Lawyers ready themselves to help advise clients on the impact of the swathe of new regulatory changes. Kevin Godier reports.


New and increasing levels of regulation are expected to exert a significant impact on the trade and export finance market, and to concurrently provide a healthy flow of work for the industry’s legal advisors.

The most influential regulatory change of 2011 was the introduction of Basel III, which was designed by the Basel Committee on Banking Supervision (BCBS) to help prevent another financial sector meltdown.

The challenge of managing compliance and risk in the fight against fraud, anti-money laundering and terrorism financing is also exercising the skill-sets of lawyers specialising in trade finance.

“There are a range of necessary but robust challenges emerging which include some heavy pitfalls for the unwary, and which we have to spend time working around and through. Traders and banks need to know as much as possible and to be comprehensively prepared, so that deals are presented to credit committees in the most favourable light,” says SNR Denton partner Geoffrey Wynne.


Basel III was a huge talking point in 2011, notes Wynne, who described as “good news” the October 2011 announcement by the BCBS that it would allow two forms of waiver – upon the one-year maturity floor and the sovereign floor – with regard to the treatment of certain trade finance instruments under the Basel III accords.

He comments that “bankers might nonetheless argue that the treatment of trade finance by Basel III, especially for well-structured transactions, is not as good as it might have been, as was also the case for Basel II”.

Wynne continues: “The big question is whether this represents the last change by the BCBS, and whether the Bank of England and other central banks might grant any further jurisdictional waivers. I have been advising clients that they ought to assume that the present model will not be altered, and to look at the best structures under this version of Basel III for optimising their capital usage both on and off the balance sheet.”

According to Alex Monk, a partner at DLA Piper focused on commodity deals, specialist regulatory lawyers are often being approached by in-house legal teams at banks for external advice on the impact of Basel III.

“Transactional lawyers will then be sought for structure guidance on individual deals that are seen as riskier, perhaps where these involve SMEs or emerging markets. They will be asked to help structure the deal to make it as cost-effective as possible.”

James Willcock, an associate based in DLA Piper’s Hong Kong office, predicts an increasing quest for structures that can reduce the capital adequacy ratios of banks.

“As the January 2013 date for Basel III gets nearer, there will be an increased demand for transactional lawyers to squeeze the adequacy ratios as low as possible,” he forecasts. As trade finance documentation and wordings undergo change in the preamble to Basel III implementation, there has inevitably been a high level of legal focus upon the rising costs of transactions, says Nick Grandage, partner at Norton Rose.

“Given that the new regulatory treatment will in many cases force banks to make provision for 100% of the finance provided, which will squeeze the cost of funding for trade finance deals upwards, the additional costs will almost always end up with the borrower. This is dealt with via a standard increased costs clause, which stipulates that in the event of regulatory change, the borrower may have to pay an incremental cost, and is also entitled to switch banks.”

Monk underlines that many banks in London are already shadowing price increases that will become a standard practice upon the implementation of Basel III. “Most banks are now arguing that they can already recover costs in that way, although one can encounter a spread of views in syndicated deals, where the majority approach generally prevails.”

Grandage notes that documentation has been adjusted by lawyers to cater for syndicated transactions in which participating banks could experience differences in their increases in costs, particularly in situations where OECD-based banks are using an advanced internal ratings-based (AIRB) approach, but where those in emerging markets are still on a standard approach.

“The role of the agent bank in the syndicate involves holding commercial information about the other banks’ risk-weighting approaches. The documentation contains provisions that ring-fence this pricing information and prevent the agent bank in sharing this with the other banks,” he explains.

Every lawyer canvassed by GTR indicated at least some concern that the tightening of liquidity entailed via Basel III could shrink trade finance transaction flows. “Behind the scenes, there has been a continuing tightening of liquidity.

Banks have in many cases already increased their pricing, and may have to turn some types of business away, so there is a potential impact on the deal flow,” says Andrew Gamble, partner at Hogan Lovells International.

He remarks: “Given the risk that banks in general may now be less well-positioned to refinance a short to medium-term trade linked deal, some borrowers may be gravitating away from trade finance deals to longer-term bond deals, to achieve more certainty. The first quarter of 2012 has been quieter, including in the export credit agency space, due to rising sovereign risk factors.”

Reed Smith’s head of trade finance Robert Parson agrees. “There is a clear trend towards structures that duck the Basel III issues entirely with huge interest in ownership-based transactions as well as fully collateralised deals as the big players butt into and fill storage across the globe. However, these sorts of solutions are simply out of reach for smaller, less sophisticated operators, and the result without doubt will be further second and third tier failures in the next 12 months,” he predicts.

But Hogan Lovell’s Gamble is confident that this will not noticeably impact the workload at legal firms. “Lawyers always sit at the back of these trends, and are in any case adept at switching their skill-sets from one form of financing to another. If any exits from trade finance did occur in the future, these would be gradual, rather than dramatic, due to the run-off periods attached to so many deals,” he says.


US banks have been subject to major levels of regulatory pressure, including the Dodd-Frank act, which aims to bolster capital bases and restrict certain kinds of speculative investments that played a key role in the 2007-09 financial crisis.

Much of the legislation has still to be approved, and US banks are awaiting their effective compliance dates. But lawyers pinpoint a concern in some quarters that Dodd-Frank – and especially its so-called Volker Rule – could prohibit or make certain trade finance deals more costly. “Some of the laws coming are so uniformly drafted that our community could become an innocent victim in the game of exterminating bad practice,” SNR Denton’s Wynne cautions.

Another new US-based regulatory act looming on the horizon is the FATCA – or Foreign Account Tax Compliance Act – that kicks in on January 2013. It will require foreign banks to report and disclose the US interests that they hold, allowing Washington to determine the ownership of US assets in foreign accounts.

“The full regulations were published in February, and by next year it will become clearer where market practice is,” observes Grandage at Norton Rose.

In essence, FATCA will impose withholding on certain payments to non-US financial institutions unless they participate in a US reporting and withholding regime, or qualify for an exemption.

“FATCA is big, and contains 380 pages of regulations that will affect the relationships between lenders and borrowers as the US strives to clamp down on tax evaders,” says another lawyer, who prefers anonymity. “It has far reaching implications, and will affect deals where, for example, European bank syndications are lending into the US against the collateral of commodities held within the US,” he emphasises.

He adds: “The US is basically attempting to use foreign banks as policemen – and it may force many European banks to think very hard about ring-fencing most of their transactions from a US footprint.

The European Loan Market Association has already published its own guidance, telling banks to protect their positions, and the five big European jurisdictions – the UK, France, Germany, Italy and Spain – have agreed that their tax authorities can deal directly with the US tax authority to streamline the administration.”

“It’s a concern for two reasons,” says Parson at Reed Smith. “Firstly, because of the creeping long arm jurisdiction that the strength and reach of the US financial system permits US lawmakers to exploit.

Secondly, because much of the take-up for capacity in the trade finance market recently dumped by some eurozone banks was seen as likely to be destined for US banks. Any discouragement of that trend could leave the trade finance community short.”


Another area where legal firms experience a significant trade finance interface is the broad Know Your Customer (KYC) compliance environment. “There is a lot of bureaucracy attached to areas such as anti-money laundering regulations,” says Monk at DLA Piper.

“In trade finance you tend to get lots of parties participating in the chain, in various jurisdictions, and it gets complicated to ensure that any one bank is in compliance with Office of Foreign Assets Control, the Patriot Act and other KYC issues. Clients say it is a huge headache for them in terms of administrative time and resources,” he underscores.

White & Case partner, Christopher Czarnocki argues that KYC “has more of a direct and visible impact on our workflow than Basel III, although generally not to the extent of scuppering deals”. Whereas three years ago banks were finalising their KYC checks in the early stages of a deal, “they are now quite often still dealing with aspects of it as late as the conditions precedent stage”, he says.

“We get more involved as lawyers now, and arguably see that KYC is more of a challenge whentrade finance extends into low-income countries,” he adds.

“Banks have their own rules and regulations for KYC, and they tend to have ticked those boxes before they speak to us,” notes Gamble at Hogan Lovell. “But on the sanctions side, there has been the growing creep of regulations particularly involving Iran. Companies and banks with continuing long-term exposures have needed to make sure that they can continue to perform, notwithstanding the EU and US sanctions.”

According to Stephen Tricks, a London-based partner at Clyde & Co, his firm has undertaken “a fair amount of work on sanctions issues”, linked with traders, banks, insurers and ship-owners that are looking for advice.

Tricks comments: “Iran clearly is the hot topic, and Syria to a lesser extent. But there are also many other countries with smaller sanctions problems, including Belarus and Myanmar, and there are even sanctions banning certain types of trade with China. Obviously weapons such as AK47s, dual effect goods and nuclear components need export licences, while sanctions such as travel bans are also used in international law.”

From a trade finance viewpoint, economic sanctions restrict the ability to provide financial services to designated individuals and companies. “Take Libya last year as an example,” says Tricks.

“An overseas company that wanted to export hospital equipment into Libya would have faced regulations from the EU that no funds or economic resources could be made available to designated people or entities. The definition of funds included letters of credit (LCs) performance bonds, guarantees and even bills of lading.”

He continues: “Look at Iran now. Sanctions have been stepped up steadily, and restrictions on both insurance and banking have effectively meant that that many western banks simply stay away from all Iranian work. They say that the complexity of the sanctions is such that they might become caught up inadvertently.”

Grandage points out that the wording of the sanctions have become broader and further-reaching over time. “The flip side of a lack of accuracy is an increase in uncertainty, so we are looking more at sanctions clauses and getting more queries on sanctions issues, especially with regard to sanctions against people.

I expect to see an increasing number of queries where clients might ask, for example, whether a politically sensitive person in an emerging market could be a director of an entity that is a borrower in the trade finance market,” he says.

To avoid being unknowingly caught up in sanctions, banks are increasingly inserting broad clauses into LCs that stipulate their right not to comply with their financial undertaking if the overall transaction extends into illegal or sanctioned areas, observes Tricks.

“This is becoming more standard now. Although some countries have prohibited banks from inserting those clauses into LCs, and the International Chamber of Commerce has advised strongly against widely-drawn sanctions clauses, banks in many countries are looking to cover themselves in this way,” he points out.

Parson at Reed Smith sees the sanctions issue on credits settling down through peer pressure.

“Because the terms of an issued LC often end up having to satisfy the requirements of confirming and issuing banks – who will tend to want to eliminate any tripwires that might lie in the way of reimbursement such as sanctions clauses – the practice ought to diminish over time because of the need for many overseas banks to provide for negotiation or confirmation by a major European bank.”  GTR