Ashurst Quarterly Debt Capital Markets Update Q1 2022

We have a number of different developments to report on in this edition:

• LIBOR transition: FCA publishes final tough legacy and synthetic LIBOR notices
• Russia sanctions
• HM Treasury proposals to replace the UK Prospectus Regulation regime
• ICMA updated standard form ECP documentation referencing SONIA, SOFR, €STR and EURIBOR
• Syndicated distribution of debt securities: New DvP model
• LIBOR transition: USD LIBOR tough legacy federal legislation signed into law
• Law Commission report on electronic trade documents
• COVID-19: FCA statement on extended financial information timelines
• UK PRIIPs Regulation Regime: FCA guidance on scope and certain changes to the UK PRIIPs KID RTS

LIBOR Transition: FCA publishes final tough legacy and synthetic LIBOR notices

On 1 January 2021, the designation of 1m, 3m and 6m GBP and JPY LIBOR as "Article 23A benchmarks" under the UK Benchmarks Regulation (UK BMR) took effect.  In connection with this, the FCA published the following:

• Notice of permitted legacy use by supervised entities (previously published in draft form only), published under Article 23C of the UK BMR, confirming that supervised entities under the UK BMR can continue to use 1m, 3m and 6m GBP and JPY LIBOR in synthetic form after 1 January 2022 in all in-scope legacy contracts that have not transitioned to an alternative rate by 31 December 2021 (except for cleared derivatives, which have already transitioned through amendments to CCP rules);
• Notice of requirements, published under Article 23D of the UK BMR, setting out the new calculation methodology required by the FCA for 1m, 3m and 6m GBP and JPY LIBOR; 
• Additional notice of proposed modifications and Notice of modifications, each under Annex 4 of the UK BMR, setting out the modifications to the UK BMR and related delegated legislation to be made in respect of the synthetic LIBOR rates.

Russia sanctions

The Russian invasion of Ukraine has triggered a swift international response. The US, EU, UK, Canada, Australia and others have imposed a series of sanctions (many joint and coordinated) against Russia.  Ashurst has created this Tracker of Sanctions in response to the Ukraine crisis which is an up to date, high-level summary of the measures imposed by the UK, EU, and Japan and Australia in response to the situation in Ukraine. 

HM Treasury proposals to replace the UK Prospectus Regulation regime

On 1 March 2022 HM Treasury published its proposals to replace the UK Prospectus Regulation regime inherited from the EU with a more flexible regime designed to take advantage of the UK's perceived new freedoms in financial services following withdrawal from the EU.

Under the proposed new regime a prospectus will still be required for admission of securities to trading on a UK regulated market.  However rule-making responsibilities regarding admission of securities to trading on UK regulated markets will be delegated to the FCA, allowing the FCA to specify in its rulebook if and when a prospectus is required, what a prospectus should contain and the manner and timing of publication.  The FCA will also be given discretion to decide whether – and, if so, in which circumstances – prospectuses must be reviewed and approved by it prior to publication.  

Also under the proposed new regime there will be a general prohibition on public offerings of securities which will be subject to a number of exemptions. These will essentially be those currently appearing in Article 1(4) of the UK Prospectus Regulation. However, the list of exemptions will be expanded to cover:

• offerings of securities which are, or will be, admitted to trading on a UK regulated market or certain UK MTFs;
• offerings of securities to those who already hold equity securities of the issuer, subject to certain conditions, including that the offer is made pro-rata to a person's existing holding; and
• certain other categories of offerings by unlisted issuers and non-UK issuers.

The qualified investor and 150 persons exemptions will be retained as will the "wholesale" exemption, though here the threshold will be set at GBP50,000 rather than EUR100,000 (subject to this, all thresholds currently stated in Euros in the UK Prospectus Regulation regime will be re-stated into sterling at 1 for 1).

HM Treasury's proposals contain no express time line but say the government will legislate to implement these proposals when parliamentary time allows.  However, as the government will delegate a greater degree of responsibility to the FCA to set out the detail of the new regime, it will also require the FCA to go through a process of consulting on, and then implementing, new rules.  This suggests the new regime is unlikely to be in place any time soon.

ICMA updated standard form ECP documentation referencing SONIA, SOFR, €STR and EURIBOR

On 2 March 2022 ICMA published amended Appendix A7 to its Primary Market Handbook containing the following standard form ECP documentation for investment grade issuers:

• Dealer Agreement;
• Multicurrency Bearer Permanent Global Note; and
• Information Memorandum.

These new, amended versions cater for ECP to be issued referencing SONIA, SOFR, €STR or EURIBOR by reference to the 2021 ISDA Interest Rate Derivatives Definitions.  

Syndicated distribution of debt securities: New DvP model

With effect from 14 March 2022 the two International Central Securities Depositories (ICSDs), Euroclear and Clearstream, Luxembourg, have implemented a new model for the traditional delivery versus payment (DvP) closing of syndicated new issues of debt securities.  The ICSDs say that after this date it will no longer be possible to close a syndicated new issue under the traditional DvP model.

The principal feature of this new syndicate closing model is that the ICSDs will require every bank which acts as a lead manager to open a new "commissionaire account" with one or other of the ICSDs.  This commissionaire account will be governed by Belgian law (in the case of Euroclear) or Luxembourg law (in the case of Clearstream) and will be for the benefit of the lead manager but will grant the issuer third party rights under a third-party beneficiary clause (‘stipulation pour autrui’).

LIBOR transition: USD LIBOR tough legacy federal legislation signed into law

On 15 March 2022 US President Joe Biden signed into law the Consolidated Appropriations Act, 2022 which, amongst other things, contains a federal legislative solution to the problem of "tough legacy" USD LIBOR contracts.  This new federal LIBOR law takes an approach similar to the legislation that was initially proposed by the Alternative Reference Rates Committee (ARRC) in 2020 and has since been passed by the State of New York and several other states.  For more information, please read this Ashurst briefing.

Law Commission report on electronic trade documents

On 15 March 2022 the Law Commission published its proposals for reform of English law to allow trade documents in electronic form to have the same legal effect as their paper equivalents, provided that they meet certain requirements to enable their possession in a digital context.  While in principle bearer form debt securities would fall within the scope of the Commission's proposed new category of documents in electronic form, the proposals expressly exclude bearer form debt securities from this new category.  This despite both ICMA and ICMSA arguing strongly in favour of including them.

The Law Commission's reason for excluding bearer form debt securities is simply that they are used in financial markets and not in international trade and as such are better dealt with in the Law Commission’s ongoing general digital assets project rather than in this project which is focused on international trade documents.

COVID-19: FCA statement on extended financial information timelines

Since the outbreak of the Covid pandemic in 2020 the FCA has provided temporary relief for reporting published financial information, including:

• An additional 2 months to publish annual financial reports (ie within 6 rather than 4 months of the financial year end date); and
• An additional month to publish half yearly financial reports (ie within 4 rather than 3 months of the financial half year end date).

In its Primary Market Bulletin 39 published on 23 March 2022 the FCA announced the withdrawal of this temporary relief with the result that it will no longer be available for reporting periods ending on or after 28 June 2022.

UK PRIIPs Regulation Regime:  FCA guidance on scope and certain changes to the UK PRIIPs KID RTS

On 25 March 2022, the FCA published Policy Statement PS22/2 which sets out changes to the FCA Handbook and the UK PRIIPs Regulation Regulatory Technical Standards (the UK PRIIPs KID RTS) to address a number of concerns relating to the UK PRIIPs Regulation regime.

The changes to the FCA Handbook include the addition of a new sourcebook, the Product Disclosure sourcebook (DISC), which contains new rules describing circumstances in which a debt security definitely is or is not a PRIIP and a number of features which are "neutral" (that is, by themselves they will not determine whether a debt security definitely is or is not a PRIIP).

The amendments to the UK PRIIPs KID RTS:

• replace the requirements and methodologies for presentation of performance scenarios in a UK KID with a requirement for narrative information on performance to be provided;
• address the potential for some PRIIPs to be assigned an inappropriately low summary risk indicator in a UK KID; and
• address concerns about certain applications of the ‘slippage’ methodology when calculating transaction costs.

While these changes came into effect on 25 March 2022, there are transitional provisions which in many respects allow market participants t to choose which version of the UK PRIIPs Regulation regime to apply until 31 December 2022.

Visit our Finance Hub for analysis and commentary on developments affecting global financial markets, including the EU Prospectus Regulation, the EU Benchmarks Regulation, PRIIPs/KID, EU EMIR and LIBOR transition.