Eye on Emerging Markets
Q2 2023 Edition Six
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“Resilience” is the buzzword for emerging markets at the moment, as highlighted in our Economic Spotlight video featured in this edition. After some very challenging headwinds in recent years, developing economies have done remarkably well on the whole. Whilst there are signs of distress in some jurisdictions and markets, the overall economic climate bodes well. Legal developments are also trending positively. For example, we expect to see even more ECA covered loans after the recent modernisation of the OECD consensus, and the Electronic Trade Documents Act in the UK should have a meaningful, positive impact on global trade. Finally, more and more jurisdictions are modernising dispute resolution frameworks, which should help to give investors more confidence. We look forward to continuing to assist our clients in their investments in emerging markets, across our cross-practice, global EM focused team.
Secondary trading in Shariah compliant instruments
Can secondary market trading be replicated in the world of Islamic finance?
Read full article
Economic Spotlight
Ash McDermott discusses emerging markets in our latest Ten Key Questions episode
Watch the video
Arbitration in the Kingdom of Saudi Arabia
The SCCA Arbitration Rules 2023
The LMA model provisions for Sustainability Linked Loans
What is their applicability in emerging markets?
Electronic Trade Documents Act
What effect will the Act have on global trade?
Read ESG Blog
Our Eye on ESG blog provides insights and analysis to help navigate the ESG landscape on a global scale. We cover a range of timely ESG updates and issues, including regulatory, policy, political and industry-related developments, as well as judicial developments and case law.
Blog: Eye on ESG
Additional Insights
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Key Emerging Markets Team
Ash McDermott | Banking & Finance
Chris Arnold | Derivatives
Barry Cosgrave | Restructuring
Ed Parker | Derivatives
Jim Patti | Banking & Finance
Douglas Doetsch | Banking & Finance
Gonçalo Falcão | Corporate
Ian Coles | Africa & Mining
Jason Hungerford | Regulatory
Kirsti Massie | Projects & Infrastructure
Kwadwo Sarkodie | Construction & Engineering
Luiz Aboim | Litigation
Musonda Kapotwe | Regulatory
Hallam Chow | Structured Finance
Peter Pears | Capital Markets
Rachel Speight | Banking & Finance
Robert Hamill | Corporate
Sam Eastwood | Regulatory
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For more information on Emerging Markets, or any of the topics in this newsletter, please contact one of our key contacts above or vist our website.
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OECD Arrangement on Officially Supported Export Credits
What changes have been incorporated?
Raid Abu-Manneh | International Arbitration
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Eye on Emerging Markets | Q2 2023
Written by Charles Thain
Electronic Trade Documents Act: Paper To Data
What does the Act do? The Act, which is largely based on the UK Law Commission's draft Bill published in March 2022, sets out the basis upon which trade documents can exist and be dealt with in electronic form under English law, such that an electronic trade document has the same effect as an equivalent paper trade document. The Act states that a person may possess, indorse and part with possession of an electronic trade document, and anything done in relation to an electronic trade document has the same effect in relation to the document as it would have in relation to an equivalent paper trade document. Prior to the Act, under English law it was not possible to possess electronic trade documents and therefore key English law principles in relation to documentary intangibles (such as bills of exchange) could not be applied to electronic forms of those documents. The Act also amends the Bills of Exchange Act 1882 and the Carriage of Goods by Sea Act 1992 to remove certain incompatible provisions. What documents are capable of being electronic trade documents? The Act states to cover a document if:
On 20 July 2023 the long awaited Electronic Trade Documents Act 2023 (the Act) received Royal Assent, and will come into effect in the UK on 20 September 2023.
it is of a type commonly used in at least one part of the United Kingdom in connection with trade in or transport of goods, or financing such trade or transport; and possession of such document is required as a matter of law or commercial custom, usage or practice for a person to claim performance of an obligation.
This part of the Act was deliberately drafted to describe the type of document (i.e. a trade document where possession is paramount as to its function), as opposed to expressly listing them all, to ensure the Act was not too restrictive. Obviously this creates some ambiguity, but the usefully the Act does expressly list the following example documents as being capable of being electronic trade documents: bills of exchange, promissory notes, bills of lading, ships' delivery orders, warehouse receipts, mates' receipts, marine insurance policies and cargo insurance certificates. What is required for a document to be an electronic trade document? A document covered by the Act can be an electronic trade document if a "reliable system" is used to:
Charles Thain Partner, London E: cthain@mayerbrown.com T: +44 20 3130 3916
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identify and distinguish it from copies; protect it from unauthorised alterations; secure it so that only one person can control it at any one time and allow that person to demonstrate that; and ensure that once a person transfers it, that person can no longer control it.
What is a "reliable system"? The Act deliberately does not define what constitutes a "reliable system" so as to remain technology agnostic, with the drafters preferring to describe the desired outputs as opposed to specifying a suitable technology solution. The rush for producing a reliable system is already well on its way with systems already being provided by standalone technology providers and finance providers looking at developing their own proprietary systems. However, the approach adopted in the Act does raise the question as to how users of electronic trade documents will derive certainty that the system being used is and remains at all times a reliable system so that the relevant document being handled by the system is indeed characterised as an electronic trade document and capable of being possessed? Where do we go from here? Our view is that the Act, in the medium- to long-term, will be transformative to trade and trade finance processes. In the short-term, however, users of trade documents and finance providers will need to identify and/or develop "reliable systems" and get comfortable with the risks associated with them (e.g. the insolvency of the technology solutions provider) and, until the governments of other key jurisdictions adopt similar legislation (n.b. UNCITRAL's Model Law on Electronic Transferable Records (MLETR) - which has been adopted most notably in Singapore - and the current proposals in the US to amend the Uniform Commercial Code (UCC) to recognise electronic drafts), it will be hard to use and finance electronic trade documents where there are nexuses to jurisdictions which do not recognise electronic trade documents. But the future is bright and it is only a matter of time.
Written by Musonda Kapotwe, Erica Arcudi, Oliver Williams
The LMA model provisions for Sustainability Linked Loans and their applicability in emerging markets
The LMA SLL Model Provisions provide the market with standardised sustainability linked loans. They also largely reflect practices across Europe and the United States, where SLLs have become fully established in recent years. In this article we look at the applicability of the LMA SLL Model Provisions for loans involving borrowers in emerging markets. As we have previously discussed here, SLLs are an attractive option in emerging markets, as they offer a reduction in interest rates if certain specific performance targets ("SPTs"), measured by predetermined KPIs, are met. SPTs and KPIs can be selected in a flexible manner. Understanding the potential challenges of applying the LMA SLL Model Provisions in emerging markets is therefore particularly important.
On 4 May 2023, the LMA published model provisions for Sustainability-Linked Loans ("SLLs"), which include draft provisions for margin adjustments linked to key performance indicators ("KPIs") benchmarked against industry ESG standards and certificates (the "LMA SLL Model Provisions").
1. KPIs, ESG Standards, and Calculation Methodology Briefly, ESG Standards (a defined term used in the LMA SLL Model Provisions) are external, industry standards that provide detailed and repeatable requirements for what should be reported for each KPI (e.g., the International Sustainability Standards Board's ("ISSB") general requirements for disclosure of sustainability-related financial information (the "IFRS S1") (for further information on the ISSB sustainability disclosure standards, read our blog here)). A Calculation Methodology (a defined term used in the LMA SLL Model Provisions) is the method used to assess the borrower's, parent's, and/or group's performance against each KPI. The Calculation Methodologies should be the same as used to benchmark a KPI against the relevant ESG Standards selected. One of the challenges with applying the LMA SLL Model Provisions in emerging markets is that, whilst borrowers may monitor ESG data internally, they may not do so in accordance with specific ESG Standards or apply specific Calculation Methodologies, and even if they do, they may not have done so for a sufficiently long period of time to allow for the requisite level of benchmarking. Furthermore, at the time of writing, several standards bodies are consolidating their frameworks, making the selection of a standard a moving target. IFRS S1 was published with the intention of functioning as a baseline, but its complexity has been the subject of much debate. The LMA SLL Model Provisions are a useful reference point, but will need to be adapted to allow for some flexibility so that emerging market borrowers and their lenders can agree on the ESG Standards and the relevant Calculation Methodologies that can be applied by the borrower without incurring excessive initial and ongoing costs. 2. Monitoring The LMA SLL Model Provisions define "External Reviewer" as "an independent [internationally recognised] professional services firm, environmental consultancy firm or ratings agency which is regularly engaged in the application and monitoring of ESG standards and ESG calculation methodologies", and in any event not the borrower, the parent, or one of their affiliates. The External Reviewer either verifies the borrower's self-reporting, or carries out a new, independent sustainability report. The LMA SLL Model Provisions also set out information undertakings from the parent (or the borrower, as applicable) with regard to the different reports to be delivered. It will be more complicated and costly for companies whose business is spread across different jurisdictions in emerging markets to engage external reviewers for the purposes of this auditing. Borrowers may be unwilling to incur the potential associated cost. Therefore, the potential costs of external reporting should also be part of the commercial discussion on whether a SLL is appropriate from the outset.
Musonda Kapotwe Partner, London E: mkapotwebot@mayerbrown.com T: +44 20 3130 3778
3. The margin adjustment The LMA SLL Model Provisions contain a margin ratchet, with rates set at different percentages per annum, depending on how many SPTs are met. This can be amended and adapted, by offering a "blended" margin ratchet where different SPT thresholds correspond to different margins, or by weighting the SPTs for importance, so that certain SPTs translate into greater margin changes. Overall, the use of a margin ratchet can offer greater flexibility to borrowers in emerging markets jurisdictions, who might decide to set up ratchets for different SPTs, conscious that these may be adapted from time to time with the needs of the business. Facility agents should pay close attention to the operational mechanics behind margin adjustments, to make sure that they are operationally feasible within the prescribed time. Whether or not the potential margin adjustments are sufficient to warrant a borrower incurring the associated cost of entering into a SLL is a topic of regular debate, but we would encourage borrowers to also consider the potential liquidity that a SLL may involve, in addition to savings on interest. 4. Sustainability Amendments and Declassification Events The concept of "Sustainability Amendment Event" in the LMA SLL Model Provisions refers to events that change a borrower's circumstances to such an extent that SPTs become too easily achievable (e.g., due to external changes in the "Calculation Methodology" or "Applicable ESG Standard"). Failure to agree on revised SPTs results in a "Declassification Event", upon which the loan will no longer be considered "sustainability-linked". Other examples of Declassification Events include (but are not limited to) consistent failure to miss SPTs over time or breaches of sustainability provisions. Notably, as a reflection of the recent market tendency towards cautiousness in labelling financing arrangements as "green", the LMA provides for such Declassification Events to be irreversible. Parties should tailor such events to the industry and corporate structure of the borrower. These provisions are helpful in emerging markets financing, where the adoption of SLLs has been slower. They offer lenders and borrowers a certain level of comfort that, should circumstances materially change, they can (with respect to Sustainability Amendment Events) renegotiate the sustainability aspect of their loan, and (with respect to Declassification Events) give some comfort to market participants in relation to their greenwashing concerns. Conclusion With the LMA SLL Model Provisions, the LMA sought to propose a form of drafting for sustainability-linked loan provisions that reflected market practice at the time of publication, can be adapted for use with other LMA recommended forms, and can be subject to deal-specific customisation. Adapting these provisions to the market and industry in a way that provides the correct incentives to borrowers will be part of early, ad hoc negotiations, especially in emerging markets. We look forward to being part of that discussion.
Erica Arcudi Associate, London E: earcudi@mayerbrown.com T: +44 20 3130 3263
Oliver Williams Trainee Solicitor, London E: owilliams@mayerbrown.com T: +44 20 3130 3238
Written by Raid Abu-Manneh, Alain Farhad, Patricia Ugalde Revilla, Gerard Moore, Bruno Savoie, Ali Auda, Lisa Dubot
Arbitration in the Kingdom of Saudi Arabia Part 3 - The SCCA Arbitration Rules 2023
Part 3: Arbitration in Saudi Arabia - The SCCA Arbitration Rules 2023 Following our detailed Legal Update on the Saudi Center for Commercial Arbitration (“SCCA”) in Part 2, in this Part 3, we examine the SCCA’s recently published arbitration rules (the “2023 Rules”), which came into force on 1 May 2023. The 2023 Rules:
Under Article 9(3), the arbitral tribunal is also empowered to refuse to allow a change to a party's representative(s) if it considers it necessary to safeguard the composition of the arbitral tribunal or the finality of the award, the most likely scenario being that such a change may give rise to conflicts of interest. 6. Increased predictability of procedural timetables The 2023 Rules provide timelines for certain procedural steps with the aim of increasing the predictability of the length of the arbitration. For example, the case management conference ("CMC") must be conducted within 30 days of the arbitral tribunal's constitution (unless the arbitral tribunal considers a CMC unnecessary). The 2023 Rules also provide a 75-day deadline after the close of the proceedings to issue the award (Article 33), subject to a further 75-day extension. Moreover, emergency arbitrators are required to issue their interim award no later than 14 days from receiving the file from the SCCA (Article 7(8)). 7. Multi-party and multi-contract arbitrations The 2023 Rules address multi-party and multi-contract arbitrations by way of consolidation, joinder and the coordination of proceedings. In relation to multi-contract arbitrations, Article 11 provides that parties may issue a single request for arbitration for claims arising out of more than one contract or arbitration agreement where: a. the relief sought arises out of the same transaction or series of related transactions; b. a common question of law or fact arises under each arbitration agreement giving rise to the arbitration; and c. if applicable, the multiple arbitration agreements under which the claims are made are compatible. In relation to multi-party arbitrations, Article 13 provides for a new consolidation procedure enabling the SCCA Court to consolidate two or more arbitrations where: a. the parties agree to consolidate the arbitrations; b. all the claims are made under the same arbitration agreement(s); or b. the disputes in the arbitrations arise in connection with the same legal relationship, and the SCCA Court finds the arbitration agreement(s) to be compatible. If consolidation takes place, all parties are deemed to have waived their right to nominate an arbitrator and the SCCA Court appoints the tribunal in the consolidated arbitration. The 2023 Rules permit joinder of additional parties prior to the tribunal's appointment, but they only allow joinder after an arbitrator has been appointed in specific circumstances set out at Article 12. Under Article 14, there is also the ability to coordinate two or more arbitrations which have identical tribunals and share a common question of law or fact provided that “coordination will assist in resolving the dispute(s) in an expeditious and cost-effective manner” (for example, the procedural steps may be aligned and/or a single award may be issued in such arbitrations). 8. Early disposition Article 26 provides for the early disposition of jurisdictional and admissibility issues, as well as issues of legal merit. Examples of instances in which an application for early disposition may be made include: a. an allegation of fact or law material to the outcome of the case is manifestly without merit; b. even if the facts advanced by the other party are assumed to be true, no award could be issued in that party's favor under the applicable law; or c. any issue of fact or law material to the outcome of the case is, for any other reasons, suitable for determination by way of early disposition. Accordingly, Article 26 provides a mechanism for arbitral tribunals to dispose of certain types of claims or issues by way of summary judgment without having to follow every step that would otherwise be taken in the ordinary course of an arbitration. This may be appealing to financial institutions seeking to enforce payment obligations. 9. Challenge to arbitrators The 2023 Rules provide parties with two additional grounds for challenging arbitrators. Whereas the 2021 Rules referred to justifiable doubts as to impartiality and independence as a ground for challenge (Article 14), the 2023 Rules also include (1) the failure to perform his or her duties, and (2) the arbitrator manifestly does not possess the qualifications agreed to by the parties (Article 18). The latter stands the 2023 Rules apart from most other institutional rules and it will be interesting to see how frequently challenges are brought on this basis. 10. Third-party funding Article 17(6) requires that each party must promptly disclose to the arbitral tribunal, the parties, and the SCCA, the identity of any non-party who has an economic interest in the arbitration's outcome, including any third-party funder. Other institutional rules in the region – such as DIAC's 2022 Rules – and internationally include similar provisions which may help further develop the arbitration funding market in the Middle East. Conclusion The 2023 Rules are to be welcomed given that they are in line with the standards and best practices espoused by the leading international arbitration institutions, promote efficiency and cost-effectiveness and provide greater powers to tribunals while respecting party autonomy. They are well designed for modern arbitrations particularly in the way they promote the use of technology. The 2023 Rules should also make SCCA arbitration ever-more suited to multi-party and multi-contract cases. We look forward to seeing if parties in the region increasingly provide for SCCA arbitration in their contracts. The SCCA’s 2023 Rules are accessible here.
Following Mayer Brown and Al Akeel & Partners’ alliance in May 2022, we are delighted to launch this joint series about arbitration in the Kingdom of Saudi Arabia.
are part of the SCCA's vision "to be the preferred ADR choice in the region by 2030"; have been issued in the wake of the SCCA's first regional office in the DIFC, which opened in February 2023; seek to modernise the SCCA's procedures to be “in conformity with the latest international standards in the arbitration industry and take into account the best practices followed by other eminent arbitral institutions”; and apply to all arbitrations filed on or after 1 May 2023.
This Legal Update highlights ten key changes to the 2023 Rules, when compared to their predecessor rules, implemented in 2016 and subsequently revised in 2018 and 2021. 1. Establishment of a new SCCA Court The 2023 Rules provide for the establishment of an SCCA Court that will make administrative decisions in relation to arbitrations administered under the SCCA rules. The SCCA Court is independent from the SCCA, in line with international standards. Other leading institutions such as the ICC, LCIA, DIAC, and SIAC also have an equivalent supervisory court. The SCCA Court itself is composed of 15 judges with diverse backgrounds, including academics, arbitrators, practitioners, and retired appeal court judges. Professor Jan Paulsson has been elected as the Court President, while Mr. James Hosking and Dr. Ziad Al-Sudairy will serve as Vice Presidents of the Court. The role of the SCCA Court includes:
the appointment of emergency arbitrators (Article 7); determining objections to multi-contract arbitrations and consolidating arbitrations (Articles 11 and 13); the appointment of arbitrators (Article 16); deciding challenges to arbitrators (Article 18); determining the place of arbitration (Article 22); reviewing and approving awards (Article 36); and determining administrative and arbitrator fees (Articles 41 and 42).
2. Application of Sharia rules limited to Saudi-seated arbitrations In the 2021 Rules, Article 31 on the "Applicable law" stated: "Without prejudice to the rules of Sharia, The Tribunal shall apply the rules of law designated by the parties as applicable to the substance of the dispute." The 2023 Rules have removed the reference to the rules of Sharia in Article 37, therefore clarifying that arbitral tribunals will apply the law designated by the parties. However, it is important to note that for arbitrations seated in Saudi Arabia, Sharia principles will nonetheless apply. Further, Sharia principles will continue to apply to the enforcement of awards in Saudi Arabia. 3. A default law of the arbitration agreement Article 37(4) provides that the law applicable to the arbitration agreement shall be the law applicable at the place of arbitration, unless the parties have agreed in writing on the application of other laws or rules of law. This provides a useful default rule in circumstances where it (i) still remains uncommon to see the governing law of the arbitration agreement specified in arbitration clauses, and (ii) risks ensue when this law is not expressly provided for in an arbitration clause or the rules incorporated by reference into it (see our earlier Legal Update on this issue). 4. Increased use of technology in case management a. Online Dispute Resolution The SCCA is at the forefront in the region with its advanced Online Dispute Resolution (ODR) system. ODR has proven to be an effective means of resolving low-value disputes, particularly those stemming from e-commerce consumer claims. In the recently released 2023 Rules, the SCCA has included the third edition of its ODR Procedure Rules in Appendix IV. These rules apply when the parties agree in writing and the disputed amount falls below SAR 200,000, excluding arbitration costs. Should any conflicts arise between the 2023 Rules and the ODR Procedure Rules, the latter will prevail. This ensures that the ODR process remains consistent and reliable in resolving disputes. To ensure a swift resolution, the appointed arbitrator must issue the final award within 30 days, unless extended by the SCCA (which will only apply on an exceptional basis). The award is primarily based on written submissions, unless the parties mutually agree otherwise or the arbitrator deems a remote hearing necessary. b. Electronic Evidence, Cybersecurity, Privacy and Data Protection The 2023 Rules also allow for submissions to be filed electronically and allow for the electronic signature of awards. Article 46 also provides guidance on cybersecurity, privacy and data protection, confirming the SCCA's forward-thinking and comprehensive approach to the revision of the 2023 Rules. Over the past few years, there has been an increasing awareness regarding the need to prioritize and advocate for arbitration practices that are more environmentally sustainable. It is encouraging to see that the 2023 Rules are proactively seeking to minimize the ecological footprint associated with the arbitration process by promoting the utilization of technology and electronic evidence. 5. Arbitral tribunals' enhanced discretionary powers The 2023 Rules provide several measures aimed at expanding the discretionary powers of arbitral tribunals. In particular, they provide that the arbitral tribunal:
has the ability to encourage parties to resort to mediation where appropriate (Article 25); may limit the length of written submissions and requests for document production (Article 27); and may determine the most effective format for hearings, including remote hearings (Article 29(2)).
Raid Abu-Manneh Partner, London E: rabu-manneh@mayerbrown.com T: +44 20 3130 3773
Lisa Dubot PSL, Paris E: ldobot@mayerbrown.com T: +33 1 53 53 83 98
Alain Farhad Partner, Dubai E: afarhad@mayerbrown.com T: +971 4 568 4950
Patricia Ugalde Revilla Counsel, Dubai E: pugalderevilla@mayerbrown.com T: +971 4 375 7160
Gerard Moore Senior Associate, London E: gmoore@mayerbrown.com T: +971 4 568 2208
Ali Auda Senior Associate, London E: aauda@mayerbrown.com T: +44 20 3130 3035
Written by Barry Cosgrave
Murabahah The situation with Murabahah-based financings is somewhat more complex. The issue at play is the relative short duration of time for which the assets in a Murabahah transaction form the basis of that sale and purchase. The obligation to pay the deferred purchase price (or similar contractual definition) is an absolute one and represents a monetary obligation. Monetary obligations that are due under Islamic instruments cannot be traded for cash other than at par, the reason being that the delta between the deferred purchase price due and the purchase price paid for that obligation would constitute Riba. The majority of Murabahah instruments that seek to be traded are in entities from whom a payment obligation is due and which are in financial distress: naturally this requires a more complicated solution. Instead of paying cash for the financial obligation, purchasers of Murabahah finance instruments are required instead to deliver commodities of a certain value as consideration for the acquisition of the right to receive the deferred purchase price. This structure can raise complications where non-Shariah compliant entities are seeking to acquire payment streams from Islamic banks but the reality is that little differentiates the economics of the transaction from a conventional trade other than the need to use commodities rather than cash. In terms of documentation, typically a Loan Market Association trade confirmation will be entered into but will be supplemented by a Shariah compliant purchase agreement that documents the trade of commodities as consideration for the purchase. While still in its relative infancy, there is a definite increase in the volume of Shariah compliant instruments being traded in the secondary market. This trading activity is set to rise and is already witnessing year-on-year growth. The challenge for market participants is to ensure that all parties are comfortable from a due diligence and trading perspective that what they are trading represents obligations that are enforceable both from a Shariah perspective and from what would be expected on a conventional basis. However, the opportunity is to create a secondary market in Shariah compliant instruments that is as efficient as its conventional equivalent, enabling Islamic banks to manage their exposure while simultaneously allowing secondary traders to enter a market in need of trading solutions.
Secondary market trading in conventional finance is a well-trodden path for conventional banks seeking to reduce their exposure to distressed credits, but can this be replicated in the world of Islamic finance?
Trading in Shariah compliant instruments has caused many headaches within the secondary trading community. Many of the issues raised concerns of a perceived difference between the rights to which Shariah compliant financiers benefit versus those of conventional creditors, together with a general misconception that trading in financial obligations is not permitted under Shariah. As financial markets enter into uncertain territory, many financial institutions are seeking to rationalize their exposures by reducing the finance provided to certain sectors or even individual names. Secondary traders, in the form of trading desks and private funds, are increasingly focused on the Middle East as a source of interesting opportunities, many of which come from Islamic banks. But how can the circle be squared between Shariah compliant banking and the need for Islamic banks to undertake the important steps in terms of corporate governance? Rights of financiers To the purchasing entity, the main area of concern is typically whether the rights conferred on an Islamic bank translate equally to the rights that a conventional lender would expect to see. The reality of Shariah compliant debt instruments is that they contain the same rights and obligations that a conventional bank would expect to see albeit in a Shariah compliant manner. The reason for this is that there is nothing in Shariah that permits any party from seeking to disclaim its obligations under a contract freely entered into. It would also be commercially unacceptable for a banking entity to grant special rights to an entity that did not make commercial sense. While certain entities have sought to use Shariah compliance (or a claim for lack thereof) as a cloak to discard obligations, such attempts have almost universally been rejected out of hand on the basis of contract law. It should be noted that Shariah respects freedom of contract provided that the terms are not onerous — a principle that is in line with most legal statutes throughout the world. Trading obligations How then can an Islamic bank trade away its right to receive payment from an entity and can this be done at a discount? Trading of financial obligations in the secondary market is almost always undertaken at a discount for commercial reasons. This raises some issues in the Islamic finance market. The majority of Islamic finance instruments tend to utilize either a Murabahah or an Ijarah structure. The Ijarah structure is most common in the Sukuk market but there are also many examples in the bank finance market. However, Murabahah is by far the most common structure used in bank finance. There are of course other structures used in Islamic finance transactions but these are not discussed for the purposes of this article. Ijarah Ijarah structures, whether they are bank financings or Sukuk, are straightforward to trade in the secondary market. Ijarah represents ownership by the provider of the finance (whether they are a bank or a Sukukholder) of the asset underlying the transaction. That asset is real and present throughout the duration of the instrument. As a result, any trade in an Ijarah transaction represents a trade in an asset which can be undertaken at any price to which the contracting parties agree. As such, trading at a discount is permitted and straightforward to complete.
Barry Cosgrave Partner, London E: bcosgrave@mayerbrown.com T: +44 20 3130 3197
Ash McDermott discusses emerging markets in our latest Ten Key Questions episode and the challenges faced by, and the resiliencies of these economies. This mini Q+A series focuses on the economy, with each episode concentrating on specific points of discussion providing you with a quick and easy way to stay informed of the ever-changing economic situation, highlighting significant and recent developments from a legal perspective and allowing you to assess the impact of these on your business.
Ten Key Questions with Ash McDermott
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Written by Ash McDermott, Kirsti Massie, David Fraher and Erica Arcudi
The OECD Arrangement on Officially Supported Export Credits (known as the OECD Arrangement or the OECD Consensus) long-awaited revision became effective as of 5 July 2023.
While a more in-depth update will follow on our next edition of the Eye on Emerging Markets newsletter (so keep an eye out!) compared to the previous arrangement (of January 2022) it incorporates amongst other changes: 1. The Modernisation of the Arrangement package reform This reform package seeks to add flexibility to the Arrangement, so that it better addresses the economic and financial needs of projects, to support a wider range of environmentally friendly transactions. In the first instance, repayment terms increased from 8.5 years for high income OECD countries and 10 years for all other countries, to up to 15 years. In addition, as part of broader reforms intended to incentivise energy transition, the maximum repayment terms increased to 22 years (instead of 18 years previously) for Nuclear Power Plants and CCSU-eligible projects, such as:
Ash McDermott Partner, London E: amcdermott@mayerbrown.com T: +44 20 3130 3120
zero emissions track-bound transportation and associated infrastructure; or low emissions rail and enabling infrastructure.
It also introduces (amongst other things) more repayment flexibility particularly for transactions with an imbalance between timing of the funds becoming available to the borrowers, and the debt profile. It further amends the Climate Change Sector Understanding (CCSU) to widen its scope to:
environmentally sustainable energy production; CO2 capture storage and transportation; transmission, distribution and storage of energy; clean hydrogen and ammonia; low-emissions manufacturing; zero and low-emissions transport; and clean energy minerals and ores.
2. CIRR reform Under this reform, CIRR is no longer determined based solely on the repayment period, and it will also consider the drawdown period, and the repayment profile of the transaction. This reform applies to the main body of the Arrangement as well as the Sector Understanding on Export Credits for Nuclear Power Plants (NSU) and the CCSU.
Kirsti Massie Partner, London E: kmassie@mayerbrown.com T: +44 20 3130 3555
David Fraher Senior Associate, London E: dfraher@mayerbrown.com T: +44 20 3130 3120
