court of Cassation considered Article 5, paragraph 3 of the Regulation (EC) no 44 of the Council of 22 December 2000, on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, to be the applicable provision, such article stating that:

‘A person domiciled in a Member State may, in another Member State, be sued:[…]3. in matters relating to tort, delict or quasi-delict, in the courts for the place where the harmful event occurred or may occur’.

As Italy was the country where the municipality suffered the alleged damages, the Italian Courts should thus have jurisdiction over the case at issue.

The legal grounds against the English jurisdiction

The defendants’ (the banks) objection to Italian jurisdiction, and therefore that Article 13 of the ISDA Master Agreement,


NEW PRoVISIoNS oF ISSuANCE oF BoNDS FRoM uNLISTED CoMPANIES

should apply and, hence, that the exclusive jurisdiction of the English courts had been chosen by the parties to the derivatives – has been dismissed by the Court of Cassation on the basis of the following arguments.

The Court pointed out that jurisdiction clauses, shall be construed in a ‘restrictive way’ (ie, preferring an interpretation that restricts the scope of application of the exclusive jurisdiction clause).

Therefore, where it is unclear whether the exclusive jurisdiction clause also applies to actions in tort and not only to contractual actions, a construction restricting the exclusivity of the chosen jurisdiction only to actions in contract shall prevail. In addition, according to the Court, the specific wording of the jurisdiction clause set forth in Article 13 of the ISDA Master Agreement referring to suit and actions ‘relating to this Agreement’ seems not to encompass actions in tort.

Moreover, among Italian contract construction rules set forth in the civil code, there is a rule that (Article 1370) provides that clauses in contracts pre-prepared unilaterally by one party shall be preferably construed against that party.

similar cases, different judgements.

We omit herein many other aspects of the decision, which would nonetheless deserve an accurate analysis. However, it is worth noting that the commented decision is supposedly in conflict with the pre-existing case law of the same Court of Cassation with respect to

the interpretation of Article 13 of the ISDA Master Agreement.

In 2007 (20 February with decision n 3841), in a very similar case involving the interpretation of Article 13 of the ISDA Master Agreement, the Court of Cassation took a diametrically opposite view affirming the exclusive jurisdiction of the foreign court chosen (English jurisdiction) by the party.

In that case, however, differently from the case determined with the Decision 2926/2012, the plaintiff’s main claim was not an action in tort but an alleged breach of contract and, however formal and bizarre this may appear, this is the actual technical justification for two entirely different judicial outcomes.

In this respect, it is worth mentioning that under Italian law it is quite frequent for lawyers and permitted by the judges to ask the Court for different measures in relation to the same case. Should the Court dismiss the main claim, it may still accept a subordinate claim made by the same party.

Consistently with its case law, and as briefly mentioned at the beginning of this short summary, the Italian Court of Cassation has always made clear that the jurisdiction shall be identified on the basis of the legal grounds underpinning the main claim, and not the subordinate claim.

Note1 Two US banks, one Irish bank, one English bank, one

German bank and one Italian bank.

New provisions of issuance of bonds from unlisted companies

itaLy

Carmelo raimondo

Chiomenti Studio Legale, Milan

[email protected]

Marco Pagani

Chiomenti Studio Legale, Milan

[email protected] o

n 15 June 2012, the Italian Cabinet (Consiglio dei Ministri) approved a law decree introducing certain urgent measures aimed at the

growth and development of the country, successively published on the Official Gazette of the Italian Republic as Law Decree No 83 of 22 June 2012 (as subsequently amended

and supplemented by Law no 134, of 7 August 2012 – the ‘Development Decree’). Among the various innovations introduced with the Development Decree to face the economic downturn, there are the new provisions reducing the requirements and facilitating the issuance of debt instruments for companies that do not issue financial



instruments traded on regulated markets or multilateral trading systems in order to provide such companies an easier access to the debt capital markets.

Through Article 32 (strumenti di finanziamento per le imprese) of the Development Decree, Italian companies would benefit from a favourable legal framework aimed at improving their financial sustainability in the short, medium and long term. The new provisions on debt instruments issued by Italian companies are a further step towards the creation of a more mature corporate debt market, which would enable Italian corporates to reduce their dependence for funding needs upon traditional bank lending.

Therefore addresses of such measures are, in addition to listed and unlisted larger companies, small and medium enterprises defined under Italian law as the companies falling within the definition provided for in the Recommendation of the European Commission 2003/361/EC: enterprises that employ less than 250 people; have an annual turnover not exceeding €50m; or companies having a total balance sheet not exceeding €43m (SMEs). Excluded, however, are the banks and micro-enterprises, defined in the Recommendation of the European Commission 2003/361/EC as the companies employing less than ten people and having a total annual balance sheet of up to €2m.

Features of the bonds and commercial papers issuable by italian unlisted companies

The Development Decree provides for three different types of debt instruments available to unlisted companies.

Commercial papers (cambiali finanziarie)

For their short-term financial needs, Italian companies will be able to issue commercial papers. Commercial papers were already contemplated under Italian law through Law 13 January 1994 No 43. Pursuant to Article 32, the regulation of commercial papers has been partially changed in terms of maturity, quantitative limits to their issuance and their negotiability regime. Paragraphs 5, 5-bis and 7 of Article 32, setting the new legal framework for commercial papers, provide that: the maturity of the commercial papers must be comprised between one and 36 months; it will be possible to issue commercial papers in dematerialised form and to list

such financial instruments on regulated markets or multilateral trading systems; and the tax treatment of commercial papers will be aligned with the new and favourable tax treatment for bonds issued by unlisted issuers, as described below.

Bonds (obbligazioni)

Under the current regulatory framework, it is possible for unlisted companies to issue bonds and to list such debt instruments in regulated markets or multilateral trading systems. It is worth noting that before the Development Decree, such debt instruments have not been widely utilised by unlisted companies, due to the very restrictive quantitative requirements set out in Article 2412, paragraph 1, of the Italian civil code, pursuant to which the total amount of bonds that an unlisted company can issue is limited to the aggregate of the double of the corporate capital of the issuer and its voluntary and statutory reserves. Pursuant to the last paragraph of Article 32, the limits set out in Article 2412 will not be applicable to the issuance of bonds that will be listed in regulated markets or multilateral trading systems. Some exceptions are already provided for under paragraphs 2 and 3 of Article 2412, pursuant to which the quantitative limit set out in paragraph 1 of the same article may be exceeded if bonds are subscribed by qualified investors (in which case, the amount of bonds subscribed by professional investors do not fall within the limits of paragraph one or are secured by mortgages (in which case the secured bonds do not fall within the limits of paragraph one up to two thirds of the amount secured by the mortgage). For medium to long-term financial needs and for investment reasons, now it will be easier for unlisted companies to issue bonds and to list such debt securities in regulated markets or multilateral trading systems. Such listings will be a condition to access the new tax regulation and to benefit from the more favourable regime available under the new provisions of the Development Decree.

Subordinated bonds and performance related bonds (obbligazioni subordinate – obbligazioni partecipative)

The third novelty introduced on debt instruments is the one concerning the introduction of bonds aimed at enabling unlisted companies to cope with their long-term financial needs. It will now be possible



for issuers to achieve a major degree of flexibility on their medium and long-term funding (ie, with maturity equal to or longer than 36 months) through the issuance of bonds that payments obligations are subordinated to the payments of the sums due to other creditors (ie, creditors other than the bondholders); or bonds whose payments are linked to the economic performance of the issuer. In this latter case the interest will be calculated as the sum of: a fixed component of interest, not to be lower than the official reference interest rate (tasso ufficiale di riferimento); and a variable component of interest linked to the performance of the issuer, in respect to which the limits of the usury law will not be applicable.

requirements for the issuance of commercial papers and the role of the sponsor

Capital markets require a high level of transparency and, without any credit rating or reputation in the markets themselves, it would be hard for unlisted companies to issue securities and to list them in the markets. The role of the sponsor is to provide the market with information about the issuer and to perform market-making activities to insure the liquidity of the issued security; its role will be discussed below. The Development Decree introduces three requirements that have to be met by unlisted companies in order to issue commercial papers in regulated markets or in multiparty trading systems: a) the issuance of bonds or commercial

papers has to be arranged by a sponsor (except for bonds that will be offered to the public and admitted to trading in a regulated market or in a multilateral trading system within the EU);

b) the sponsor has to buy and hold, until their maturity, a share of the securities issued not lower than:(i) for issues up to €5m, five per cent

of the issue price;(ii) plus, for issues between €5m and

€10m, three per cent of the issue price;

(iii) plus for issues over €10m, two per cent of the issue price;

c) the last financial statements of the issuer has to be audited; and

d) the circulation of bonds or commercial papers has to be limited to qualified investors (as defined in article 100 of Legislative Decree 24 February 1998

No 58) that shall not be shareholders of the issuer; such limitation operates both in the primary and in the secondary market.

Different companies may be qualified as a sponsor and arrange the issuance of bonds or commercial papers: banks, investment companies, harmonised management companies, financial intermediaries, banks providing investment services in non-EU countries (if authorised to perform their activities in Italy).

As arranger of the issuance the sponsor will assist the issuer in the issuance procedure and in the initial placement of bonds or commercial papers: this activity consists in a sort of quality check provided for by the sponsor. After the issuance of the debt security, the sponsor will have to give notice, in the context of the issue, if the overall outstanding amounts of the commercial papers issued by the same issuer is larger than an amount equal to the current assets (attivo corrente) of the issuer, which term would refer to the assets due to expiry within the year from the end of the tax year of the last financial statements; and at the issue, classify the issuer with two parameters: its creditworthiness (classified in five categories – excellent, good, satisfactory, weak and negative) and the level of guarantee (classified in three categories – high, normal and low). Under paragraphs 5-bis, comma 2-quarter and 2-quinquies of Article 32, it is provided that larger companies (ie, companies other than SMEs) that do not have listed securities may waive the assistance of a sponsor or any of the services provided by the same provided that the issue is covered, for an amount not lower than 25 per cent of the issue value, by a guarantee granted by a bank or an investment company.

tax treatment of the financial instruments issued under article 32

One of the characteristics that made bonds and commercial papers issued by unlisted companies not convenient for investors was the comparative advantage in terms of tax treatment of instruments issued by listed companies, that attracted the vast majority of investments from international investors. The Development Decree introduces significant changes in relation to the tax treatment of commercial papers and bonds that will be applicable to unlisted companies subject to


FuRTHER THAN WE WANTED To Go: A DEBATABLE ITALIAN REFoRM oF BANKING CoMMISSIoNS

the condition of the debt securities provided for under Article 32 being issued and traded in regulated markets or multilateral trading systems. Pursuant to paragraph 9 of Article 32, unlisted companies issuing bonds or commercial papers will not be subject to withholding or deduction for or on account of Italian withholding tax (tax rate 20 per cent) in accordance with Italian Legislative Decree number 239 of 1 April 1996 (as amended by Article 32). The penalising tax regime applied to bonds and securities

similar to bonds issued by unlisted companies has been amended, and it will also be possible for unlisted companies to deduct interests payable with respect to bonds and similar instruments with the same rules applicable to listed companies (about 30 per cent of EBITDA), subject to the further condition of the debt securities issued under Article 32 being initially subscribed by, and subsequently traded between, qualified investors not being shareholders of the issuer.

Further than we wanted to go: a debatable Italian reform of banking commissions

itaLy

Luigia giuliani [email protected]

there have been a number of (in)famous Italian banking fee arrangements over the years, among them the so-called ‘commissione di

massimo scoperto’ (maximum utilisation fee). This particular fee arrangement was activated when a client used an overdraft facility on a current account for the maximum amount granted. The commissione di massimo scoperto allowed the bank to be paid an additional fee for this top amount usage. The fee applied was ordinarily of a significantly high level, much higher than the fee applied to the granting or utilisation of the facility below that maximum amount.

Similarly significantly expensive fee arrangements were also in place in cases where clients were granted by the bank an overdraft facility in consideration of their urgent liquidity needs. In these circumstances, too, the fees charged by the banks were significantly higher than ordinary fees.

These practices have raised many doubts over time, especially as the application of these fees most often happened with reference to situations where the client was facing a crisis of liquidity and had little alternative but to turn to the bank for help. In some cases, the client was de facto on the verge of insolvency. Clients typically turning to these kinds of credit facilities were

small and medium-sized enterprises, facing temporary and urgent liquidity needs.

After a long series of claims and parliamentary questioning by consumers and trade associations, and following a financial crisis where small and medium-sized enterprises – a good part of the most vital texture of the Italian economy – have been among the hardest hit, the government decided to face the issue. Law Decree No 29/2012, now converted into Law No 62/2012, was designed to strengthen and complete a reform initiated some years ago and deals with a number of these banking fee arrangements, including the commissione di massimo scoperto.

The first legislative intervention in 2008 (Law Decree No 185/2008, as further amended by Law Decree No 78/2009) established that the most radical and detrimental versions of the commissione di massimo scoperto were to be considered null and void, in particular those where the use of the maximum amount, or the line granted by way of urgency, had a duration shorter than 30 days. It also established that the bank could not impose a fee for credit lines not used at all by the client, or fee arrangements that were not proportionate to the duration and amount of the usage of the credit line.

In an even more critical phase of the financial crisis, the government decided to look into the issue once again, regulating


FuRTHER THAN WE WANTED To Go: A DEBATABLE ITALIAN REFoRM oF BANKING CoMMISSIoNS

in detail the whole matter of banking fees arrangements with reference to credit lines.

The final and current version of article 117 bis of the Italian Banking Law (legislative Decree No 385/1993), as amended by law Decree No 29/2012, now establishes a precise maximum percentage – 0.5 per cent quarterly, that is, two per cent a year – of the fees that can be charged to clients by banks when dealing with credit lines. It must be clarified that this does not concern the margin on the interest rate, which remains open to negotiation (but not entirely open, because the interferences with the usury law regime need also to be carefully kept into consideration).

What the law is looking at is any fee, regardless of what it is called or what its purpose is. Paragraph 3 of Article 117 bis states very clearly that provisions whereby any fee or charge or expense different from those described above are established are to be deemed as null and void.

For anyone working in banking, especially in corporate and investment banking, many terms can come to mind: upfront fee, arrangement fee, utilisation fee, compensation fee etc. A wide range of definitions is used to describe in detail the various activities performed by the bank in the context of the granting, arranging or managing of a credit line. Most of these fees now seem destined to disappear, at least in the context of a ‘credit line’ as meant in the reform here analysed.

This leads to the second, and effectively more problematic, element of the new version of the law: its objective scope. As mentioned before, the concept of ‘overdraft’ is not the only contract or arrangement to be included. The law speaks in fact of ‘apertura di credito’ (roughly translated as ‘credit line’), which, under Italian law, means precisely the contract regulated by articles from 1842 to 1845 of the Italian Civil Code.

In the Italian banking market, apertura di credito is a legal regime utilised with reference to two significant categories of banking arrangements: ordinary overdraft facilities, granted on a current account, and revolving credit facilities, usually granted in the context of more complex transactions, such as facilities syndicated on the international markets, or structured finance facilities (project finance, real estate finance, leveraged finance etc). In these transactions, revolving credit facilities are one of the types of the facilities granted so that the borrower can satisfy its continuous corporate necessities for

liquidity and use the other credit lines for the completion of a specific project.

As can be imagined, the nature of the counterparties involved in the two different categories of the legal regime are quite different: while overdraft arrangements are effectively used by consumers and all enterprises, syndicated facilities and structured finance facilities are granted to medium-large enterprises, or financial institutions, which operate in the banking market with very different needs and with a very different contractual power. This means that the objective scope of the rule of law has also a significant impact on the subjective aspect of its application.

That is to say that the imposition of what can be seen as an administered price for a private service will affect not only the relationships held by the banks with the subjects that may effectively deserve some form of public protection, again, consumers and small-and medium sized enterprises, but also relationships held with a much more powerful range of clientele: large enterprises and financial institutions.

The definitive coming into force of the legislation is subject to the issuance of a specific implementing regulation by the Interministerial Committee for Credit and Savings (Comitato Interministeriale per il Credito e Risparmio – CICR), which was supposed to be finalised by 1 July 2012, but it has not been yet.

On 28 May 2012, the Bank of Italy issued some draft guidelines for CICR and opened a wide consultation with the market. The draft Guidelines do not include any specific consideration on the subjective–objective scope of the rules of law and, therefore, do not offer any help on the points raised here.

The market continues to interrogate itself on the changes needed to comply with the new provisions, especially with reference to the category of subjects, including large enterprises and financial institutions, which did not seem to be the target of the reform initiated some years ago.

This clientele does not ordinarily turn to the bank for temporary, urgent or limited-liquidity needs. The services rendered by the banks to these categories of clientele are instead of a quite sophisticated nature, almost always tailor-made, especially when arranging the granting of credit lines where the amounts are very significant and the activities quite complex.

Will the new political price be enough to pay for all the work done by the bank?


FACING NEW CHALLENGES IN DERIVATIVES MARKETS IN PoRTuGAL

Facing new challenges in close-out netting and set-off arrangements in derivatives markets in Portugal

PortugaL

ana Margarida Frazão

Abreu Advogados, Lisbon

[email protected]

in the over-the-counter (OTC) derivatives markets, netting and set-off provisions are of paramount importance to mitigate credit risk and operational

costs for counterparties. However, since the outbreak of the 2008 financial crisis and subsequent weakening of the global economy, governments began to focus on legislative reforms to promote financial stability and mitigate the systemic impact of financial sector failures.

Although Portuguese law recognises the validity and enforceability of netting and set-off arrangements in derivatives transactions, recent amendments to the legal framework of credit institutions have put at risk the enforceability of such provisions in case of resolution and winding up of failed credit institutions.

In fact, these changes are in line with the forthcoming EU framework for crisis management, which means that the Portuguese legislator is only anticipating (and actually testing) what is expected to be implemented in all European jurisdictions in the short term.

What is netting?

Netting may be generally defined as a process whereby the payment obligations of a party are set-off against the payment obligations of its counterparty, in order to achieve a reduced net obligation.

Two forms of netting are widely employed in derivatives markets: payment netting and close-out netting.

Payment netting allows the parties to settle their positions by netting multiple cash flows that are due under one or more transactions on a given day, to a single net payment. It allows the reduction of settlement risk and operational costs, as well as streamlining the processing of transactions.

On the other hand, close-out netting applies in case of early termination of the

agreement following the occurrence of an event of default or a termination event specified in the agreement. The early termination of the agreement and subsequent close-out netting may be automatically triggered after the occurrence of the relevant event (if so specified in the agreement) or upon notice by the non-defaulting party.

Pursuant to close-out netting provisions, all outstanding transactions (or all of a given type of transactions) are terminated, and early termination amounts payable by each party are calculated. Ultimately, such positive and negative termination amounts are set-off into a single net amount.

This method reduces the credit risk of counterparties in OTC derivatives (by considering the net position of each party) and, in case of bankruptcy, it prevents liquidators from ‘cherry picking’ the performance of the in-the-money transactions, while resolving the out-of-the-money transactions.

At the end of the day, close-out netting and set-off play an important role in promoting stability of the financial system.

netting under standard derivatives documentation

The most commonly used standard documentation for OTC derivative transactions is the International Swaps and Derivatives Association’s (ISDA) Master Agreement. The parties to an ISDA Master Agreement may enter into one or more derivatives transactions, which will be evidenced by confirmations governed by such master agreement. These confirmations are incorporated into a single agreement.

The ISDA Master Agreement provides for a set of events of default that gives the non-defaulting party the right to terminate all transactions under the agreement. These events include insolvency, bankruptcy or any other similar actions or measures.



If the non-defaulting party chooses to trigger an event of default, the close-out netting mechanism takes place, allowing market participants to protect against adverse market changes.

enforceability of netting and set-off arrangements

When entering into an ISDA Master Agreement, market participants should confirm if the netting and set-off provisions of the said contract are enforceable in the relevant jurisdictions.

Although the ISDA Master Agreement is governed by English law or by the laws of the state of New York, insolvency proceedings are generally subject to the exclusive jurisdiction of the courts of the home country of the bankrupt. The insolvency laws of many European jurisdictions allow the liquidator to choose for the performance of some contracts, whilst resolving others.

Since 1997, Portuguese Law recognises the validity and enforceability of close-out netting arrangements. Pursuant to Decree Law 70/97 of 3 April, the parties to a bilateral derivatives agreement may agree to net all their obligations under the contract, in case of counterparty insolvency or bankruptcy. This rule also applies when the credit institution is subject to any recovery, reorganisation or similar measure.

However, recent developments on the Portuguese legal framework of bankruptcy and reorganisation measures applicable to credit institutions may challenge or weaken close-out netting in our jurisdiction.

impact of the financial crisis on bankruptcy legislation

The 2008 international financial crisis has shown governments the need for extensive legislative reforms to promote the stability of financial markets, and the effective protection of depositors. For such purposes, supervision authorities need to be provided with the necessary powers and tools to deal with unsound or failing credit institutions, in order to minimise risks of systemic contagion.

In 2010 the European Commission announced its intention to draw up an EU framework for crisis management in the financial sector, which would include new legislation on bank recovery and resolution.

However, such legislative process is still in progress and the European Commission

proposal for a Directive establishing a framework for the recovery and resolution of banks and investment firms in the EU was only published on 14 June 2012 (the ‘EC Proposed Directive’).1

In the interim, Portugal was dealing with serious challenges regarding its financial situation, which ultimately led to the EU/International Monetary Fund (IMF) Financial and Economic Assistance Programme. In addition, Portuguese credit institutions were facing severe difficulties, and in some cases they had to receive extraordinary public financial support.

Against this background and pursuant to the EU/IMF Financial and Economic Assistance Programme, the Portuguese government enacted the Decree Law 31-A/2012, of 10 February (the ‘DL 31-A/2012), which in fact anticipated the above-mentioned European Commission’s Directive proposal.

the new legal framework of credit institutions’ bankruptcy

A new turn on the enforceability of netting agreements

Under the previous legal framework, the powers granted to the Bank of Portugal in case of deterioration of the financial situation of a credit institution were limited to the withdrawal of the corresponding authorisation, which would ultimately lead to its winding up.

New mechanisms were now created to promote the recovery or, where not possible, the orderly resolution of failed financial institutions.

For such purposes, the Bank of Portugal is empowered to intervene in three main areas: prevention, early intervention and resolution. Such intervention must comply with the general principles of necessity, adequacy and proportionality, and take into account the following criteria: seriousness of the risks involved; impact on the stability of the financial system; and the protection of depositors. Resolution tools generally operate as a special insolvency regime for credit institutions, and should be applied by the Bank of Portugal as the last resort.

The Bank of Portugal may decide to apply the following resolution tools to a credit institution that is failing or likely to fail:• saleofallorpartofthecreditinstitution’s

business to another credit institution authorised to operate in Portugal; or



• transferofallorpartofthecreditinstitution’s business to a bridge bank.

In case of partial sale or transfer, all the eligible individual contracts with the same counterparty and subject to the same netting agreement must be assigned to the new entity as a single agreement (‘no cherry-picking’ rule).

If the Bank of Portugal applies any of the said resolution tools to a credit institution, a temporary suspension of the early termination and close-out rights under a netting arrangement is automatically triggered, provided that such rights arise solely of the use of the resolution tools.

This temporary stay is limited to 48 hours and is effective when: the suspension is notified; or the Bank of Portugal makes public its decision, whichever is the earliest.

Notwithstanding the above, this new legislation exempts from the temporary stay: collateralisation agreements and payments or delivery obligations under Directive 98/26/EC of the European Parliament and of the Council, of 19 May 1998, on settlement finality in payment and securities settlement system.

The ratio of this mandatory suspension of close-out netting is to allow the Bank of Portugal to adequately assess what assets and liabilities should be transferred to a sound financial institution or bridge bank, without any external interference, and mitigate the risks involved in that operation.

However, even after the period of the stay, the netting rights arising by reason only of the use of the resolution tools may not be exercised by the counterparty, provided that the netting agreements are effectively sold or transferred to another credit institution or to a bridge bank.

This means that the close-out rights are only preserved in the following cases:• defaultbythecreditinstitutionin

resolution that has occurred before, during or after the period of the stay, and that is not related to entry into resolution; and

• nettingagreementsthatarenotsoldortransferred to another credit institution or to a bridge bank pursuant to a resolution tool, that is, those netting contracts that remain in the failed credit institution that will be wound down.

This temporary stay mechanism is substantially similar to the new legal

framework proposed by the European Commission, except for two main aspects: the trigger of the suspension mechanism and its time limit.

While pursuant to DL 31-A/2012, the temporary suspension of early termination and close-out netting rights is automatically triggered when resolution tools are applied to a credit institution, under the terms of the EC Proposed Directive, resolution authorities will be allowed to impose such a temporary stay at their discretion.

On the other hand, the EC Proposed Directive establishes that such temporary suspension may only last until 5pm on the business day following the notification, which is a shorter period than the one under DL 31-A/2012 (48 hours).

In brief, the above-mentioned limitations to early termination and close-out netting rights will affect netting arrangements in OTC derivatives entered into with credit institutions, subject to the supervision of the Bank of Portugal. Constrains that will likewise affect all European jurisdictions, after the final text of the Directive is approved by the European Parliament and the Council (should the proposed text remain unchanged).

This new legal regime aims to ensure an orderly resolution of failed financial institutions, and thus mitigate the risks of systemic contagion; however it is unclear whether the benefits arising from the new mechanisms will surpass the negative impact on close-out netting enforceability in derivatives markets.

In view of the new restrictions on close-out netting, changes in the way OTC derivatives market players negotiate netting agreements are expected to take place in the near future – not only when dealing with Portuguese counterparties, but also with counterparties of other EU jurisdictions.

Note1 Proposal for a Directive of the European Parliament and

of the Council, establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directives 77/91/EEC and 82/891/EC, Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC and 2011/35/EC and Regulation (EU) No 1093/2010 (COM(2012) 280 final).


TREASuRy SuKuK CERTIFICATES IN TuRKEy

Treasury sukuk certificates in Turkey

turkey

serra Basoglu gürkaynak

Mehmet Gun & Partners, Istanbul

serra.gürkaynak@ gun.av.tr

alisya Bengi Danisman

Mehmet Gun & Partners, Istanbul

alisya.danisman@ gun.av.tr

Following the recent legislation regarding the issuance of sukuk al ijara in the Turkish private sector, that is, exemption of taxes and fees applied

to sukuk certificates and the Communiqué regulating special purpose vehicles1 (SPVs) in Turkey, the government also took steps for the issuance of onshore and offshore Treasury sukuk certificates utilising state-owned properties. To that end, the government introduced new legislation on 29 June 2012 – Code 6327, Amending the Individual Pension Savings and Investment System Law and Certain Laws and Statutory Decrees dated 13 June 2012 (the ‘Code’) – which provides the mechanism, including some tax exemptions, to be applied to the Treasury and the SPVs that are authorised to issue Treasury sukuk certificates.

It is obvious that, by way of these regulations, the government aims to increase the Islamic finance movements, particularly issuance of sukuk certificates in the Turkish market.

the Code introducing treasury sukuk certificates

The Code, by an additional article under the section where domestic and foreign debts are set forth, has brought an amendment to the Turkish Public Finance and Debt Management Law2 regarding the issuance of lease certificates. With this addition, Treasury sukuk certificates can be issued onshore or offshore where the underlying assets will be state-owned movable and/or immovable properties. Also, the said institutions’ intangible assets, such as usufruct rights or operational privileges, can be the basis of a Treasury sukuk al ijara. As a consequence of this, the Treasury will, for instance, be able to issue sukuk certificates, whereupon the income will be generated from the operation of state-owned immovables such as dams, railways, highways, bridges and airports.

The Code primarily foresees having the opinion of the public institution that holds the ownership of the asset as an originator for the issuance of Treasury sukuk.3 Also, the maintenance, repair and construction

of the assets that are the basis of lease certificates will be under the responsibility of the originator public institution.4 However, assets owned by the state or publicly traded companies are excluded from the issuance of Treasury sukuk.5

According to the Code, the Minister of State in charge of the Undersecretariat of Treasury is entitled to authorise the Treasury to establish asset lease SPVs or instruct public capital institutions to establish such SPVs for the sale, purchase, sell-back, lease, leaseback and transfer – with or without payment – of state-owned movable, immovable or intangible assets.

For ease of sukuk transactions in practice, the Code also enables these SPVs to be exempt from complying with the standard legislative requirements on establishment, registration, operation and liquidation. For instance, SPVs will not need to conform to amendments on real-estate registry and official form requirements.6 However, the wording of the relevant article referring to said exemption in the Code is quite vague and broad, which therefore makes it hard to determine the requirements that will be exempted. Indeed, it is highly likely that there will be secondary legislations detailing such general aspects in the future.

The Preamble of the Code7 further states that the revenue gained from the issuance of Treasury sukuk will ultimately be transferred to the Treasury. On the other hand, the Code regulates that any third-party transactions related to the underlying assets of the Treasury sukuk will be prohibited during the sukuk period.8 This is to ensure that the asset and any legal right attached thereto remain conserved and in compliance with the sukuk’s terms and conditions. In that respect, a third-party transferee in good faith will not even be protected as per Article 763/2 of the Turkish Civil Code,9 which protects the third parties in good faith (in their acquisitions of immovable properties) against any claims arising from ownership.

The Preamble of the Code10 provides that for ease of implementation, Treasury sukuk certificates issued by the sukuk SPVs will be



subject to the same legislation pertaining to Treasury bonds, which are regulated under the Law on Central Bank of the Republic of Turkey11 and the Turkish Capital Markets Law.12 In this respect, for example, Article 41 of the Law on Central Bank of the Republic of Turkey provides that financial services for government’s domestic debt certificates13 shall be provided by the Turkish Central Bank. As stated in the Preamble of the Code, this will apply to Treasury sukuk as well. According to Article 4/2 of the Capital Markets Law, debt certificates or securities issued by the general budget institutions and contributory budget institutions14 and/or the Turkish Central Bank are not required to be registered with the Capital Markets Board, provided the Board is informed of such transactions. Similarly, the same will apply to sukuk al ijara issued and amortised by the Treasury’s asset lease SPVs.

Moreover, according to the Code, underlying transactions, such as the sale and leaseback arrangement of state-owned assets, are not subject to the Turkish State Procurement Law15 and the Turkish Public Procurement Law.16 That is to say, any sale and leaseback of the public institutions in that respect does not need to comply with the burdensome public tender procedures. Besides, Treasury sukuk can also be provided as security/guarantee in a public tender.

It is declared17 that Treasury will issue the sukuk certificates in Turkish lira, but the issuance in foreign currency (highly likely in US dollars) will also be provided, such as Eurobonds, considering the participation of foreign investors.

tax exemptions brought by the omnibus Bill for treasury sukuk

Another significant development regarding the issuance of Treasury sukuk is the tax exemptions brought by the Omnibus Bill18 on 15 June 2012 (the ‘Omnibus Bill’). The government, likewise the tax exemptions applied to private sukuk certificates, passed an Omnibus Bill, which, among other issues, provides income tax exemptions to Treasury sukuk certificates. According to temporary Article 67 of the Turkish Income Tax Code (Code 193, dated 6 January 1961), banks and intermediaries are obliged to pay taxes amounting to 15 per cent of their revenues gained as a result of the sale and

purchase, amortisation or loan of securities and capital markets instruments, including periodical revenues generated from the collection of the same, to the extent they are not contingent upon any other securities or capital markets instruments. However, Article 11 of the Omnibus Bill exempts the Treasury and the SPVs established according to the Code to be subject to such taxes amounting to 15 per cent of the revenues they generated. Article 11 of the Omnibus Bill also amends Article 7519 of the Income Tax Code and provides that the revenue generated from offshore leasing certificates issued by SPVs will also be exempted from 15 per cent income tax payment.

As a package, the Code enabling the issuance of Treasury sukuk certificates and the supportive tax exemption regulations applicable to Treasury sukuk certificates will, with no doubt, serve for the improvement of the Turkish sukuk market.

a last word

With the Code of 29 June 2012 enabling the issuance of Treasury sukuk, Treasury sukuk will certainly become a significant tool in leveraging the financing of state-owned projects, including infrastructure and transport. This is expected to trigger state-sponsored (or co-sponsored) areas, such as health, transport, energy, education, telecommunication, public works and construction projects. The Omnibus Bill providing tax exemptions will, as a supportive action of government, highly likely improve the issuance of Treasury sukuk.

Paving the way to issuance of treasury sukuk by legislations will attract foreign investors, and it will also be beneficial for Turkish economy in the long term. With no doubt, the legislative developments will bring further activity to Islamic finance market and attract investors beyond the conventional finance jurisdictions.

Notes1 SPVs specifically authorised to issue sukuk certificates. 2 Law 4749, dated 9 April 2002.3 According to Article 32 of the Code.4 According to the Preamble of Article 32 of the Code.5 See above, note 3.6 See above, note 4. 7 Preamble of Article 32 of the Code. 8 Ibid.9 Code 4721, dated 8 December 2001.10 See above, note 4.


11 Law 1211, dated 3 June 1986.12 Law 2499, dated 30 July 1981.13 Debt certificates are all sorts of Turkish and foreign

securities that are traded on capital and money markets according to Decree No 32 on the Protection of the Value of Turkish Currency – Decree 26801, dated 28 February 2008.

14 General budget and contributory budget institutions, which are financed by public sources, produce public goods and services solely and partially, respectively.

15 Law 2886, dated 10 September 1983.16 Law 4734, dated 22 January 2002.17 As being discussed among the executives of the

participation banks in recent days (www.haberx.com/kira_sertifikalari_tl_ve_dolar_bazindan_olacak(17,n,10985853,908).aspx), which was also confirmed by the Treasury. En kötü senin haberin linkini yazalım

18 Bill 6322, dated 15 June 2012. 19 Article 75 of the Turkish Income Tax Code provides that

the following will be subject to 15 per cent income tax payment, excluding revenues generated from offshore leasing certificates issued by the Treasury or SPVs established according to the Code:• Revenuesgeneratedfromanykindofbillsand

Treasury bonds, securities issued by Housing Development Administration, State Partnership Administration, Privatization Administration; and

• InterestsofanykindofbillsandTreasurybondsaswell as the revenues generated from offshore leasing certificates issued by SPVs and securities issued by Privatization Administration or Housing Development Administration or State Partnership Administration.

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