SPVs in Ireland

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Irish companies signing deeds

Per section 41 of the Irish Companies Act 2014 ,Deeds can be executed with or without a company seal:

41. (1) Notwithstanding anything in its constitution, a company may empower any person, either generally or in respect of any specified matters, as its attorney, to execute deeds or do any other matter on its behalf in any place whether inside or outside the State.

(2) A deed signed by such attorney on behalf of the company shall bind the company and have the same effect as if it were under its common seal..

Registering charges of securities and cash in Ireland

You are having commercial relations with an Irish espievie. It grants you security. Do you need to register your charge?

Your starting point would be well, since Ireland is still a member of the EU and, as far as north-Atlantic states go, an enthusiastic one at that, and as such is obliged to implement the Financial Collateral Directive into domestic law. Since that happy directive has done away with the tiresome yet strangely exhilarating business of having to register charges with the domestic agency responsible for monitoring those things things in your member state, the answer, on a commonsense application of principles of European Law, ought to be “no”.

And, indeed the Irish Financial Collateral Arrangement Regulations, as incorporated into Part 7 of the Irish Companies Act 2014 provide that certain types of charges do not actually count as “charges” for the purposes of Section 408(1) of the Irish Companies Act 2014 and therefore do not need to be registered under Section 409.

These include mortgages and charges created over an “interest” in the following assets (let’s call them FCR-eligible assets):

(a) cash;

(b) deposits and money credited to bank accounts;

(c) shares, bonds or debt instruments;

(d) money market funds or collective investment scheme units; or

(e) claims and rights (such as dividends or interest) over any of the above.

But.

That isn’t necessarily how the Central Bank of Ireland sees it. Matheson warns that the registrar tends to take a conservative approach to excluding charges from the registration requirement on account of the Financial Collateral Arrangement Regulations — by which it means if you have a general charging clause that mainly concerns financial collateral, but includes non-FCR-eligible assets as well you still have to register the whole thing — so you may still find local counsel for Irish espievies insisting that you register charges with the CBI, notwithstanding the Emerald Isle’s continued membership of the European Union.

In fairness to the CBI, they are implementing the statute literally.. Section 408(3) goes on to say a charge created over both the excluded FCR-eligible assets and other, ordinary property will “other than to the extent to which it is created over an interest in FCR-eligible assets” be regarded as a registrable charge.

Here is where the lawyer’s yen for over-particularity can be a self-snooker. A prime broker or a custodian will like to take a general charge over not just securities, but the fund’s claim against the custodian in whose accounts they sit (even though that will usually be itself), and all the fund’s rights against its counterparties under market transactions (even though they will (largely) be itself). It is a moot point whether claims under a swap transaction referencing a bond or share count as “claims and rights over any of the above” so the path of least resistance, paved with good intentions though it is, is just to register the charge and be done with it.

That said, Section 408(3), in language that is no model of the deft use of the English language, acknowledges that an unregistered charge will still be effective to the extent it covers FCR-eligible assets, even if it won’t work for other assets. Since the “other assets” part of a prime broker’s security, if it bites on anything at all, is basically thrown in for good measure, one might be inclined to take a bit of a view. Not that we would recommend anything quite so cavalier, of course. but if you were stuck in a corner.

Nobody puts baby in a corner.

Types of Irish espievie

ICAVs

See the whole extra article about Irish collective asset-management vehicles.

PIFs and QIFs

As per the CBI rules, a PIF (professional investors fund)) and QIF (qualifying investors fund) may rehypothecate its own assets to a prime broker under the following conditions:

PIF: rehypothecated assets must not exceed 140% of the level of PIF’s indebtedness (that is actual indebtedness and not potential exposures, and subject to the right of set-off) to the PB.

QIF: no limit to the extent to which assets may be available to the PB but the extent to which assets are available to the PB must be fully disclosed in the prospectus issued by the QIF.

Common contractual fund

A common contractual fund is an Irish mutual fund with no legal personality — the same basic vibe as a French fond commun de placement or a Dutch FGR, and it depends on collateral directive for netting efficacy — so beware natural persons who are unitholders.

Section 110 Companies

An Irish Section 110 special purpose vehicle is an Irish tax resident company designed for use in securitisation transactions, which qualifies under Section 110 of the Irish Taxes Consolidation Act 1997 for a special tax regime that enables it to be tax neutral in Ireland.

This means it is a common Irish espievie.

Section 110 was created to help International Financial Services Centre (IFSC) legal and accounting firms compete for the administration of global securitisation deals. They are the core of the IFSC structured finance regime.

A lot more information from the JC’s big brother here.

MiFID

See a detailed exposition of the travails of European repackaging SPVs that aspire to repackage emissions allowances or commodity derivatives who wonder whether this might count as a MiFID 2 regulated activity at our dealing on own account page. MiFID is implemented in Ireland through the European Union (Markets in Financial Instruments) Regulations 2017 of Ireland. We mention this only because there are some odd provisions of MiFID 2 which potentially put SPVs into scope should they look to securitise commodity derivatives or carbon emission allowances.

So, an odd thing. In MiFID 1, commodity derivatives and carbon emissions products were (largely) excluded from scope. To ensure participants on commodity derivatives markets appropriately regulated and supervised, MiFID 2 narrowed exemptions, especially as regards “dealing on own account”.

This activity is vaguely defined in MiFID — always has been, as “'trading against proprietary capital resulting in the conclusion of transactions in one or more financial instruments” — but given MiFID’s purpose, generally has been understood as being restricted to brokerage and market-making activity; a continual activity in the market either to be able to fulfil third-party customer demand or provide market liquidity, only holding prop inventory. In other words, this is not about participants using their own capital to buy, and go on risk to, financial instruments. Indeed, MiFID is meant to protect people like that, not regulate them.

Anyway. When trying to bring commodity derivatives and EUAs into scope for MiFID, the regulations and technical standards do a curious job of them handling the usual exemptions, such as those under Art 2(1)(d), which says:

Persons dealing on own account in financial instruments other than commodity derivatives or emission allowances or derivatives thereof and not providing any other investment services or performing any other investment activities in financial instruments other than commodity derivatives or emission allowances or derivatives thereof unless such persons:

(i) are market makers;

(ii) are members of or participants in a regulated market or an MTF, on the one hand, or have direct electronic access to a trading venue, on the other hand, except for non-financial entities who execute transactions on a trading venue which are objectively measurable as reducing risks directly relating to the commercial activity or treasury financing activity of those non-financial entities or their groups;

(iii) apply a high-frequency algorithmic trading technique; or

(iv) deal on own account when executing client orders;

Persons exempt under points (a), (i) or (j) of MiFID II Article 2(1) are not required to meet the conditions laid down in this point in order to be exempt.

All very tedious, but what is going on here is exactly as presaged above: if you are just a regular joe, and you aren’t making markets, using algos, executing client orders, or directly accessing a regulated market, you aren’t required to be authorised under MiFID 2 ... unless you’re transacting in commodity derivatives or emission allowances.

Like, what? we have gone from commodities being out of scope from MiFID altogether, to being in scope for MiFID 2, even when normal MiFID instruments aren’t. That cannot have been what the regulators intended. Can it?

To see we have to continue down the laundry list of exemptions. The next one that might help is Article 1(j):

(j) persons:

(i) dealing on own account, including market makers, in commodity derivatives or emission allowances or derivatives thereof, excluding persons who deal on own account when executing client orders; or

(ii) providing investment services, other than dealing on own account, in commodity derivatives or emission allowances or derivatives thereof to the customers or suppliers of their main business;

provided that:

—for each of those cases individually and on an aggregate basis this is an ancillary activity to their main business, when considered on a group basis, and that main business is not the provision of investment services within the meaning of this Directive or banking activities under Directive 2013/36/EU, or acting as a market-maker in relation to commodity derivatives,

—those persons do not apply a high-frequency algorithmic trading technique; and

—those persons notify annually the relevant competent authority that they make use of this exemption and upon request report to the competent authority the basis on which they consider that their activity under points (i) and (ii) is ancillary to their main business;

See also

• ICAV
• ISDA netting categories
• Espievie
• Section 110 companies on Wikipedia