Trade finance’s new master participation agreement: 5 key changes
The Bankers Association for Finance and Trade (Baft) has revised and updated its English law master participation agreement (MPA) to drive further standardisation in trade transactions and meet the “modern-day requirements” of the industry.
The new MPA, or master risk participation agreement (MRPA) as it deals with risk, comes a decade after the release of the original document, which has served as the industry standard framework for banks and their counterparties when they buy and sell trade finance-related assets globally.
The 2018 MPA keeps many of the provisions from the original, but also includes amended and new specifications to reflect the significant developments in market practice and changes to the global regulatory landscape since 2008.
Baft carried out the revision together the International Trade and Forfaiting Association (ITFA), which put together a working group of experts to review the existing forms and identify necessary changes. International law firm Sullivan & Worcester drafted the modernised form and its usage guidelines. An updated New York law version is expected in the coming months.
GTR understands that the new MPA is available free of charge to Baft and ITFA members, but that others can obtain it at a cost.
Although it is available to use immediately, there is no obligation to do so. The old and new documents will run in parallel with one another.
“We hope that if you start tomorrow with a participation agreement between you and another party, that you might look at the new document as one to start your discussions with,” said Geoff Wynne, partner at Sullivan & Worcester, speaking at ITFA’s annual conference in Cape Town last week.
The most significant revisions include:
- Allowing for true sale
The new MPA has been developed to allow for ‘true sale’, namely the transfer of financial assets, rather than only transferring liability of one party to the other, as reflected in the 2008 MPA. As such, what was known as the ‘grantor’ in the original document is now called the ‘seller’.
“This is no longer a debtor-creditor relationship: the intention of the parties is to transfer ownership rights in the underlying transaction from seller to participant,” Wynne explained.
With this true sale, the beneficial interest in the underlying transaction is placed “beyond the reach of the seller’s creditors”.
- Removing optionality
Another key revision is what Wynne calls a “bold decision” to remove optionality within the document. This means that institutions cannot modify the document, but must use it in its entirety. The intention is for the new MPA to be used as an industry standard instead of merely a recommended form, as was the case with the original.
“In the past, banks looking at the MPA varied the form to suit their own position: if they were a grantor, they picked all the options that were favourable to a grantor. If they were a participant, they tried to reverse that process,” said Wynne.
- Dealing with a multi-party document
Recognising the potential issues when dealing with a multi-party document, the new MPA introduces the concept of two ‘master parties’ as the only entities involved in the actual agreement. “In other words, each institution involved would sign up with one master party – for example, its head office – as the seller or participant,” said Wynne.
Affiliates and branches of the master parties will then be “free to conclude participation agreements without signing a master agreement”, reads the usage guidelines, as drafted by Sullivan & Worcester.
- Dealing with fraud
The new MPA has no separate provision dealing with fraud risk – which links with the fact that there is no optionality. “We took the view that the provision in relation to fraud can be adequately dealt with elsewhere [in the document],” said Wynne. “There are other clauses that deal with fraud which stipulate that the seller has an obligation to examine the documentation presented to it – if it gets that wrong then it would be liable – and that it must administer the transaction with proper care and attention.”
In simple terms, if a seller breaches either of these obligations, the participant has recourse to the seller. And if the seller is in compliance with its obligations, then the risk is shared.
- Taking participations into the future
The hope is that the new document meets “the modern-day requirements” of the industry and that it “begins to look forward into the fintech world”, said Wynne.
In a follow-up with GTR, Wynne expands: “The document contemplates communications through platforms, for example. In reality we anticipate electronic offers and acceptances and thereafter the MPA being an electronic document. After that we can contemplate smart contracts and so on. That is for the future though.”take me back