Feature

The FSB’s Consultation on Liquidity Preparedness for Margin and Collateral Calls: is it all about liquidity?

The FSB consultation report on Liquidity Preparedness for Margin and Collateral Calls (https://www.fsb.org/2024/04/liquidity-preparedness-for-margin-and-collateral-calls-consultation-report/), responded to a number of high-profile loss-making transactions by various banks involved in lending against collateral comprised of large positions in single listed stocks. Recently, the most talked-about debacle was that of  Archegos Capital Management (Archegos), the family office of Bill Hwang with total assets reported at around $36bn. In a nutshell, the prices of several stock positions held by Archegos dropped  for different reasons and it could not post enough cash collateral, so some of the lending banks had to liquidatethe collateral shares. Some banks managed to exit their positions quickly, but other chose not to, and suffered substantial losses. 

This article provides a detailed overview of the issues involved in such large transactions and highlights the key procedural requirements and potential regulatory developments needed. 

Floating charges again

Far too much ink has been spilled attempting to distinguish between fixed and floating charges, so I will keep this brief. It was prompted by reading Sarah Worthington’s article in this journal last year (‘Fixed and floating charges: still favouring absolutism over multi-factored nuance’ (2023) 9 JIBFL 583). My purpose is twofold: to argue that distinguishing between fixed and floating charges is both conceptually impossible and commercially pointless; and then to suggest how the law might be reformed.

Russia’s quest for financial independence through the use of digital assets, cryptocurrencies and digital currencies

The Russian Central Bank and its regulatory bodies, which were historically against all things crypto, took a co-ordinated U-turn shortly after Russia's invasion of Ukraine in Feburary 2022 and the imposition of unprecedented sanctions by the West - because they realised that cryptocurrencies and digital assets can be used the evade sanctions. Having been subject to widespread sanctions for over two years and effectively cut off from the international payment system (SWIFT), and largely shut out of Western's bank and bank accounts, Russia is trying to adjust the "new order" and its international isolation - both economically and financially. It is finding new ways to receive monies from the West for its raw materials and to trade independently of Westen banks  and the US dollar, so that it can transact with both friendly and not so friendly countries on the premise that West cannot  trace those transactions.

How to address the “possession or control” issue in the UK Financial Collateral Arrangements

This article examines the legal uncertainties surrounding collateralisation in the UK, focusing on the Financial Collateral Arrangements (No.2) Regulations 2003, SI 2003/3226. It explores the challenges posed by the “provision” of collateral and the “possession or control” test, especially in practical portfolio management and derivatives markets. Through an analysis of key case law, the article identifies inconsistencies and recommends separate definitions for “possession” and “control”. These proposed reforms aim to align legal definitions with modern financial practice, thereby enhancing legal certainty, reducing systemic risk, and supporting the resilience of financial markets.

The rise of NAV financings: is an equity contribution really “equity”?

Leveraged buyouts have traditionally been funded principally by debt secured against the collateral of the asset being acquired (typically borrowed by the acquisition special purpose vehicle, onward lent, and secured against the underlying collateral), combined with a sponsor equity commitment. To this, debt and equity commitment letters are commonplace within acquisition processes, and there is a clear expectation – both from sellers, and the acquisition financing provider – that the sponsor is committing true equity into the structure. However, as rising costs of capital have made investment returns more challenging, sponsors have looked to more creative ways to assist in levering their equity contribution, including by way of the incurrence of NAV financings. NAV financings used in this manner can mask the underlying nature of the equity commitment and, in a downside scenario, potentially lead to significantly more complex, and uncertain, workouts.

The limitations of limited recourse

This article unpacks the risks for lawyers advising on financing transactions which are, on their face, limited recourse transactions, looking at alternative routes to recourse which funders may have against the operating companies, their directors and shareholders who utilise these financing structures. The underlying security assets are typically some or all of real property, shares, receivables and bank accounts.

Contracting out of the default discharge rule

This article considers whether it is possible to contract out of the rule that the discharge of one surety results in the discharge of all co-sureties and whether such a clause in a contract complies with the Unfair Contract Terms Act 1977, in light of Cynergy Bank Ltd v Dinglis  [2024] EWHC 754 (Comm).

From London to Berlin: insights on taking security over receivables in Germany

This article explores some of the complexities and key considerations for lenders and legal practitioners when taking security over receivables in Germany. We consider: (i) the types of security that can be taken over receivables and their key features/formalities; (ii) how to navigate contractual restrictions on transfer; (iii) potential pitfalls when taking security over receivables; and (iv) secured creditors’ priority when realising security over receivables in an insolvency.

Lost in the labyrinth: the Court of Appeal in KVB Consultants

The decision of the Court of Appeal in KVB Consultants Ltd & Ors v Jacob Hopkins McKenzie Ltd & Ors  [2024] EWCA Civ 765 has important implications for anyone who deals with, appoints or acts as an appointed representative (AR). It applied a number of principles from existing case law but reached a surprising conclusion regarding how a principal can limit the responsibility it takes for its AR.

Money laundering in the supply chain: the use of “adequate consideration” to “cleanse” criminal property

Section 329 (2)(c) of the Proceeds of Crime Act 2002 exempts a person from criminal liability where criminal property is acquired for adequate consideration. Previous authority appeared to suggest that the provision of adequate consideration had the effect of "cleansing" criminal property. Thus, anyone who subsequently dealt with the property would not commit a money laundering offence. 

In Rex (on the application of World Uyghur Congress) and National Crime Agency  [2024] EWCA Civ 715, 26 June 2024  the Court of Appeal rejected this interpretation. In a decision which will have significant implications for businesses and professional advisors, the court held that the “adequate consideration” exemption is no more than a personal exemption. It has no impact on the status of the property as criminal property or recoverable property. It does not therefore operate to cleanse tainted property.