The Bank of Mauritius (the BoM) launched a consultation paper on 8 January 2016 on the setting up of an asset management company (an AMC) in Mauritius. The consultation closed on 16 February 2016.
The BoM established an working group in August 2015 with the purpose of examining the possibility of setting up an AMC in Mauritius to (i) address concerns of the weakening effect of non-performing loans (NPLs) on the balance sheet of local banks, (ii) to remedy the lack of effectiveness of the Borrower Protection Act 2007 (the BPA)1 and (iii) to address the deficiencies of the sale by levy procedure2.
The BPA and the sale by levy procedure, which are supposed to facilitate enforcement and recovery of debt liabilities, have proved to be more cumbersome and ineffective. The sale by levy procedure has been criticised by two successive commissions of inquiries which have noted that the process is lengthy and costly. In addition to the process providing hardship to debtors, lenders have also criticised the sale by levy procedure by highlighting that sale of assets fetched at most 20 to 25 % of their market value.
In light of the inadequacies of the current regime in place for consumer credit, the BoM working group has recommended the setting up of an AMC to achieve the following objectives:
- To protect the vulnerable class of society which the BPA was intended to protect.
- To eliminate recourse to the sale by levy procedure.
- To set up a recovery system relieving banks from the problems encountered under the BPA regime.
- To stabilise the level of NPLs.
- To enable both lenders and borrowers to have a fair deal upon realisation of assets held as security.
The BoM working group considered both a centralised AMC model with one agency responsible for the restructuring of debts and a decentralised model where each bank would take responsibility of the debt workout. In recommending the centralised model, the working group recognised the efficiency of a central AMC to recover the maximum possible value from NPLs allowing banks to focus on their core day-today lending activities.
The centralised AMC would acquire NPLs from banks following completion of a due diligence process to ensure that there are no deficiencies in the credit facility documentation and to determine the current market valuation and long-term economic value of underlying secured assets. The AMC would apply a valuation methodology under which the NPL being transferred would be discounted.
The BoM working group recommended that the AMC be formed by way of a joint-venture between the BoM and banks with the BoM holding 60% of the capital in the AMC with the remainder being subscribed for by banks and other financial institutions.
The outcome of the consultations is being awaited.
IBA publishes roadmap for ICE LIBOR
A critical step in the evolution of the London Interbank Offered Rate (also known as ICE LIBOR) (LIBOR) was reached with the publication of the roadmap on LIBOR by its administrator, ICE Benchmark Administration Ltd (the IBA) on 18 April 2016. The roadmap is the outcome of IBA's consultation after publication of a second position paper in July 2015 setting out its proposals for the evolution of LIBOR. The measures set out in the roadmap will be implemented progressively during 2016.
Objective of the roadmap
The roadmap covered submission criteria, the implementation of a transaction based approach over a period of time, expert judgement determination as well as other enhancements to the benchmark.
To ensure the continuity of LIBOR in all market circumstances, the roadmap adopts the following waterfall of methodologies to be followed by benchmark submitters when making their LIBOR submissions:
- Level 1: transactions, using a range of eligible counterparties (Level 1).
- Level 2: data derived from transactions (including adjusted and historical transactions, interpolation and extrapolation/ parallel shift) (Level 2).
- Level 3: Expert judgement, appropriately framed.
Centralised determination
An important theme discussed in the consultation was the submission of raw data by benchmark submitters to IBA, who would then calculate and publish rates. IBA would collect trade data from benchmark submitters as set out in the waterfall of methodologies detailed above. Doing so would require IBA to build systems and algorithms and the roadmap sets out an indicative timetable for to implement the centralised determination model with IBA set to announce the outcome of its feasibility study by the end the second quarter of 2016. IBA would then seek regulatory approvals for its determination processes from its regulator, the Financial Conduct Authority, during the second half of 2016 with the view that IBA would take over centralised responsibility for the formulation of LIBOR in 2017.
Use of transactions
Benchmark submitters already use a range of transactions within their waterfall of methodologies to anchor their LIBOR submissions. These methodologies have been developed by each benchmark submitter resulting in a variation of approaches amongst benchmark submitters.
Through the roadmap, IBA is standardising acceptable Level 1 methodology. Acceptable Level 1 transactions will be the volume-weighted average price of unsecured deposits, commercial paper and certificates of deposits.
Respondents to the consultation noted that the use of historical transactions as anchor points would be particularly useful in the absence of new trades providing Level 1 transactions to IBA. The use of historical transactions involves a bank taking its transactions from previous day(s) and adjusting them by the day-on-day change of a correlated rate such as short-dated government bonds or central bank rates.
By allowing the use of Level 2 historical transactions, the roadmap ensures that rates can be submitted even where there is a lack of Level 1 transactions submitted to IBA. This approach is particularly useful for longer tenors where there are generally fewer transactions. Level 2 historical transactions will be weighted depending on their currency, tenor and proximity to the time of submission and the maximum number of LIBOR submission days for which historical transactions could be used has been set by the LIBOR Oversight Committee.
Expert judgement
In the consultation, IBA considered whether any adjustments should be permitted in determining LIBOR submissions based on Level 1 and/or Level 2 inputs. For example, if a market event result in Level 1 or Level 2 input being clearly unrepresentative of the market or the benchmark submitter considers that the transaction-based submission rate is clearly unrepresentative of the bank's funding cost, the benchmark submitter's use of expert adjustments could change the input by removing unrepresentative trades or adjust the rates through the application of expert judgement.
The third level of the waterfall methodology allows for the use of expert judgement, framed in the following manner:
- Expert judgment should be based on the benchmark submitter's internally approved procedure and agreed by IBA.
- It should be formulated using inputs allows by IBA.
- It should be accompanied by full documentation of the rationale and with the supporting evidence provided to IBA.
Other proposals
The roadmap also proposes other amendments to LIBOR, including allowing benchmark submitters to use transactions where they receive funding from non-financial corporations to inform LIBOR. This is a result of the decrease in interbank activity and the increasing importance of wholesale deposits from other counterparties to bank funding. This shift has led IBA to conclude that unsecured loans from non-financial corporations to banks should be eligible for submission by benchmark submitters. The roadmap sets out a list of eligible counterparties, including sovereign wealth funds and supranational non-financial corporations, whose trades with benchmark submitters should inform LIBOR. Moreover, as set out in the roadmap, IBA intends to move away from the administrator's question3 which will be replaced with an output statement setting out inter alia the waterfall of methodologies and the list of eligible counterparties.
The roadmap can be found on the ICE website: theice.com/iba
Basel publishes revised framework on minimum capital requirements for market risk
The Basel Committee on Banking Supervision (BCBS) has published a revised market framework on minimum capital requirements for market risk (the Revised Framework) in January 2016. The Revised Framework takes into account two consultations carried out by BCBS in October 2013 and December 2014 as well as several quantitative impact studies. The Revised Framework will come into effect on 01 January 2019.
Following the deficiencies regarding the capitalisation of trading book exposures during the financial crisis, BCBS identified a number of structural flaws in the existing market risk framework and revised the market risk framework as part of the Basel 2.5 reforms. There remained areas of concern with the Basel 2.5 market risk framework which have led to the Revised Framework being published.
The key highlights of the Revised Framework are:
- Revising the boundary between the banking book and the trading book to disincentive regulatory arbitrage between the two books.
- Enhancing the internal models approach by (i) providing for more coherent and comprehensive risk capture, (ii) providing an enhanced model approval process and (iii) constraining the capital-reducing effects of hedging and portfolio diversification.
- Revising the standardised approach for market risk to allow for greater reliance on risk sensitivities into capital charge calculations.
Providing coherent and comprehensive risk capture
A noteworthy change in evaluating market risk in the trading book is the replacement of value at risk (VaR) as the risk measure with expected shortfall (ES). It is understood that the VaR model faces significant difficulties under market stress by assuming that asset returns follow normal distributions. Consequently, VaR does not take tail risk into account. By measuring the risk of a position through a consideration of both the size and the likelihood of losses above a certain confidence level, ES is seen as being better equipped to evaluate tail risk and consequently, a better judge of market risk.
The Revised Framework can be found on: https://www.bis.org/bcbs/publ/d352.pdf
Basel publishes Guidance on credit risk and accounting for expected credit losses
The Basel Committee on Banking Supervision (BCBS) has issued its Guidance on credit risk and accounting for expected credit losses (the Guidance) on 18 December 2015. The consultation process was undertaken in early 2015 and the Guidance replaces the Committee's Sound credit risk assessment and valuation for loans published in 2006.
The Guidance sets out supervisory expectations for banks relating to sound credit risk practices associated with the implementation and ongoing application of expected credit loss (ECL) accounting framework.
The Guidance is structured around 11 principles and its impact will largely depend on each national supervisor's interpretation and application of these principles.
The Guidance recognises that there exists differences between ECL accounting frameworks across jurisdictions and aims to drive consistent interpretations and practices where there are similarities across these frameworks.
In addition, the Guidance includes provisions specific to banks applying IFRS.
The Guidance can be found on: https://www.bis.org/bcbs/publ/d350.htm
UBS AG v MCB4, Supreme Court refers dispute to arbitration
MCB brought proceedings to the Commercial Division of the Supreme Court in respect of an undertaking evidenced in a side letter with UBS AG5.
The Commercial Division of the Supreme Court previously held that the issue as to the applicability of the arbitration clause under a facility agreement should be transferred to the Supreme Court of Mauritius for determination under section 5 of the International Arbitration Act 2008.
The Supreme Court considered the test under section 5 (2) of the International Arbitration Act 2008 which provided that the court transfer the dispute to the competent arbitral tribunal unless a party shows, on prima facie basis, that there is a very strong probability that the arbitration agreement may be null and void, inoperative or incapable of being performed. In applying section 5 (2), the Supreme Court noted the heavy burden placed on a party to satisfy the prima facie test and that the court would have to finally decide whether the arbitration agreement is null and void, inoperative or incapable of being performed in very rare cases. The Supreme Court held that such threshold had not been met by MCB and referred the matter to the competent arbitral tribunal.
Footnotes
1. The BPA was introduced to safeguard the interest of borrowers in respect of credit facilities not exceeding MUR 2 million.
2. The sale by levy procedure is a mechanism under the Sale of Immovable Property Act 1864 by means of which a creditor can realise the immovable assets of a debtor and apply the proceeds towards discharging the debts of that debtor.
3. The question asked of submitters, referred to as the "Administrator's Question", which is currently "At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am?"
4. UBS AG v The Mauritius Commercial Bank Ltd, 2016 SCJ 43
5. The Mauritius Commercial Bank Ltd v UBS AG. Singapore Branch & Anor, 2015 SCJ 307
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