What 2021 holds in store for trade and commodity finance

Sullivan & Worcester

[co-author: Humzah Irfan]

Jacqueline Cook, Senior Knowledge Development Lawyer at Sullivan's London office, broke ground on our first Trade & Export Finance Webinar of 2021, held on 21 January, and the EU-UK Trade and Cooperation Agreement (the TCA) for the post-Brexit position was top of the agenda. London's Senior Partner, Geoffrey Wynne, followed with thoughts on what the trade finance industry should be looking out for in 2021.
Key points from Jacqueline and Geoffrey's presentation included:

  • Choice of English law in finance agreements – Completion of the Brexit transition period has ended supremacy of EU law in the UK, but the TCA did not cover cooperation between the UK and EU on civil justice. What we do know is that there is little impact on the choice of English law in finance agreements. For the moment, the UK will rely on the Hague Convention on Choice of Courts Agreements 2005 (the Hague Convention),1 principles of private international law and bilateral treaties between the UK and any other state for choice of courts, recognition and enforcement of judgments. The Hague Convention protects exclusive jurisdiction clauses in civil and commercial matters.2 Therefore, at the outset of any transaction, parties should consider, amongst other things, whether to switch to an exclusive, two-way jurisdiction clause, as well as the most relevant jurisdictions for any future litigation.
  • Applicable regulations – As the UK does not have the benefit of passporting rights, implementing systems to award equivalence for certain areas of financial services are key. With both the EU and UK regulatory regimes in place, it is crucial for financial institutions to know who their regulators are and where they are located to determine which regime applies. The HM Treasury's recent guidance on the UK's equivalence framework maintains that it will work towards "an open and globally integrated financial system." Furthermore, equivalence decisions should be compatible with the UK's policy priorities, namely the rule of law, international sanctions, human rights and efforts to combat money laundering.
  • Contractual recognition of bail-in clauses – It was helpful to see that the FCA and PRA have used their temporary transitional power to grant relief to UK regulated entities by moving the deadline for including the bail-in clause in EEA law governed documents for phase two liabilities to 31 March 2022. From 1 January 2021, English law became a non-EEA law in relation to the EEA bail-in rules, and a similar UK regime is now in place.
  • LIBOR developments – There were two key developments last month. First, for Sterling LIBOR, the trial for the SONIA Term Rate has ended, and two forward-looking SONIA Term Reference Rates were launched on 11 January 2021: one by ICE Benchmark and one by Refinitiv. Second, for US Dollar LIBOR, the US Federal Bank and Alternative Reference Rates Committee announced that the LIBOR rate will be available until mid-2023 for legacy contracts. As other transition deadlines remain, the end of Q1 2021 should see a change in market practice.
  • Sanctions – The UK continues to build its own sanctions regime as implemented by the Office of Financial Sanctions Implementation (OFSI). The US, under a new Biden administration, continues to impose extrajudicial sanctions, and it looks like US sanctions may become less politically motivated, bringing more certainty to the trade finance industry. Since the date of the webinar, Janet Yellen has been appointed to the US Treasury and has announced that a review of US sanctions policy is one of her priorities. Watch this space.
  • Digital trade – The TCA promotes digital trade, emphasising both the EU and UK's intention to protect electronic signatures and contracts and cross-border data flows. This is an important step in facilitating digital worldwide trade. The dramatic change in working practices during the COVID-19 pandemic has accelerated the drive to digital trade and virtual working, providing a prime opportunity to the industry to lobby for more digital-friendly regulatory changes in respect of due diligence, AML and KYC.
  • Looking to the future – Predictions for 2021 include:
    • a widening of possible obligors in trade finance transactions, opening the market up to more SMEs in emerging markets;
    • an increased use of warehouse financing due to the growth of online transactions and financing of warehoused goods;
    • new rules on digital trade in the form of the Uniform Rules on Digital Trade Transactions (URDTT); and
    • more structured trade finance, including new and recycled concepts, including SPV structures, securitized assets and structured letters of credit.

With some interesting questions from a wide audience, Geoff thanked everyone and invited us all to the next webinar on 25 February 2021 at 12.30pm.

Please click here for a link to a video of the webinar to find out more about recent challenges in trade finance.

1 Effective in the UK since October 2015.
2 Areas such as insolvency, competition and tort are excluded.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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