The Structured Finance & Derivatives guide provides expert legal commentary on the key issues for businesses involved in capital markets. The guide covers the important developments in the most significant jurisdictions.
Last Updated: November 23, 2018
Global Market Trends
At the beginning of 2018, the macroeconomic factors in most major economies appeared to be aligned to allow global structured finance and derivatives issuance to continue the strong growth that it had begun to experience, after several years of relative inactivity following the global financial crises in 2008. In the United States, for instance, 2017 had seen increased activity in most asset types, ranging from the securitisation of auto loans and leases to collateralised loan obligations (CLOs) and commercial mortgage-backed securities (CMBS), where the core issues related to risk-retention have now largely been settled. Even the market for residential mortgage-backed securities (RMBS) was showing increased activity in certain areas. Here and elsewhere, the momentum experienced in 2017 continued in 2018.
In the Swiss market, for instance, record figures were seen for securitised structured products. This trend was driven by the increased appetite of national and international investors for flexible and liquid products – on the one hand as an alternative to low interest rates, and on the other hand as an opportunity to participate in current developments by tracking innovations. A well-known example concerns theme certificates in crypto-currencies.
We have also observed the growing importance of fintech, both in the general market and in structured finance in particular. For instance, in the United States, the more established fintech companies are rolling out securitisation programmes and other funding structures, while newer fintech companies are attempting to find the favourable financing terms a securitisation programme entails.
There are, however, some potential factors that could derail these positive trends. One of these factors is the uncertainty of the outcome of the ongoing Brexit negotiations, and what exactly the effects of the UK leaving the EU will be. For instance, following Brexit, it is unclear whether the multitude of EU laws and regulations that ensure the smooth functioning of the derivative and collateral markets will still apply within the UK, or what will happen in respect of existing UK laws. While certainty will only come following negotiation of the post-Brexit derivatives regulatory regime, in light of the efforts that have been undertaken in the UK in developing these regulatory requirements, pundits are generally of the opinion that the current framework will be left largely untouched. However, issues may arise in specific areas, such as in relation to the margin and clearing requirements for UK firms that enter into derivative contracts with EU 27 counterparties. Furthermore, rising interest rates and the current market volatility add uncertainty to the market outlook.
Introduction to the Guide
The aim of this Global Practice Guide is to give legal practitioners a thorough insight into the legal framework and the issues applicable to structured finance and derivatives issuances in selected jurisdictions.
Recent years have brought a wealth of regulatory change in most jurisdictions, in which legislators have not always succeeded in their attempts to strike a fine balance between adequate protection of market participants and excessively cumbersome regulation. Accordingly, this guide is designed to lead legal practitioners through the vast and fairly complex regulatory regime that has arisen. In short, it aims to provide guidance on the typical issues that may arise in any country in relation to structured finance and derivatives.
Each of the following chapters begins with a general overview of the main trends and most important developments in the structured finance market in the relevant jurisdiction, followed by more specific information on practical issues relating to different asset types including, inter alia, acquisition and leveraged finance, securitised debt and other asset-based lending, credit-linked notes and other structured products, and OTC derivatives.
Some issues covered in this year's guide are country-specific, and are highlighted in the introductory sections on the main trends and developments for each country. These include matters such as the 2018 reform of the French structured finance market that will provide new investment opportunities for non-bank entities and may thus have a deep impact on the French structured finance industry, or the headwinds faced by the UK structured finance market due to the omnipresent Brexit concerns.
Other topics are recurring, such as the rules on risk retention (the so-called 'skin in the game' rules). These play an important role both in the United States, where the risk-retention rules authorised under the Dodd-Frank Act are fully effective, and in the EU, where the former regime on risk retention was superseded on 1 January 2019 by the new Securitisation Regulation and the amended Credit Requirements Regulation.
As the legal framework in many jurisdictions is in a state of flux, this guide pays special attention to pending reforms. Thus, the general atmosphere in the current political climate in the United States and its impact on the laws and regulations applicable to the structured finance market are discussed, as is the amendment to the Civil Code of Japan that will become effective on 1 April 2020 and its impact, inter alia, on the legal certainty of securitisation structures using future receivables.
Of course, the above overview of the current market trends and the country reports contains but a few of the enticing legal issues that are thoroughly elucidated in this guide.