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Legal & Regulatory Risk NoteJanuary 2013

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Document title | 20122

© Allen & Overy LLP 2013

Legal & Regulatory Risk Note | January 20132


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In this edition 4

Section I: Opinion pieces

Views from the UK 6 – An opinion by Tim House – The approaching regulatory 8 capitalandliquidity“cliff” – Regulation on OTC derivatives, 10 central counterparties and trade repositories (EMIR)

View from Continental Europe 12 – Banks single supervisory mechanism

Views from the U.S. 14 – Antitrust enforcement has arrived on Wall Street – Update on the New York litigation 16 and regulatory landscape – Continued regulatory focus 18 on insider trading/dealing

Views from Asia 20 – Policing the common law? – Update from China 22

Global Risks 24 – The pari passu clause and the Argentine case

Section II: New threats and opportunities for banksindifferentjurisdictions

Australia 28 –Ratingagenciesinthefiringline

Czech Republic 29 – Prague court says that secured creditors should have limited control over the sale of assets in an insolvency

Europe 30 –Threattoone-way(hybrid)jurisdictionclauses – Debt programme updates/establishments 31 and the new Prospectus Directive (PD) regime

– Securitisation vehicles in the wake of the 32 implementation of the Alternative Investment Fund Manager Directive – Dealing with personal data: your antitrust risk 33

Hong Kong 34 – New competition measures imminent

India 35 – Enforceability of default/ex parte foreignjudgmentsinIndia

Italy 36 – A mixed picture on derivatives disputes

The Netherlands 38 – New corporate governance rules passed by the Dutch Parliament

Poland 39 – New regulation on short selling raises concerns

Romania 40 – New amendments to the regulation on issuers and securities transactions

Spain 41 – Crisis management of Spanish credit institutions

United Arab Emirates 42 – Matching theory and practice: enforcing international awards in the UAE

United Kingdom 44 – FCA’s new product intervention powers – LIBOR reforms – an update 45 – UK Supreme Court ruling on 47 contractual termination provisions – Consultation period for UK 47 collective redundancies to halve

United States 48 – Update on FATCA – Commodity Futures Trading Commission 50 (CFTC) – Recent activity

Legal & Regulatory Risk Note | January 20134


In Section I, Tim House begins by providing his views on the current litigation and regulatory landscape for banks. Bob Penn provides his thoughts on the implementation of Basel III and what he terms “the approaching regulatory capital and liquidity ‘cliff’ ”.DamianCarolansummarises points of note on the key regulatory technical standards under EMIR (expected to become effectiveinmid/lateMarch2013).From Continental Europe, Fabrice Faure-Dauphin provides an update on plans for a European Banking Union. We then include a triple contribution from the U.S.: Andrew Rhys Davies considersrecentjudicialcriticismofregulators’ settlements with regulated entitles, John F Terzaken explains how antitrust enforcement authorities are making their presence felt on Wall Street and William E White provides his observations on the continued regulatory focus on insider trading in the U.S.. From Asia, Matt Bower, Alan Ewins (Hong Kong) and Jane Jiang (PRC) provide an update on the latest litigation and regulatory risks in that region. Finally, in Section I, Philip Woodexplainsthewidersignificanceof the hard fought and long running litigation in New York between Argentinaandcertain“holdout”bondholders concerning the interpretation of the pari passu clause in certain bond documentation.

In Section II, we highlight new threats oropportunitiesforbanksindifferentjurisdictions.Weincludeshortarticleson the following matters: proposed changes to the UK regulatory framework following the LIBOR scandal (page 46), a recent Australian decision which found a rating agency andanarrangerofacomplexfinancialproductliableforlossessufferedbyinvestors (page 28), issues to be considered in the context of debt programme updates under the new EU Prospectus Directive regime (page 31), concerns in Luxembourg regardingtheclassificationofcertainsecuritisation structures under the Alternative Investment Fund Manager Directive (page 32), an update on FATCA(page49),difficultieswiththeenforcementofforeignjudgmentsinIndia (page 35), new competition measures proposed in Hong Kong (page 34), developments relating to the crisis management of Spanish credit institutions (page 41), the implications for banks of a French decision which found a hybrid (one-way)jurisdictionclauseinvalid(page30)and,finally,MassimilianoDanusso assesses the latest litigation in Italy involving derivatives contracts (page 36).

Please do not hesitate to get in touch with any of the contributors if you require further information.

In this edition

Sarah GarveyTel +44 20 3088 [email protected]

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Section I: Opinion pieces

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Legal & Regulatory Risk Note | January 2013 | Section I: Opinion pieces6


The fallout from the LIBOR investigations continues to dominate the regulatory enforcement agenda and will gradually move towards a focus on the anti-trust aspects, as well as criminal prosecutions of individuals. The pace of follow-on civil claims in the courts, with claimants seeking to rely on regulatory findings(ofbothUKandU.S.regulators) to progress their claims against banks will increase. The lasting relevance of this from a regulatory enforcement perspective is the increased emphasis that the Anti-Trust Division of the U.S. Department of Justice has now put on investigatingaspectsofthefinancialservices industry – as John F Terzaken points out below.

In the UK market we continue to see banks facing increasingly invasive and demanding regulatory oversight. Banksarefindingitharderandharderto have a rational conversation with their regulators. There is a growing recognition that the severity of action against banks and the enormity of recentfinesisimpactinginvestorappetite in the sector which can have an impact on banks’ ability to raise capital to meet new regulatory requirements and can impact their ability to nurture a weak economic recovery. The Association of British

Insurers (ABI), for instance, has highlighted1thatdifficultiesinthebanking sector are being felt in the wider economy, in particular by pension funds. None of this, however, lookslikeaffectingtheenforcementagenda yet. The ABI notes that investorappetiteissignificantlyadverselyaffectedbylackofregulatoryclarity and notes a concern that the UK may impose more stringent requirementsthanotherjurisdictions.

Senior management remain a focus of attention for UK regulatory agencies. The FSA recently wrote to CEOs remindingthemaboutconflictsofinterest between their asset managers and customers, and seeking declarations in this regard. The FSA has said we should expect to see enforcement work in this area.

A current global theme is the harmonisation of regulation internationally. While this is a desirable goal at a policy level, at the point of enforcement the picture remains (and is increasingly) fragmented. On the ground, repeatedly we see local regulators and courts tasked with enforcing such regulations taking decisions for apparently domestic or political reasons.Thisisacontinuingconflict.

In Asia, a consistent message is that litigation is not the primary worry for banks; rather the focus is on regulatory investigations, in particular investigationsthatspandifferentmarkets and which are seemingly driven by U.S.-style investigation techniques. We have noted previously the challenges thrown up by the extraterritorial ambit of U.S. jurisdictionclashingwithlocalconcerns about national sovereignty and the right of self determination. There continues to be much New York based litigation against Chinese account holders which gives rise to manydifficultiesinthiscontext. The U.S. Securities and Exchange Commission (SEC), for example, has issued over 50 requests for information to China recently. Themajorityoftheserequestshavereceived no meaningful response. Against this backdrop, it is very difficulttoadviseclientsinChinaastotheambitandeffectivenessof U.S.“longarm”law.

View from the UKAn opinion by Tim House

1_ “Investability in UK banks” December 2012.

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If you require further details please contact:

Tim House Tel +44 20 3088 3775 [email protected]

“A current global theme is the harmonisation of regulation internationally. While this is a desirable goal at a policy level, at the point of enforcement the picture remains (and is increasingly) fragmented.”



Thefinancialsectorhasinrecentmonths been preoccupied with the U.S.“fiscalcliff”.Alessdebated, but nevertheless important, risk for (andfrom)thefinancialeconomyisthe prospect of the approaching regulatorycapitalandliquidity“cliff”,in the form of the impending date for the implementation of Basel III. Thankfully,likeitsU.S.fiscalequivalent,thiscliffhasbeendeferred:following the over-optimistic undertaking by Michel Barnier to implement Basel III faithfully by the end of 2012, European capital and liquidity reform have been delayed (until 2013) as CRD IV becomes caught up with the broader banking union, resolution and deposit compensation proposals. The U.S. authorities have cast doubt on whether it will be implemented at all in the U.S..

Although the slow pace of regulatory reform attracts censure from the political classes, it is welcome in this case. Basel III’s triple cocktail of requirements to increase capital, hoard liquidity and reduce leverage has the potential to drain liquidity and reduce theflowofcredit.Thereisstillaworrying absence of any meaningful analysisofhowitwillaffectbanks’behaviour. In particular, little seems to have been done to assess properly its

quantitative impact – and in particular howfaritwouldstiflegrowthinthereal economy.

We are now beginning to detect a dawning realisation among regulators that, perhaps because of this, deferral of reform might not be such a bad idea – and indeed that the loosening of existing standards could be useful to support economic recovery. For example, we have recently seen the FSA temporarily waive its capital requirements in respect of certain classes of lending (arguably such lending as might be politically expedient). One can also detect the firstsignsofacertainamountofback-pedalling on Basel III in the recent announcement watering down the substance, and timing, associated with the introduction of the Liquidity Coverage Ratio.

Although the continuing uncertainty makes business planning and pricing transactionsdifficult(particularlywithstructural reform proposals in the pipeline), and adds frictional costs to financialbusiness,itisperhapsbetterthan the lemming approach to the regulatorycliff.

Near-term, regulatory attention in Europe will be moving towards implementation of the European Market Infrastructure Regulation and Alternative Investment Fund

Managers Directive – both of which are due for implementation in 2013. Market participants have been awaiting secondary legislation in order to commence implementation. This has arrived very late, where it has arrived at all. There will be a scramble to implement many aspects of these over the coming months: we expect a capacity squeeze on compliance and derivatives resources (both in banks andinservicesfirms)inparticular.This is an unfortunate, but depressingly predictable, output of the uncoordinated and unwieldy European legislative process – expect several repeats of this rather frustrating process over the coming years.


Bob Penn Tel +44 20 3088 2582 [email protected]

View from the UK (continued)The approaching regulatory capitalandliquidity“cliff”

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“Basel III’s triple cocktail of requirements to increase capital, hoard liquidity and reduce leverage has the potential to drain liquidity and reduce the flow of credit.”



Key Regulatory Technical Standards (RTS) adopted – the real work beginsEMIR entered into force on 16 August 2012 but obligations at thatstageremainedlargelysubject to further technical standards being drafted and adopted. The European Commission (EC) has now adopted various key RTS, in substantially the form proposed by ESMA, regarding the clearing and reporting obligations and OTC risk mitigation requirements (other than collateralisation).

AssumingnoobjectionfromtheEuropean Parliament or Council, we currently expect to have these RTS becomingeffectiveinmid/late March 2013 (on the understanding that the European Parliament will ask for a one-month extension to its review period). Market participants are therefore now in a position where implementation planning should be progressed in earnest. The following are some key aspects and timing considerations to note:

Timing of clearing obligation It has become clear that the mandatory clearing obligation is now not likely to bite in practice on any class of standardised OTC derivatives until early 2014, once CCPs have become EMIR-authorised and relevant OTC derivatives cleared by those CCPs have been through a subsequent public consultation process run by ESMA.

Application of clearing obligation to existing transactions (frontloading)Ithasalsobeenclarifiedthattheobligation, once the clearing obligation applies, will only look backwards to those OTC contracts concluded after the date when a relevant CCP becomes EMIR-authorised and ESMA then starts its consideration of the contract-type in question. This is likely to be no more than six months prior to the coming into force of the clearing obligation for any particular contract class. At one stage, there had been concerns that in some cases one might need to look back to any contracts concluded aftertransitionalCCPnotificationswhich were likely to take place in Q1 of 2013.

So the priority for market participants in the short term is around OTC risk mitigation requirements (noting that collateralisation requirements are still awaited – see below).

Knowing your counterparty and OTC requirements Since the extent EMIR obligations regardingOTCriskmitigationdifferdepending on the status of both parties to a trade, it will be important to know the EMIR categorisation of dealing counterparties so as to understand the compliance expectations applicable to each relationship.

The OTC risk mitigation requirements will cover the timeliness ofagreeingtradeconfirmations,portfolio reconciliation processes, use of portfolio compression arrangements where appropriate, marking of positions to market/model and dispute resolution arrangements.

The process of categorising counterparties (which is necessary on an initial and ongoing basis), and the substantive obligations, will likely involve some repapering of existing OTC documentation.

View from the UK (continued)Regulation on OTC derivatives, central counterparties and trade repositories (EMIR)

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It is anticipated that elements of this will be assisted by the availability of industry protocols or standard-form published wording where appropriate.

Reporting The EMIR reporting obligation applies to ALL derivative contracts outstanding on 16 August 2012 and those entered into on or after that date (ie exchange-traded and OTC derivatives).

However, the commencement of the obligation is tied to the date by which a recognised/registered trade repository is available. The earliest date any reporting can actually occur is currently set at 1 July 2013 (for interest rates and CDS, with other assets following), though that will move backwards commensurately if the process for registering a trade repository slips beyond 1 April 2012 (which we currently think is unlikely to be met).

FAQs The EC published a set of Frequently Asked Questions regarding EMIR at the end of 2012. These currently cover only a limited set of issues but there is scope for market participants to submit questions to the EC and it is expected that the FAQ document

will be updated over time as regulators look to provide more clarity on particular issues.

Key RTS remain to be drafted Resolution of the collateralisation requirements for OTC derivatives not clearedbyaCCPissignificantlydelayed and consultation is now expected to be published in early 2013 (once other consultations – in particular, the Basel consultation on margin requirements for non-centrally cleared derivatives – have completed). An additional paper is also awaited in relation to the extraterritorial application of EMIR following completion of discussions at an international level. Both of these paperswillhavepotentiallymajorstructural impacts on the OTC market and will need to be considered carefully once available.


Damian Carolan Tel +44 20 3088 2495 [email protected]

“the priority for market participants in the short term is around OTC risk mitigation requirements”



In the October 2012 Risk Note we reported on the European Commission’s initiative to implement a European Banking Union. The Commission’s initial target was to have the system in place by January 2013. We expressed doubts about the feasibility of this aggressive timetable. Unsurprisingly, the timetable has now slipped. It is now proposed that the European Central Bank (ECB) will assume its supervisory tasks within the single supervisory mechanism (SSM) on 1 March 2014 (or 12 months after the entry into force of legislation, whichever is later). From this date, the ECB will also be entitled to exercise its supervisory functions, in relation to any credit institution which the European Stability Mechanism (ESM) considers requires recapitalisation.

In early December 2012, the Council of the European Union made significantprogresstowardstheplanto create a European Banking Union. Its decision of 13 December 20122 (the Council Proposal)reflectsthepolitical agreement reached by the Member States concerned. Although this Council Proposal will need to follow the European legislative process, we now have a relatively precise idea of the shape of the future EU banking supervision system.

It may not be entirely a coincidence that this decision was taken almost simultaneously with the release of the Financial Stability Board’s (FSB) report on strengthening the oversight and regulation of “shadow banking entities”.3 This is another initiative which emerged in the wake of the financialcrisis.Itisobviousthatthemore mainstream banking business is subjectedtodemandingregulation,the more the question of how, and to what extent, banking activities can be exercised outside that framework becomes relevant.

Further steps towards a European Banking Union The Council Proposal contains two proposals aimed at establishing a SSM for the oversight of credit institutions. The proposals involve two regulations; the most noticeable one confers supervisory tasks on the ECB. The Council Proposal aims to reduce the systemic risk posed by certain European credit institutions. Arguably, even more fundamental is theobjectiveofdecorrelation between banks and sovereign risks. The concern is that only a properly regulatedfinancialinstitutionincrisisshouldreceivefinancialassistancefrom the ESM.

Which credit institutions will be covered? The SSM will apply to all 17 Euro Area Member States and also any other EU Member Sates wishing to participate and who enter into a close participation agreement (some have already indicated that they are not interested in participating, including Sweden, the Czech Republic and the UK).

After much discussion it was agreed in Council that not all credit institutions within those participating Member States would be directly covered, but only those representing a degree of systemic risk. It is estimated this means approximately 150 to 200 banks overall will fall within scope. This point was of particular concern to German negotiators who wanted to exclude smaller, regional German banks from SSM supervision. The criteria for banks tobeaffectedincludesthesizeofthebalance sheet (total assets exceed EUR 30 billion or 20% of a relevant Member State’s GDP) or the fact that a bankhasalreadybenefitedfromaEuropeanfinancialsupportplan.Inaddition, the ECB will automatically and directly supervise the three most important credit institutions of each participating Member State and, upon demand of any participating Member State, a particular credit institution.

View from Continental EuropeBanks single supervisory mechanism

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“not all credit institutions within those participating Member States would be directly covered, but only those representing a degree of systemic risk” The future shape of the SSMThe SSM will be composed of the ECB and national competent authorities. The ECB will be responsible for the overall functioning of the SSM and, in this respect, the Council Proposal remains in line with the proposal from the Commission of September 2012.4

National supervisors will remain in charge of tasks not conferred on the ECB, for instance in relation to consumer protection, money laundering, payment services, and branches of third country banks. The European Banking Authority (EBA) will retain its competence for further developing the single rulebook and ensuring convergence and consistency in supervisory practice.

It is intended that the ECB’s monetary tasks will be separated from supervisory tasks to eliminate potentialconflictsofinterestbetweentheobjectivesofmonetarypolicyand

prudential supervision. To this end, a supervisory board responsible for the preparation of supervisory tasks will be set up within the ECB. As a result of concerns expressed by non-Euro Area Member States about the governance of the SSM, non-Euro Area countries participating in the SSM will have full and equal voting rights on the supervisory board.


Fabrice Faure-Dauphin Tel +33 1 40 06 53 [email protected]

2_ Adopted at a meeting of the Economic and Financial Affairs Council.

3_ “Policy framework for strengthening oversight and regulation of shadow banking entities”. See the paper by Allen & Overy LLP “The future of credit” which comments on some of the key conclusions of the FSB’s report: http://www.allenovery.com/SiteCollectionDocuments/future-of-credit-2012.pdf.

4_ See the October 2012 Risk Note.



The Antitrust Division of the U.S. Department of Justice, which has exclusivejurisdictionovertheprosecution of criminal antitrust offences,hasarrivedonWallStreetand appears to be settling in for the long haul. This development has positivesandnegativesforfinancialfirms.Ontheonehand,theAntitrustDivision’s involvement further complicates the already tangled web of enforcement agencies overseeing the industry and potentially expands the liability of executives for the illegal conduct of wayward employees. On the other hand, the transparency and predictability of the Antitrust Division’s enforcement program may provide some order and consistency to the at times chaotic swarm of enforcement in this area, as well as provide for some strategic advantages to those who properly navigate the process.

The Antitrust Division has prioritized the investigation and prosecution of mattersinthefinancialservicesindustry. Consistent with this mandate, the Division already has numerous ongoing investigations into pricefixing,bidriggingandotheractivitiesinthefinancialservicesindustry, including the CDS, municipal bonds and interest rate investigations. More importantly, signalling a potential long term presence in the area, the Division’s participation in

the interest rate investigations demonstratesadefinitiveshiftintheDivision’s view of traditional market manipulation conduct as constituting a potential antitrust violation.

“The Antitrust Division has prioritized the investigation and prosecution of matters in the financial services industry.”Aside from further crowding the enforcement landscape, the involvement of the Antitrust Division inthefinancialservicesindustryraisesthestakesyetagainforfirmsand their executives. Unlike other prosecuting entities within the Department of Justice, the Antitrust Division routinely requires criminal convictions from corporations and criminally prosecutes not only the individual(s) who committed the illegal act(s) but also those executives with knowledge of the conduct and the authority to stop it. The Antitrust Divisionalsoenjoysasentencingadvantage vis-à-vis its prosecution brethren in the nature of a generous proxy by which it can estimate, as opposed to prove, the harm caused by a particular illegal act. This proxy, which applies equally to corporate

finesandindividualjailsentences,hasthe potential to produce disproportionately larger criminal penalties than other statutes targeting the same conduct. Finally, the antitrust discipline has a long and storied tradition of follow-on class action lawsuits, as well as a developing tradition of follow-on shareholder lawsuits, which prey on individual and corporatesubjectsandtargetsofAntitrust Division investigations and commonly result in significantpenalties.

While the Antitrust Division may wield an arguably sharper sword than many of its fellow enforcers, it does so in a more predictable and transparent way. The Division’s leniency program establishes the benefitsforcorporateandindividualwhistle-blowers – complete immunity – without regard to the sometimes murky discretionary principles applied by other enforcers. Similarly, the Division’s policy for handling co-operators dictates generous discounts and has proven to generate consistent results across prosecutions. Further, because of its long history of handling corporate matters, the Division uniquely brings to the enforcement table in-house economic and technical resources and expertise that can help to more quickly short-circuit investigations that lack merit.

Views from the U.S.Antitrust enforcement has arrived on Wall Street

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The rise of antitrust enforcement in thefinancialservicessectorplacesapremium on the evaluation of existing compliance policies and procedures. Aswithotherareasofsignificantexposure,firmswouldbewelladvisedto establish robust compliance measures to root out potential antitrust problems, as well as mitigate the risk for their executives. Italsorequiresthatsignificantthought be put into investigative and defense strategies upon discovery ofaproblem.Thefinancialservicesspace is fraught with potential challenges for antitrust enforcement and an early evaluation of those challenges will inform the best strategy for resolving or mitigating a problem. In the crowded enforcement environment, it will become increasingly important how a potential violation is characterizedandpursuedbyafirmfrom the outset because that distinction may ultimately dictate which agency takes the lead role in developing the evidence and, consequently, what strategies the firmcanemploy.


John F Terzaken Tel +1 202 683 [email protected]

“In the crowded enforcement environment, it will become increasingly important how a potential violation is characterized and pursued by a firm from the outset because that distinction may ultimately dictate which agency takes the lead role in developing the evidence and, consequently, what strategies the firm can employ.”



In the last few months, several financialinstitutionshavepaidverylarge sums to resolve regulatory claims brought by various U.S. federal and state regulators arising from, among other things, claims of sanctions violations, money laundering and LIBORmanipulation.Duringthefirstquarter of 2013, the Second Circuit Court of Appeals will confront the question of what limitations apply to a regulated entity’s ability to reach a settlement with its regulators, and what role the federal courts should play in approving such settlements.

This issue was presented recently in thecontextofadistrictjudge’srefusalto approve, at least in its current form, a settlement between the SEC and IBM arising from alleged violations of the Foreign Corrupt Practices Act, withthejudgereferringtoagrowingawarenessamongfederaljudgesoftheneed for more rigorous reviews of corporate settlement agreements. Or,asthejudgereportedlyputitmore directly at the hearing, “I’m not just going to roll over like the SEC has.”

The Second Circuit appeal arises from adistrictjudge’srefusaltoapprove a settlement between the SEC and Citigroup of claims relating to Citigroup’s CDO business, which comprised a monetary payment, injunctionagainstfutureviolationsof

the securities laws and the implementation of certain remedial procedures. The core of thecourt’sobjectionwasthatthesettlement – like most SEC institutional settlements – was made on the basis that Citigroup neither admitted nor denied liability.

Thejudgeconsideredthattheabsenceof an evidentiary record prevented him from evaluating whether the settlement was adequate or in the publicinterest.Asthejudgeputitpointedly,hefounditdifficulttoseewhat the SEC was getting from the settlement, other than a “quick headline”.Healsoexpressedconcernthat settlements approved without afactualrecorddonotbenefitdefrauded investors, who derive no collateralestoppelbenefit,andhavethe potential to be unfair to the regulatedentity(althoughthejudgealso characterised the agreed-upon USD 285 million settlement payment as “pocket change”).

InMarch2012,atthejointrequest of the SEC and Citigroup, the Second Circuit stayed the trial court proceedings, ruling that the parties had shown a substantial likelihood that they would succeed in overturning the district court’s ruling on appeal. Argument on that appeal is scheduled for February 8 2013, and many are waiting with interest to see

what the appellate court will have to say about the proper allocation of responsibilities between the regulator and the courts when it comes to deciding what is a fair and adequate settlement.

Views from the U.S. (continued)Update on the New York litigation and regulatory landscape

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Andrew Rhys Davies Tel +1 212 756 [email protected]

“as the judge reportedly put it more directly at the hearing, ‘I’m not just going to roll over like the SEC has’”



Insider trading and concerns surrounding information sharing remain at the top of the agenda for 2013 for the SEC and the U.S. Department of Justice (DOJ). Regulators have followed up on their successful prosecutions of Galleon HedgeFundmanagerRajRajaratnamand Goldman Sachs director and formerMcKinseyheadRajatGupta,among many others, with dozens of new investigations. These investigations touch almost every aspectofwhatfinancialservicesfirmsdo. For example, the SEC and DOJ recently brought charges against a former portfolio manager and an affiliateofSACCapitalseekingmorethan USD 276 million in allegedly illicitgains.Theyalsorecentlyfiledcases against a Wells Fargo investment bankerwhoallegedlytippedoffaringof friends about upcoming deals.

The SEC and DOJ have also been aggressive in reaching outside U.S. borders when pursuing these cases. Recent examples include the settlement between the SEC and Tiger Asia relating to insider trading in the stocks of Chinese banks and the settlement of insider trading charges by a former investment banker in Brazil relating to trading in Burger King stock.

U.S. regulators are not alone in their current aggressive approach to insider trading: elsewhere, UK regulators haverecentlybroughtsignificantinsider dealing cases, including the Greenlight Capital matter; Japanese regulators have brought a number of insider dealing cases against a well-known international bank; and the Hong Kong regulators have brought highly publicized charges in the Tiger Asia matter.

Given this level of activity, now is a good time to review policies, procedures and training surrounding insider trading and information sharing. In particular, the focus should be on business lines, initiatives or products that may have sprung up overthelastfewyearsasfirmshavereorganized, looking at areas where information is disseminated broadly or is shared between groups or affiliatedentities.Inaddition,reviewing cross-border information sharingamongaffiliatesmaybebeneficial.Nothingcanpreventthepossibility that a bad actor could engage in misconduct, but understanding the scope of the potential issues, crafting tailored policies and procedures, and conducting appropriate training, cansignificantlymitigatetherisks.


William E White +1 202 683 [email protected]

Views from the U.S. (continued)Continued regulatory focus on insider trading/dealing

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“now is a good time to review policies, procedures and training surrounding insider trading and information sharing ... reviewing cross-border information sharing among affiliates may be beneficial”



Theroleoffinancialsectorregulatorshas come under intense scrutiny in the wake of the credit crunch. In the UK, for example, legislative changes have filledperceivedgapsinfinancialregulation exposed by the crisis, and commenced a complete overhaul ofthestructureoffinancialregulation. In Asia, the fallout has been less dramatic. But while local law makershavelargelyleftfinancialregulators to continue their regulation ofthefinancialservicesindustryagainst previous legislative frameworks, a number of events may demonstrate a move by the regulators themselves to step beyond what may be perceived as their traditional stomping ground.

In Hong Kong, the SFC recently published a report on the selling practices of licensed corporations. Among other things, the report considered the appropriateness of the use of exclusion clauses, which typically provide, for example, that a client is making its own independent decisions, is not receiving advice, and is capable of making its own assessment of the risks involved when entering into a transaction. The SFC concluded that the use of such clauses with the intent to restrict the client’s ability to make claims related to protections under the SFC’s Code of Conduct is likely to be contrary to the principle that

intermediaries must act honestly, fairly and in the best interests of clients and the integrity of the market. The SFC will issue an appropriate regulatory response to address its concerns.

Anyattempttolimittheefficacyofexclusion clauses so far as they seek to limit regulatory obligations is not likely to be controversial. But any broader attempt by the regulators to curtail their use could impinge upon the common law that has in many jurisdictionslargelyupheldtheirmeaningandeffect.Inanyevent,existing legislation already provides a means by which their use can be restricted in particular circumstances due to the application of legislation governing contractual terms in the retail sector and liability for misrepresentation.

A similar move may be foreshadowed by the SFC’s consultation on electronic trading, in which the SFC proposed that a licensed or registered person is ultimately responsible for orders sent to the market through its electronic trading system and for the compliance of the orders with applicable regulatory requirements, regardless of who placed the order By providing for such responsibility as a matter of regulation, the SFC may go far beyond the liability that the common law would otherwise impose on such market participants.

It would be wrong to read too much into these developments. The SFC has already demonstrated that it is willing to step in to resolve private causes of action when it believes it is appropriate to do so, not least when it brokered a deal with banks who had sold Lehman minibonds to provide additional ex gratia payments to retail investors who had already settled their claims through private causes of action. Recent regulatory developments, however, demonstrate that local regulators will remain alive to the limitations of the law when imposingresponsibilitiesonfinancialsectorparticipants,andseektofill the void when they deem it appropriate to do so.

Other topical risk issues include the bringingintoeffectofthestatutoryrequirements for listed companies to release price-sensitive information (PSI),whichwillhaveasignificanteffectonthewaythatPSIistreatedinfuture, and needs to be factored into banks’ dealing policies and procedures to ensure that the more likely “hairtrigger”publicdisclosures are taken into account.

The SFC has also released its consultation conclusions on its proposed enhanced regulatory regime for sponsors, designed to ensure that any IPOs brought to market will be properly guided as regards the regulators’ expectations and

Views from AsiaPolicing the common law?

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requirements for their conduct of the process. This includes the level of resources devoted to the transaction, verificationarrangementsandsoon.Thismarksasignificantraisingofthebar for investment bank sponsors in the Hong Kong listing market in terms of the black and white requirements, although unsurprisingly there is the sense that the new regime willprincipallybedesignedtoreflectthe current market practices and behaviourof“fitandproper”marketparticipants. There is an additional twist in the tail, in that there is an intention to change the legislation to ensure that sponsors are directly pinned with prospectus-type liability fortheincorrectcontentsofofferdocuments,whichisacodificationofwhat is already arguably the case, but is essentially designed as a marking of the line in the sand by the SFC for what they regard as inappropriate conduct, following a number of recent scandals in the Hong Kong listing market.


Alan Ewins Tel +852 2974 7151 [email protected]

Matt Bower Tel +852 2974 [email protected]

“Recent regulatory developments ... demonstrate that local regulators will remain alive to the limitations of the law when imposing responsibilities on financial sector participants, and seek to fill the void when they deem it appropriate to do so.”



For China, after the standstill on virtually all regulatory developments in anticipation of the 18th National Congress of the Communist Party, thecurrentregulatoryeffortsremainfocusedonboostingconfidenceinthestock market through tackling issues such as sponsor’s liabilities and market conduct. Mis-selling claims continue to attract publicity which prompted the China Banking Association (a self-regulatory body of banking financialinstitutionsinChina) to establish a Committee of Wealth Management Business on 11 December 2012. It issued the Ten Commitments of Strengthening Self Regulation in Selling Wealth Management Products on the same day.Extraterritorialeffectofforeignregulations and enforcement actions affectingorconflictingwithPRClawhas attracted regulatory attention and Chinesefinancialregulators’awareness on issues arising from the likes of Dodd-Frank, EMIR, FATCAhassignificantlyincreased. It would seem that the time has come to engage them in a dialogue to resolve these issues.

Innovation, though not a regulatory priority, is brewing in some business areas. Opportunities presented by such innovation have generated significantbusinessinterest,despitethelowprofilefashioninwhichthediscussions are taking place. The securities industry is considering OTC equity derivative instruments forthefirsttime,forexample. A preliminary review of the necessity and viability of creating the concept of preferential shares within the PRC securities legal regime is also under way.


Jane Jiang Tel +86 10 6535 [email protected]

Views from Asia (continued)Update from China

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“Innovation ... is brewing in some business areas ... The securities industry is considering OTC equity derivative instruments for the first time, for example.”



The case of NML Capital Ltd v Argentina decided by a U.S. federal court of appeals in New York in October 2012 held that Argentina violated a standard pari passu clause in its old unrestructured bonds and therefore Argentina was ordered not to make any payments on new bonds unless it made a rateable payment to the holders of the old bonds. The new bonds had been exchanged for most of the old bonds in 2005 and 2010 pursuant to the restructuring of Argentina’s foreign debt.

The court held that the reasons for the violation were a combination, among other things, of a statute passed by Argentina preventing Argentina from paying the holders of the old bonds as holdouts, declarations by Argentina that it would not pay the holdouts and the persistent non-payment of the holdouts for six years.

The pari passu clause typically provides that the bond debt will rank pari passu with other debt or, in the case of sovereigns, other external debt. It is a standard provision in international sovereign and private sector bonds.

One of the reasons the case is important is because of the consequences of adopting one of the two main competing interpretations of pari passu clauses, the narrow

interpretation or the wide interpretation. The narrow interpretation holds that there is a breach of the pari passu clause only if the debtor subordinates the protected debt by some legal or mandatory measure which changes the legal ranking. The wide interpretation holds that once a debtor is in fact insolvent or in payment default, it cannot actually pay any of its debts without a rateable payment of other debts within the scope of the pari passu clause.

It is unclear which interpretation the court sided with although it held that Argentina’s overall course of conduct wassufficienttoallowthecourttoreach its decision. In doing so, the wider interpretation seems to be the preferredonebutnotwithsufficientdiscussion of the issues and clarity of principle and policy. Accordingly, there is uncertainty as to what the court intended and the possibility of destabilising litigation.

Although the decision is a decision on bonds governed by New York law, a decision by a senior court in New Yorkmightinfluencecourtselsewhereandcould,inanyevent,affectbondsnot governed by New York law. The case is also important because, insteadofjustleavingthecreditortoits ordinary remedies for a default,

the court made a tough order compelling Argentina to make rateable payments to the creditor if Argentina paid the new bonds.

For a more in depth version of this article produced by the Global Intelligence Unit, please go to Allen & Overy LLP’s website.5

Global Risks The pari passu clause and the Argentine case

5_ http://www.allenovery.com/SiteCollectionDocuments/The%20pari%20passu%20clause%20and%20the%20Argentine%20case.pdf.

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Philip Wood Tel +44 20 3088 2552 [email protected]

“Although the decision is a decision on bonds governed by New York law, a decision by a senior court in New York might influence courts elsewhere and could, in any event, affect bonds not governed by New York law.”

Legal & Regulatory Risk Note | January 2013 | SectionII:Newthreatsandopportunitiesforbanksindifferentjurisdictions26


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Section II: New threats and opportunities for banks indifferentjurisdictions

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In a recent landmark decision of the Federal Court of Australia, both the rating agency and the arranger of a complexfinancialproductwereheldliableforlossessufferedbyinvestorsin those products. The case is important for rating agencies as it appearstobethefirstcaseworldwidein which a rating agency has successfully been held responsible for itsratingofafinancialproduct.

The court held that even if it was accepted that the rating was the rating agency’s opinion, the question then became whether the rating agency had a reasonable basis for expressing the opinion or exercised reasonable care in forming the opinion. By expressing the opinion that the relevant notes had a risk of default commensurate with a AAA-rated bond, the court found the rating agency engaged in misleading or deceptive conduct.

The rating agency was also not able to rely on its general disclaimer that the rating should not be relied upon by a potential investor to make investment decisions. The court reasoned that the rating agency did not require the arranger to include the disclaimer when advising potential investors of the rating and so would have been unaware whether or not investors saw this disclaimer. Further, the court found that the disclaimer could not be understood as going further than

simply ensuring that potential investors were aware that the rating agencywasnotgivingthemfinancialadvice as to their investments. It did not disclaim the exercise of any skill or care in forming the opinion expressed in the rating. The court found that would have made the rating futile and self-defeating.

The case is also important for arrangers as it points out the dangers of playing a bigger role in the rating process than merely being a conduit for the rating. The arranger submitted that as a mere conduit of the rating it made no representation about the reliability of the rating agency’s opinion or about the creditworthiness of the relevant notes. The court, however, found that the arranger’s involvement in the rating process was of such a nature, degree and extent that it could not be said that the AAA rating represented the opinion of an independent expert. In addition, the court found that the arranger had made certain representations in its marketing material which went far beyond acting as a mere conduit for the rating. Accordingly, the court found the arranger was also engaged in misleading or deceptive conduct.

It is understood that this decision is being appealed. There are also press reports about threatened class actions following this decision.


“By expressing the opinion that the relevant notes had a risk of default commensurate with a AAA-rated bond, the court found the rating agency engaged in misleading or deceptive conduct.”

Australia Ratingagenciesinthefiringline

Nelda Turnbull Tel +61 2 9373 [email protected]

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Two similar decisions of the Prague High Court have deepened an existing controversy around the power of a secured creditor to instruct an insolvency administrator to sell an asset, which the creditor has secured, without further intervention from the court and the creditors’ committee. This ruling applies where the method of resolving insolvency is liquidation. According to the court, sales of assets carried out pursuant to an instruction from the secured creditor but without the approval of the court and the creditors’ committeeareineffective.Thatmeansthat proceeds cannot be distributed to the secured creditor until the approvals have been obtained.

A sale of assets by an insolvency administrator, other than by way of a public auction or court administered sale, must generally be approved by the court and the creditors’ committee. But a secured creditor can instruct the insolvency administrator

with respect to the sale of an asset subjecttosecurity.Thelawissilentonwhich of these two rules prevails. We think that the latter overrides the former and that no approval of the court or creditors’ committee is required where a secured creditor has given an instruction, but the opposite view has also been expressed frequently. Indeed, some courts have been refusing to issue approvals on thebasisthattheylackedjurisdictionwhile other courts would issue them upon request.

The legislator intends to clarify by an amendment that no court or creditors’ committee approval is required where a secured creditor has given an instruction. However, in the interim, secured creditors should take note of the new case law and try to seek an agreement with the court and the creditors’ committee before issuing an instruction to the insolvency administrator.


Czech Republic Prague court says that secured creditors should have limited control over the sale of assets in an insolvency

RobertPavlůTel +420 222 107 [email protected]



In September 2012 the French Supreme Court6struckdownahybridjurisdictionclause and declared such a clause was contrary to the rationale and purpose of Article 23 of the Brussels Regulation (the EU Regulation concerning jurisdictionandenforcement).Similarclauses are routinely included in banking documents in international markets. Essentially, they restrict one party (usually a borrower) to sue only in a chosen court, but allow the other party (usually a lender) to sue in the chosen court but also in any other court of competentjurisdiction.Thisformulationgiveslenderstheflexibilitytodeterminewhere to bring proceedings, possibly following an assessment as to where it will be necessary to enforce against a debtor’s assets.

In the French case the clause provided fortheexclusivejurisdictionoftheLuxembourg courts but allowed the bank to bring proceedings before any courtofcompetentjurisdiction.Thisclause was contained in a Luxembourg law governed contract entered into between a Luxembourg bank and an individual (a French national resident in Spain). Although seeking to interpret EU law the French court appears to have done so through a rather French prism, applying a concept taken from the French Civil Code. It held that the hybrid clause was void as it entailed obligations conditional on an event that only one party controlled (a so-called

clause potestative). The court did not base itsfindingsonanyconsumergrounds.

There are many points one might debate about the merits of this judgment,butthematterhasnotbeenreferredtotheECJ.Thejudgmenttherefore stands as authority of a senior domestic court of a Member State.

This decision gives rise to particular risks on deals with a French nexus. A French courtmightfindthehybridclausetobeinvalidandtakejurisdictionoveradispute. Even absent a French nexus, there remains a risk attached to the use of such clauses. Certain other Member States also recognise the concept of clause potestative and so, conceivably, such courts may adopt a similar approach to the French Supreme Court. Further, there is a risk that should a party raise such an argument before any Member State court, then that court may now feel compelled to refer the question of whether or not such clauses are permitted under Article 23 of the Brussels Regulation to the ECJ to determine the issue. As well as added uncertainty, this would give rise to consequential delays and additional costs.

There does not appear to be a settled approach to the drafting of dispute resolution clauses in the various financialmarketsfollowingthisdecision.Whether clients wish to move away from a standard hybrid clause will depend on the client’s own assessment

of the risk and on the relative merits of alternative dispute resolution options. It is worth considering what additional benefittheoptionalityactuallyprovides.In many cases, parties may be happy with a simple mutually exclusive jurisdictionclause.

As noted in the October 2012 Risk Note, there is also concern about the vulnerability of optional arbitration clausesincertainjurisdictions,particularlyin the light of the recent Moscow decision striking down such a clause.

As these cases highlight, choosing an appropriate dispute resolution clause in anydealisnotjustaquestionofcopyingover“boilerplate”provisions.Muchwilldepend on a party’s assessment of risks and its strategic goals.


Europe Threattoone-way(hybrid)jurisdictionclauses


6_ MME X v Rothschild Cass, Civ 1, 26 September 2012 n11-26.022.

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The implementation deadline for the PD Amending Directive was 1 July 2012. This means that prospectuses to be approved by competent authorities for the purposes of admission to trading on EEA regulatedmarketsornon-exemptofferstothepublicinEEAjurisdictionswhere implementation has taken place must comply with the new PD requirements. Issuers with debt programmes established or last updated before 1 July 2012 (which have sofarbenefittedfromgrandfathering(relevant programmes)), will now have to ensure that relevant amendments are made to base prospectuses at the next programme update.

As competent authorities (and market participants in general) come to terms with the new requirements, it is important that issuers with relevant programmes anticipate, and are prepared for, longer turnaround times during the prospectus approval process. Current experience shows there is not always a consistent approach among competent authorities when interpreting some of the new requirements. In addition, to date competent authorities have raised commentsforthefirsttimeinthecontext of live deals, meaning that issuers are having to respond to these within tight deadlines. Some of the issues/competent authority comments to watch out for include:

Final termsThe interpretation of the requirements relating to what can or cannot be included in Final Terms. Comments from competent authorities in this context are varied and sometimes inconsistent, which means that it is not yet possible to set out an exhaustive list of issues.

Passporting and tax disclosureThe inclusion in the base prospectus ofalistofjurisdictionstowhichtheissuer may wish to passport plus a tax sectionforeachsuchjurisdiction.Some issuers may not be keen to do this at update or establishment, but maythenfindthattheyaresubsequently unable to passport an issue promptly due to having to either update their programme or produceasupplementtoreflectanewjurisdiction.

SummariesThe requirement from one competent authority that the base prospectus summary in a retail programme covers all issues including wholesale issues. Thismeansthatanissue-specificsummary will be required for a wholesale issue under a retail programme. There are also varying requirements regarding the content and form of summaries.

As the market continues to come to terms with the new requirements, this continues to be a space to watch.


Debt programme updates/establishments and the new Prospectus Directive (PD) regime

Addie Ugbenne Tel +44 20 3088 [email protected]



Initially designed to provide a European internal market for managers of “alternative investment funds”,theAlternativeInvestmentFund Manager Directive (Directive 2011/61/EU, the AIFMD)effectivelyregulates all those entities that manage arrangements or entities that fall within the term “alternative investmentfund”asdefinedintheAIFMD.Thewidedefinitionofthisterm“alternativeinvestmentfund”catches not only arrangements and entities that one might typically consider to be a fund, but potentially other arrangements and entities – including certain types of securitisation transactions – as well.

The intention of the European legislator was to exclude securitisation transactions from the scope of the AIFMDbyinsertingaspecificexemption for “securitisation special purposeentities”intheAIFMD.However, market players are increasingly concerned that this exemption(whichusesadefinitionfrom a European Central Bank (ECB) regulation on statistical reporting) is not broad enough to cover the entire securitisation and structuredfinancebusiness.

This threat applies to securitisation vehiclesinallrelevantjurisdictionsingeneral, and securitisation vehicles subjecttotheLuxembourgactdated

22 March 2004 on securitisation, as amended (the Securitisation Act 2004), in particular. The Securitisation Act 2004 provides a verybroaddefinitionofsecuritisation, which allows for almost any asset producing a regular flowofincomeoranyrisktobesecuritised. Over the years, Luxembourg has become an attractivejurisdictionforstructuredfinanceandsecuritisationtransactions, notably in light of its broad concept of securitisation.

Certain structures within the Securitisation Act 2004 may not necessarily, or at least automatically, fall within the AIFMD exemption on securitisation. There is therefore a risk thatsuchstructuresmaybeclassifiedasan“alternativeinvestmentfund”.

Further guidance at AIFMD level is pending and it is hoped that such guidance will clarify what can qualify asan“alternativeinvestmentfund”and what cannot. While conceptually a limited number of securitisation transactions could be considered to be akintoa“fund”(andhenceshouldberegulated under the AIFMD), it is difficulttosee,fromapolicyperspective, why regulators would wantstructuredfinanceandsecuritisation to fall within the scope of the AIFMD. It is important that theseissuesbeclarifiedsoon.


“market players are increasingly concerned that this exemption is ... not broad enough to cover the entire securitisation and structured finance business”

Paul Péporté Tel +352 44 44 55 [email protected]

Europe (continued) Securitisation vehicles in the wake of the implementation of the Alternative Investment Fund Manager Directive

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Many companies collect and utilise vast amounts of personal data – internet service providers, large retailers, telecommunication companies and banks to name a few. Financial institutions will be familiar with the need to comply with rules protecting the privacy of individuals. But what about the risk of infringing competition laws in this context?

Joaquín Almunia, Vice President of the European Commission responsible for competition policy, hasfiredawarningshot.Inaspeechin November 2012, he raised the possibility of antitrust enforcement inthisfield.MrAlmuniaclearlyfavours the use of consumer policy as an enforcement tool. However, in the context of the huge increase in the commercial value of personal data,itmayjustbeaquestionof time before the European Commission opens a case suspecting that such data has been used to breach EU competition law.

Perhaps most feasibly, a dominant firmcouldbeinvestigatedforunfairlyseeking to keep or push competitors out of the market – an abuse liable to finesofupto10%ofglobalturnover.Forexample,afirminadominantposition might accumulate personal information and then seek to restrict a rival’s access to it (or otherwise manipulate it in a way that maintains their dominance by locking in customers).Almuniaredflagsanindividual’s“rightofportability”,stating “I believe that a healthy competitive environment in these markets requires that consumers can easily and cheaply transfer the data they upload in a service onto another service.”Itseemsthatcompaniesmostat risk are those active in markets which can only be open to competition if customers can readily switch to rivals by taking their own private data with them.


Emily BourneTel +44 20 3088 [email protected]

Dealing with personal data: your antitrust risk



Parts of the Hong Kong Competition Ordinance, enacted in June 2012, will becomeeffectiveduringthecourseof2013, including (in broad terms):

– on 18 January 2013, provisions relating to the setting up of a Competition Commission (a body that will be responsible for the investigation and public enforcement of the competition law), and requiring the Commission to issue guidelines regarding various aspects relating to the operation and enforcement of the competition law; and

– on 1 August 2013, provisions relating to the setting up of a Competition Tribunal (a body that will be responsible for hearing and adjudicatingcompetitioncasesbrought by the Commission).

Crucially, the Hong Kong government has yet to announce when the substantive provisions of the Competition Ordinance will come into effect.Thesesubstantiveprovisionsinclude: (i) a general prohibition against anti-competitive agreements, concerted practices and decisions of associations; (ii) a prohibition against the abuse of substantial market power in the market; and (iii) a prohibition against mergers thathavetheeffectofsubstantiallylessening competition in Hong Kong (limited to mergers involving holders of carrier licences under the Telecommunications Ordinance).

It is expected that as the Commission releases guidelines, further clarity will be gained regarding the operation of the Competition Ordinance.


Hong KongNew competition measures imminent

Kevin KeeTel +852 2974 [email protected]

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Section 13 of the Indian Code of Civil Procedure 1908 prescribes certain conditionswhichmustbesatisfiedbyaforeignjudgmentinorderforittobe enforced by an Indian court. One such condition is that the foreign judgmentmusthavebeen“given on the merits of the case”.

The Indian courts have held that where a judgmentisgrantedbyaforeigncourtsolely on account of the default of the defendant’s appearance, either by way of penalty or under a certain special procedure permitted by the rules of that foreigncourt,suchaforeignjudgmentmay be considered by the Indian courts as one not “given on the merits of the case”and hence unenforceable in India, albeit thatsuchajudgmentmayremainvalidand enforceable in that foreign country (see, for example, M/s International Woolen Mills v M/s Standard Wool (UK) Ltd, where the Indian Supreme Court refused to enforceadefaultmoneyjudgmentgivenby an English court on the basis that the judgmentwasgivenmerelyonaccountof the defendant’s absence and was not based on a consideration of any evidence adducedbytheplaintifforanexamination of the points of controversy between the parties). To this extent, the Indianlawisdifferentfromthelawsincertainotherjurisdictionswhereforeignjudgmentsgivenfordefaultofappearance of the defendants are also accepted as conclusive between the parties thereto and enforced.

However, the mere fact of a foreign judgmentbeingex parte will not in itself justifyafindingthatitwasnotgivenonthe merits. The Indian courts have held that where, notwithstanding the non-appearance of the defendant, some oral and/or documentary evidence is adduced on behalf of the plaintiffandtheforeigncourtgivesajudgmentbasedonajudicialconsideration of such evidence and an examination of the points of controversy between the parties, such a foreignjudgmentmaybeenforcedasone “given on the merits of the case”.

Thus, parties in litigation with Indian counterparties pursuant to a contract providing for a foreign (ie non-Indian) jurisdictionclauseneedtobeawareofa litigation defence strategy pursuant to which the Indian party may choose not to put in an appearance or contest the claim before the contractually chosen foreign court and then seek to rely on the line of authority discussed above to resist enforcement of any default/ex partejudgmentgivenbytheforeigncourt on the ground that it has not been “given on the merits of the case”.Insuch a situation, the parties may need to consider adducing oral and/or documentary evidence before the foreign court and request it to grant a judgmentbasedonajudicialconsideration of its evidence so as to obtainajudgmentwhichmaythenbeenforceable in India.


“the Indian party may choose not to put in an appearance or contest the claim before the contractually chosen foreign court... then seek to... resist enforcement of any default/ex parte judgment [in India]”

IndiaEnforceability of default/ex parteforeignjudgmentsinIndia

Manish Aggarwal Tel +44 20 3088 [email protected]



The current economic downturn and resultantfiscalpressuresonlocalgovernments has resulted in many local authorities challenging the validity and enforceability of derivative contracts based on allegations of mispricing, misconduct and, in some cases, fraud. We anticipate 2013 will see an escalation in pressure on banks in Italyinrelationtocomplexfinancialproducts sold into the Italian market, in particular to local authorities. This pressure will intensify if the recent example of the Court of Milan is followed. In December 2012 the Court of Milan found that certain investment banks were guilty of fraud for mis-selling derivatives products to the City of Milan. The court imposed heavy criminal sanctions upon the banks (and even gave nine bank employees suspended prison sentences). It is understood this decision will be appealed.

On a more positive note, however, in November 20127 the Italian Administrative Supreme Court handed down an extremely important decision regarding the enforceability of interest rate swap agreements entered into with Italian local authorities. The Administrative Supreme Court held that certain interest rate swaps could not be executed at mid-market prices (as alleged by the relevant local authority)

and price components such as credit charges,hedgingchargesandprofitscould be legitimately charged by banks in their role as investment services providers. Moreover, the Supreme Court found that banks were under no obligation to disclose such price components to the local authority, the Province of Pisa.

The background to this particular dispute is complex but, in summary, it related to two interest rate swaps entered into in July 2007 between DEPFA Bank plc, Dexia Crediop SpA and Pisa, under ISDA-documented contracts governed by English law andsubjecttothejurisdictionoftheEnglish courts.

In June 2009, Pisa alleged that the swaps were unenforceable due to the presence of hidden/implicit costs and requestedanimmediatewrite-offofthe amounts owed by it under the swaps. The banks commenced proceedings before the English Commercial Court seeking declaratory relief as to the validity of the swaps. On 25 May 2010, the English court affirmeditsjurisdictionoverthecaseat hand and dismissed Pisa’s jurisdictionalchallenge.

Pisa subsequently issued executive decisions whereby it annulled, by self-redress, the resolutions adopted in 2007 which authorised the execution of the swaps and purported to annul

the swaps themselves. Consequently, the banks commenced separate proceedings before the Italian administrative courts in October 2009 challenging the validity of the self-redress decisions.

In September 2011, the Administrative Supreme Court issued apreliminaryjudgmentaffirmingjurisdictiononthevalidityoftheself-redressdecisionsandtheireffectson the swaps. However – since the issues related to the presence of hidden/implicit costs were complex and technical – the same court decided to refer them to a court-appointed expert in order to finaliseadecisiononthesepoints.Agreeing with the expert, the Administrative Supreme Court – in thesubsequentdefinitivejudgmenthanded down in November 2012 – found that the price components of the swaps such as credit charges, hedgingchargesandevenprofitscannotberegardedas“implicitcosts”but rather as legitimate charges by the banks as part of their investment services. In any event, contrary to Pisa’s allegations, such (theoretical) costswouldnotaffecttheeconomicconvenience of the debt restructuring transaction put in place by Pisa in the context of which the swaps were executed. As a consequence, the self-redress decisions adopted by Pisa were deemed to be illegitimate.

ItalyA mixed picture on derivatives disputes

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From a regulatory standpoint, the Supreme Court also held that there was no obligation on the part of the banks to disclose the various componentsofthefinalpriceoftheswaps to Pisa at the time the swaps were executed (prior to MiFID implementation in Italy). On this basis, the Supreme Court concluded that the banks had acted at all times in good faith and that Pisa itself had a duty of due diligence to seek the information that it deemed necessary to evaluate properly its decision to enter into the swaps. Finally, as Pisa had already executed swap transactions, the Supreme Court stated it was reasonable to assume Pisa had a certain degree of understanding about them.

Allen & Overy LLP act for Dexia and Depfa in this matter in Italy and England. For a more detailed analysis of this case, see the December 2012 edition of Allen & Overy LLP’s European Finance Litigation Review.


7_ Decision No 5962 Judgment of the Consiglio di Stato, 27 November 2012.

“We anticipate 2013 will see an escalation in pressure on banks in Italy in relation to complex financial products sold into the Italian market, in particular to local authorities.”

Massimiliano Danusso +39 06 6842 [email protected]



The Dutch Parliament has adopted a new Corporate Governance Act, the so-calledActFrijns.Bywayofsummary,the key changes are as follows:

(i) Loweringthefirstnotificationthreshold for shareholders with a substantial interest from 5% to 3% of the total voting rights or total issued nominal share capital of an issuer. This applies to public limited companies under Dutch law whose shares are admitted to trade on a regulated market, and to a legal person, incorporated under the law of a non-Member State, whose shares are admitted to trade on a regulated market in the Netherlands. The 3% threshold does not replace the existing lowest threshold of 5% but it is in addition to that threshold.

(ii) Introduction of an obligation to notify possible short positions of 3% or more in the companies as listed above under (i) on a gross basis. As a result a company may have to notify one and the same short position to the Dutch regulator on a gross basis under theActFrijnsandonanet basis under the Short Selling Regulation (236/2012/EU). Further rules to be set by the Dutch regulator will hopefully clarify this obligation.

(iii) Introduction of a regulation on theidentificationofshareholdersof listed companies, aimed at enabling communication among shareholders prior to the shareholders’ meeting. Shareholderidentificationcanbemade by public companies or foreign legal entities whose securities are admitted to trading on a regulated market (Euronext Amsterdam) or a multilateral trading facility in the Netherlands, such as Alternext. Only shareholders and holders of depositary receipts for shares that hold 0.5% or more in a listed companycanbeidentified.

(iv) Raising the threshold for the right to put items on the agenda from 1% to 3%. If an NV has included the1%specificallyinthearticlesof association, rather than referring to the relevant article in the Dutch Civil Code, that 1% threshold remains valid, unless the articles are amended. The same applies to the alternative criterion of EUR 50 million. The right to place items on the agenda with respect to private companies (BVs) remains unchanged.

The new rules will enter into force on 1 July 2013.


The NetherlandsNew corporate governance rules passed by the Dutch Parliament

CarolineObenhuijsen+31 20 674 1595 [email protected]

AnoukRaaijmakers+31 20 674 1437 [email protected]

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As of 1 November 2012, EU Regulation No 236/2012 of the European Parliament and the Council of 14 March 2012 (the Regulation) hasbeeneffectiveinPoland.TheRegulation sets out a common regulatory framework concerning short selling in the European Union.

The new regulatory regime for short selling in Poland however is not consistent with the existing rules concerning short selling set out in the Act on Trading in Financial Instruments dated 29 July 2005 (the Act). In particular, the Regulation and the Act allow short sale transactions to be executed in differentcircumstances.Additionally,according to the Act, the Warsaw Stock Exchange (the WSE) is entitled to introduce into its regulations detailed rules for: (i) determining whether particular securitiescouldbesubjecttoshortselling; (ii) limitations on short sale transactions; and (iii) monitoring these transactions. On this basis and under the relevant WSE rules, the stock exchange publishes daily a list of securities available for short selling. Furthermore, under the WSE rules and the Regulation of the Ministry of Finance on Procedures and Conditions of the Operations of Investment Firms and the Banks, dated 24 September 2012, short sale orders must include a designation

necessarytodifferentiatethem from other orders. These additional limitations are not imposed by the Regulation.

These inconsistencies result in legal doubts as to whether: (i) a particular transaction will qualify as a short sale; (ii) short sale transactions could only be executed involving a limited number of shares included on the WSE’s list (or involving any securities for which short selling is allowed under the Regulation); and (iii) short sale orders should include a designationnecessarytodifferentiatethem from other orders.

This uncertainty is a particular concern to exchange members. If an exchange member breaches the WSE rules or the Regulation of the Ministry of Finance on Procedures and Conditions of the Operations of Investment Firms and the Banks, dated 24 September2012,itmightbesubjecttoafineorotherregulatorysanctions.

Currently, there is a draft legislative proposal which aims to amend the Act so that it would conform with the Regulation. However, introducing the relevant changes to the Act may take several months.


PolandNew regulation on short selling raises concerns

Pawel Mruk-Zawirski Tel +48 22 820 [email protected]



New amendments which align the Romanian Regulation on Issuers and Securities Transactions (the Regulation) with the Prospectus Directive 2003/71/EC and changes recently made to the Capital Markets Law,8 improve the framework for setting up securities transactions in the Romanian market. These changes will becomeeffectiveasof15January2013.

The most important changes introduced by the Regulation include: (i)theremovalofthesimplifiedprospectus for prospectus exempted offers;(ii)increasedthresholdsforprospectusexemptedpublicoffers;(iii) no preliminary prospectus necessary for road shows addressed onlytoqualifiedorprofessionalinvestors; (iv) increased maximum limit for total consideration in the European Union of prospectus exemptednon-equitysecuritiesoffersperformed in a continuous or repeated manner by credit institutions; and (v) elimination of the prospectus for the admission to trading of shares representing (within 12 months) less than 10% of the shares of the same class already admitted to trading on the same regulated market and shares issued in substitution of shares of the same class already admitted to trading on the same regulated market, if the issuing of such shares does not involve any increase in the issued capital. The Regulation also now

providessignificantlyshortertermsfor the National Securities Commission (the NSC) to approve the amendments to the prospectus.

New requirements regarding the internal capital adequacy assessment Romanian credit institutions and Romanian branches of credit institutions from non-EU/EEA countries had until 31 December 2012 to integrate a new type of FX risk in their internal credit risk management systems. The new risk relates to lending activities performed in connection with debtors who are exposed to foreign FX risk (ie debtors that: (i) do not obtain income denominated in the relevant foreign currency; and (ii) have not concluded agreements covering the FX risks). These requirements aim to ensurethefinancialstabilityofcreditinstitutions with respect to the aforementioned risk.

Implementation of the new T-bill primary market regulation The new T-bill Primary Market Regulation came into force on 1 January 2013. This regulates, inter alia, (i) the requirements to become a

primary dealer; (ii) the categories of offersontheprimarymarket;and(iii)the performance of transactions in a client’s name through the government securities’ record accounts.


RomaniaNew amendments to the regulation on issuers and securities transactions

Andreea Burtoiu +40 314 05 [email protected]

8_ For more details, see the October 2012 edition of the Risk Note.

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As noted in the October 2012 Risk Note, on 31 August 2012 the Spanish government passed a Royal Decree-law which sets out the procedures for the crisis management of Spanish credit institutions (early intervention, restructuring and resolution), as well as the relevant tools to be used in such procedures (including the general regulatory regime to govern theSpanish“badbank”).ThisRoyalDecree-law has now been approved by the Spanish Parliament and become law (with certain additional provisions).

Further, the Spanish government has approved the regulations governing the Spanish“badbank”,theso-called“Sareb”.Theimpairedassetsandliabilities of the Spanish banks under restructuring or resolution (basically, real estate and related assets) will be transferred. In addition, the FROB has adopted the necessary agreements, subjecttothenon-oppositionoftheMinistryofFinancialAffairsandPublicAdministration, to conclude the recapitalisation of the four banks in Group 1 (including BFA-Bankia). The main purpose of Sareb will be the management and orderly divestment of the portfolios of such assets over a maximum time frame of 15 years.

These new regulations set out the rules to determine the transfer value of the assets (with an average discount to be applied of approximately 63% on the gross book value of foreclosed assets). The volume of assets to be transferred to Sareb is estimated to be EUR 45 billion.

This new legislation should be considered by both Spanish and non-Spanish institutions also have entered into transactions with Spanish credit institutions. Business opportunities could also arise with respect to the real estate assets transferred to Sareb.

If you require further details please contact Allen & Overy LLP Madrid.

SpainCrisis management of Spanish credit institutions – further developments

Salvador Ruiz Bachs +34 91 782 99 [email protected]

Álvaro Pereda +34 91 782 98 [email protected]

9_ Fondo de Reestructuración Ordenada Bancaria.



United Arab EmiratesMatching theory and practice: enforcing international awards in the UAE

The United Arab Emirates (the UAE) acceded to the New York Convention (NYC) on 19 November 2006 without making any reservation, by way of Federal Decree No 43 of 2006. In practice, however, there has remained a degree of uncertainty as to the approach that the UAE courts would take on any application for the enforcement of an international award. This uncertainty appears to have been resolved. The recent decision of the highest court in Dubai (the Court of Cassation) in the case of Macsteel International v Airmech (Dubai) LLChasconfirmedthatarbitration awards made outside the UAE are enforceable in Dubai under the NYC. As the UAE is a civil law jurisdiction,thisdecisionisnotabindingjudicialprecedent.However,thejudgmentshouldserveaspersuasive guidance in future cases. We highlight below certain aspects of thisjudgment.

A dispute arose between Macsteel and Airmech under a contract for the sale of steel sheets. The contract included an arbitration agreement that provided for disputes to be resolved by arbitration in London under the rules of the DIFC-LCIA Arbitration Centre. English law was the governing law of the arbitration agreement and the contract. Airmech failed to nominate an arbitrator

withinthetimeperiodspecifiedand,in accordance with the terms of the arbitration agreement, the arbitrator nominated by Macsteel was appointed as sole arbitrator by the DIFC-LCIA.

The sole arbitrator made an award on 17 November 2009 that required Airmech to pay Macsteel USD 411,905 plus interest. On 22 December 2009, the sole arbitrator made a second award that required Airmech to pay Macsteel’s costs of AED 93,321 and GBP 40,000 plus compound interest. On 17 February 2010, Macsteel commenced proceedings before the Dubai Court of First Instance for the recognition and enforcement of the two arbitration awards.

Airmech challenged the enforcement of the arbitration awards on various grounds including various technical grounds relying on provisions of the UAE Civil Procedure Code (the CPC) (for example, the appointment of the arbitrator nominated by Macsteel (as sole arbitrator) breached Article 216(1)(b) of the CPC; and the award of interest was in breach of Sharia laws and the public policy of the UAE, under Article 235(2)(e) of the CPC).

The Court of Cassation dismissed all ofAirmech’sarguments.Itclarified

that the provisions of the CPC that provide procedural requirements for the conduct of the arbitration and fortheratificationandreviewofarbitration awards only apply to arbitration awards that are made in the UAE. Further, it held that Article 238 of the CPC which provides that international conventions entered into by the UAE shall be construed as binding UAE law, includes the NYC. It held “[...] the court jurisdiction over foreign arbitration awards shall, upon considering the request to recognise and enforce the same, be limited to ensure that such awards do not involve the breach of the Federal Decree under which the UAE acceded to the New York Convention [... and satisfy] the legal requirements in terms of form and subject matter dictated in Articles IV and V [of the New York Convention]”.Itconfirmedthatthearbitration awards were enforceable in the UAE.

This decision should provide comfort to any party seeking to enforce an international arbitration award in the UAE. A new federal arbitration law for the UAE has been under discussion for several years, buttherearenofirmindicationsastowhenitwillbefinalisedorimplemented. It is hoped that when itiseventuallyfinalised,itwillalignthe enforcement regime for domestic arbitration awards with the

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New York Convention regime. In the meantime, it is hoped that the robust approach adopted in the Macsteel case will encourage the UAE courts to be similarly robust in dealing with challenges to the enforcement of domestic arbitration awards under the CPC.

This matter was covered in more detail in Mealey’s International Arbitration Report.


Christopher Mainwaring-Taylor Tel +9714 426 [email protected]

“The recent decision of the highest court in Dubai ... has confirmed that arbitration awards made outside the UAE are enforceable in Dubai under the NYC.”

Yacine Francis Tel +9714 [email protected]



As part of the UK Government’s plannedreformofthefinancialservices regulatory structure, the Financial Services Authority (FSA) will cease to exist and its responsibility for conduct regulation will be taken up by a new regulator, the Financial Conduct Authority (FCA). The new regulatory structure will be in place from 1 April 2013.

The FCA will have a suite of new powers including the power to make temporary product intervention rules without consultation where it considers it is necessary or expedient to advance: (i) its consumer protection objective;(ii)itscompetitionobjective;or (iii) if the Treasury makes such an order,itsmarketintegrityobjective.The rules will last no more than 12 months and may not be renewed.

On 3 December 2012, the FSA (on the FCA’s behalf ) published a consultation paper on the FCA’s use of this new product intervention power and set out a draft statement of policy on its use. There are a number of matters worthy of note including:

– First, the FCA makes no commitmenttonotifyaffectedproduct providers and manufacturers of such rules. Temporary product intervention rules will be published on the FCA website and will be included in the FCA Handbook for their duration. Reasonable endeavours will be made to ensure that information about the rule is communicated as widely as possible, but it is not expected that the FCA will contact allaffectedfirmsdirectly.Firmstherefore will need to ensure systems are in place to keep track of and make sure they are in compliance with any such rules.

– Secondly, the FCA will only incorporate unenforceability and automatic compensation provisions into its product intervention rules in relation to agreements entered into after the product intervention rules are introduced and in contravention of those rules (although, of course, the FCA could achieve the same effectthroughothermeansegaredress scheme). Consumers seeking redress in relation to arrangements entered into before the introduction of the rules would need to establish their claims in the usual way.


United KingdomFCA’s new product intervention powers

Arnondo Chakrabarti Tel +44 20 3088 [email protected]

Christabel Constance Tel +44 20 3088 [email protected]

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Since mid-2012, various proposals have been published in relation to what has been described as a “complete overhaul”oftheregulationand supervision of LIBOR and its European counterpart, EURIBOR.

The Wheatley Review Following the well-publicised issues relating to the setting of LIBOR, in July 2012, HM Treasury commissioned Martin Wheatley (Managing Director of the Financial Services Authority (FSA) and CEO Designate of the Financial Conduct Authority (FCA)) to conduct a review into the setting of LIBOR (the Wheatley Review) and the criminal sanctions regime. The Wheatley Review produced a ten-point plan for the comprehensive reform of LIBOR regulation, which included the following recommendations:

– a new independent body should take over the responsibility for the administration of LIBOR and produce a Code of Practice to govern the LIBOR submission process;

– the submission and administration of LIBOR, as well as key individuals responsible for this, should be regulated by the FSA. The FSA should be given the power to make rules in relation to the submission of LIBOR, with reference to the

Code of Practice produced by the new independent body;

– the FSA should be given statutory powers which allow it to bring criminal prosecutions for the manipulation of LIBOR; and

– LIBOR submissions should, so far as possible, be supported by transaction data.

These recommendations are designed to enhance the FSA’s ability to implement rules that help ensure the integrity of the LIBOR submissions process, as well as allowing the FSA to supervise and, if appropriate, take enforcementactionagainstfirmsandindividuals who are involved in the LIBOR submission process.

The Financial Services Act 2012HMTreasuryconfirmedthatithasaccepted the recommendations made by the Wheatley Review in full. In November 2012, HM Treasury also published draft secondary legislation (in the form of amendments to the Financial Services Bill which received Royal Assent on 19 December 2012) toreflecttheserecommendations.Most notably, the Financial Services Act 2012 will make the following changes in relation to the regulation of LIBOR:

– Thecriminaloffenceofmakingmisleading statements (s397 of the Financial Services and Markets Act 2000 (FSMA)) will be replaced with asuiteofthreecriminaloffences(Part 6A of the Financial Services Act2012).Thefirsttwooftheseoffenceswilllargelyreplicatetheexistingoffencesinss397(2)and(3)FSMA.However,thethirdoffenceis new and relates to the making of false or misleading statements, or the creation of false or misleading impressions in relation to LIBOR.

– At present, the Financial Services Act2012limitsthedefinitionsof“regulatedbenchmarks”(forthepurposes of what constitutes a regulated activity in the new Regulated Activities Order) and “relevantbenchmarks”(forthepurposes of the new suite of criminaloffencesinthenewMisleading Statements and Impressions Order) to LIBOR. However, the legislation leaves it open for the Government to incorporate additional benchmarks in the future.

– In the event that the Government does decide to incorporate additional benchmarks in the future,thedefinitionof“benchmark”forthepurposeofdetermining whether an activity is a regulated one is quite widely drawn

LIBOR reforms – an update



(s22(6) FSMA, as amended by the Financial Services Act 2012). It includes an index, rate or price that is used for one or more of a range of purposes (such as to measure the performance of investments) with no requirement that this purpose be its main or dominant purpose. However,thisbroaddefinitionof“benchmark”istosomeextentcurtailed by the requirement that the index, rate or price in question must be made publicly available which means that non-public benchmarks, such as those that are sharedamongfinancialservicesentities, may be excluded.

FSA consultation In December 2012, the FSA launched a consultation which invites feedback on the FSA’s proposed approach to regulating the future submission and administration of LIBOR.

The FCA intends to introduce rules and guidance in relation to the submission and administration of LIBOR in a new section of the Market Conduct section of its Handbook – “General Guidance on Benchmark Submission and Administration”(BENCH). These rules and guidance will cover the internal systems, controls and codes of practice of entities responsible for administering and submitting LIBOR.

In relation to approved persons, the FCA is proposing to create two new SIF Controlled Functions for individuals who administer LIBOR (CF50 – benchmark administration function) and individuals who submit LIBOR (CF40 – benchmark submission function). It is also envisaged that, in addition to the new SIF Controlled Functions, those people who are responsible for administering or submitting LIBOR may also fall within the following SIF controlled functions: Director (CF1), Non-Executive Director (CF2) and Chief Executive (CF3).

EuropeThese proposed new powers to take action against wrongdoers in relation to LIBOR will be in addition to the powers proposed in the new European market abuse regime.

In July 2012, the European Commission announced various amendments to its proposals for a Regulation and Directive on insider dealing and market manipulation which are intended to clearly prohibit the manipulation of benchmark rates such as LIBOR and EURIBOR and make suchmanipulationacriminaloffence.However, the UK has not at present opted in to these additional rules.


Arnondo Chakrabarti Tel +44 20 3088 [email protected]

United Kingdom (continued)LIBOR reforms – an update (continued)

Sarah Hitchins Tel +44 20 3088 3948 [email protected]

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UK Supreme Court ruling on contractual termination provisionsOn 19 December 2012, the Supreme Courtgaveitsjudgmentin Geys v Société Générale, London Branch which highlights the importance of the careful drafting and exercise of “PILON”clauses(clausesgivingemployers a power to terminate employment by making a payment in lieu of notice). This decision is a reminder of the need for banks to pay close attention to contractual termination provisions in any dismissal process.

The Supreme Court ruled that the making of a PILON into the employee’s bank account did not constituteaneffectiveexerciseofaPILON clause because the employer did not notify the employee that it was exercising its rights under the PILON clause. As a result, his employment continued until the PILON clause was validly exercised, increasing his severance entitlement by approximately EUR 5.5 million.

According to the Court, when using a PILON clause, an employer must ensure not only that the employee receives a payment in lieu of notice butthattheemployeeisnotifiedinclear and unambiguous terms that the PILON clause is being exercised and when exactly the termination of employmentwillbeeffective.

This case has also cleared up the long-running uncertainty over when an employment contract comes to an end in circumstances where an employer purports to terminate summarily in breach of contract. By a majoritydecision,theSupremeCourthasconfirmedthattheemploymentcontract will only terminate if the employee agrees to this. Otherwise the employee can usually remain in employment and (as in this case) qualify for additional rights which depend upon continued employment.

Consultation period for UK collective redundancies to halveThe UK Government has announced that, for employers proposing 100 or more redundancies (at one establishment within a 90-day period), the current 90-day minimum period of consultation that must be undertakenbeforethefirstredundancycantakeeffectwillbereduced to 45 days from 6 April 2013. The 30-day minimum period that applies for those proposing at least 20 but fewer than 100 redundancies will remain the same.

Thisisgoodnewsforthefinancialsector, where redundancies are likely to continue in response to regulatory and economic pressures. Further details of the proposals are still awaited.

Felicity Gemson Tel +44 20 3088 [email protected]

UK Dismissal process – Supreme Court and Government guidance



As reported in past Risk Notes, there is continuing concern about the introduction of the U.S. Foreign Account Tax Compliance Act (FATCA). FATCA added a new component to the U.S. tax withholding and information reportingregime.Thelaweffectivelymakesforeignfinancialinstitutions(FFIs) information gathering and withholding agents of the U.S. Internal Revenue Service (the IRS) by threatening an FFI’s own U.S. source income and sale proceeds with a 30% withholding tax (30% Withholding). TheexpansivedefinitionofFFIprovided by the law means that these changes are of concern not only to banks, but also to investment funds, hedge funds, private equity funds, securitization vehicles and many other formsoffinancialintermediaries.

This new regime is not intended to be a revenue raiser for the U.S. government, but rather to provide a mechanism to identify U.S. investors in FFIs. The 30% Withholding does not apply if the relevant FFI enters into an agreement with the IRS to report certain information in respect offinancialaccountsmaintainedbyitwhich are held by U.S. persons (as well as certain non-U.S. entities which have a 10% U.S. owner), or complies with prescribed procedures to ensure that the FFI does not maintain any

financialaccountsheldbysuchpersons or entities. In addition, such an FFI will need to withhold on “passthrupayments”itmakestootherFFIs. Based on the limited guidance contained in the law, the agreement with the IRS will require the FFI to identifywhichofitsfinancialaccountsisa“UnitedStatesAccount”;reportinformation to the IRS concerning, eg the owner, value, income of, and withdrawals from, such accounts and; either deduct 30% Withholding with respecttoafinancialaccountiftheowner of such account does not cooperate in providing the required information (a recalcitrant account holder), or arrange for 30% Withholding to occur at source with respect to income and gross proceeds of sale attributable to such recalcitrant account holder.

We highlight below two important recent developments.

Revised timelines for implementationThe original commencement date for all forms of FATCA withholding was January 1, 2013. Subsequent guidance provided that withholding on U.S. source income, eg payments on securities issued by U.S. issuers made to FFIs, would not begin until January 1, 2014. More recent guidance

released in October 2012 (Announcement 2012-42) pushed back the date for withholding on the gross proceeds of sale of U.S. debt and equity securities to January 1, 2017. The commencement date for withholdingon“passthrupayments”is also January 1, 2017.

Announcement 2012-42 also extended the timing of the so-called “grandfathering”provisions,sothatobligations that can only produce foreignsource“passthrupayments”and cannot produce U.S. source “withholdablepayments”willbeexempt from FATCA withholding if issued up to six months after the date theU.S.definestheterm“foreignpassthrupayment”infinalregulations.Thiscreates,ineffect,a“floating”grandfathering date for obligations which have no immediate U.S. connection. More recently, a senior U.S.Treasuryofficialstatedthatallobligations entered into prior to January 1, 2014 (even those producing U.S. source withholdable payments) would be grandfathered. This rule is expectedtobeincludedinfinalregulations which were due to be published by year-end but were not published as of the date of this note. Only obligations which have a definitivetermandarenotclassifiedas“equity”forU.S.taxpurposescanbenefitfromgrandfathering.

United StatesUpdate on FATCA

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Intergovernmental agreementsIn February 2012 the U.S. Treasury released a Joint Statement with France, Germany, Italy, Spain, and the UK in which these countries announced their intention to enter into bilateral agreements to alter the manner in which FFIs in those jurisdictionsoperatetheFATCAinformation reporting and withholding regime. Since that time, the UK, Denmark, Ireland, and Mexico have signed such agreements. These“Model1”agreementsreducethe compliance burden on FFIs in thosejurisdictionsbyeliminatingtheneed for them to make FATCA withholdings from payments they make to others, and relieving them of the burden of being withheld against. Such FFIs will also send information regarding U.S. account holders to their home governments for forwarding to the U.S., rather than doing so directly. It is hoped by this means to overcome objectionstosuchinformationsharing under data protection, bank secrecy, and other similar laws. A “Model2”agreement,whichwillstillrequireFFIsincertainjurisdictionstoenter into agreements with the IRS and to perform some FATCA withholding, is also under

consideration in a number of jurisdictions(egSwitzerland and Japan).

We have prepared detailed guidance notes for clients on this initiative. Clients wishing to discuss the implications of this legislation upon their businesses should contact Stephen Fiamma or another tax specialist in the U.S. law group at Allen & Overy LLP.

Stephen Fiamma Tel +44 20 3088 3657 [email protected]

“More recently, a senior U.S. Treasury official stated that all obligations entered into prior to 1 January 2014 (even those producing U.S. source withholdable payments) would be grandfathered.”



The CFTC has in recent months issued a multitude of temporary and conditional no-action relief letters and exemptive orders to delay the application of certain Title VII requirements such as certain reporting requirements, external business conduct requirements and documentation requirements, that were due to come intoeffectonDecember31,2012.Withnew exemptions and relief being announced daily, it is increasingly difficultforentitiestodetermineexactlywhat their obligations are under the CFTC requirements and when such requirementsbecomeeffective.Themostsignificantoftheseexemptiveorders was the Final Exemptive Order Regarding Compliance with Certain Swap Regulations (the Final Order) and the further proposed guidance on the cross-border application of certain CFTC requirements, published by the CFTC on December 21, 2012. The FinalOrderclarifiesand,incertaincases, improves on many aspects of the CFTC’s Proposed Exemptive Order Regarding Compliance With Certain Swap Regulations (the Proposed Order) and the CFTC’s proposed guidance on the Cross-Border Application of Certain Swap Provisions of the Commodity Exchange Act, both of which were published in July 2012.

The Final Order: (i) provides a new temporarydefinitionof“U.S.Person”;(ii)clarifieswhichswapsshouldbe

included in determining whether a non-U.S. person is required to register as aswapdealer(SD)ormajorswapparticipant (MSP) and, in particular, it providesnon-U.S.personsaffiliatedwithregistered SDs temporary relief from having to aggregate the swap dealing activitiesofcertainaffiliates;and (iii) allows certain SDs and MSPs to delay compliance with particular CFTC requirements. The relief provided by the Final Order will expire on July 13, 2013. There are however still several issues that remain outstanding with respect to the application of the CFTC’s regulations to non-U.S. entities and the swaps such entities enter into, in particular, the temporary nature of the relief provided by the Final Order and the Final Order’s further guidance raises a number of additional points for comment. The cross-border application of the CFTC’s requirements are still being discussed between the CFTC and various foreign regulators and the outcome of those discussions will determinethefinalterritorialscopeofthe CFTC’s rules and regulations in relation to cross-border swaps activities.

Following our discussion on changes to U.S. commodity pool regulations in the October 2012 Risk Note, U.S. regulators have started to address the concerns brought up by various industry groups. In particular, the CFTC has provided relief for a range of securitization and covered bond vehicles which were

subjecttosignificantregulatoryburdensas“commoditypools”.Wenote,however,thatsomestructuredfinancevehicles are not eligible for the relief and maystillbesubjecttocommoditypoolregulations. Further, the relief that has been provided has only taken the form of no-action and interpretative letters at the enforcement level, and amendments to U.S. regulations at the legislative level may be necessary to fully address the issue in the long term. Lastly, the ambiguities of the regulations and various ongoing interpretative guidance have caused market participants to be increasingly concerned that they may inadvertently be in violation of applicable U.S. regulations. This concern is heightened where previously unregulated areas are subjecttoU.S.regulation.


Commodity Futures Trading Commission (CFTC) – Recent activity

Ruth Arnould Tel +1 646 344 [email protected]

United States (continued)

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Key Contacts


Tim House Tel +44 20 3088 3775 [email protected]

With new exemptions and relief being announced daily, it is increasingly difficult for entities to determine exactly what their obligations are under the CFTC requirements and when such requirements become effective.

Allen & Overy LLP One Bishops Square London E1 6AD United Kingdom

Tel +44 20 3088 0000 Fax +44 20 3088 0088

FOR mORE INFORmATION, PLEASE CONTACT:

London

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This note provides guidance as to legal trends and developments only, and should not be relied upon without seeking advice. If you do require legal advice in respect of a specific matter mentioned in this note, please do not hesitate to contact us.