Ashurst Quarterly Debt Capital Markets Update

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

• ESMA updates Q&As on alternative performance measures (APMs)
• Commission and ESAs proposals for changes to the EU PRIIPs Regulation regime
• ESAs supervisory statement identifying concerns with drafting of KIDs
• More from the FCA Primary Markets Effectiveness Review
• What does "gross negligence" really mean?
• ESMA's overview of the EU market for ESG rating providers
• FCA publishes views on integration of ESG topics in the UK capital market
• FCA consults on wind-down of synthetic sterling LIBOR and considers future synthetic US dollar LIBOR

ESMA updates Q&As on alternative performance measures (APMs)

On 5 October 2015, ESMA published guidelines (ESMA//2015/1057) relating to the use of APMs in prospectuses or regulated information.  These guidelines are enhanced by a Questions and Answers (Q&A) document published by ESMA from time to time, the most recent version of which was published on 1 April 2022.

The latest additions to these Q&As clarify that:

• when financial measures using ESG labels are included in regulated information and prospectuses, those measures are covered by ESMA's APM guidelines unless such measures are disclosed in accordance with applicable legislation that sets out specific requirements governing the determination of such measures (for example, the EU Taxonomy Regulation); and
• issuers should use caution when they present APMs using ESG labels as these may be misperceived by users as compliant with the applicable legislation (such as the EU Taxonomy Regulation).

Commission and ESAs proposals for changes to the EU PRIIPs Regulation regime

On 3 May 2022 the European Commission launched a call for evidence to assist its assessment of whether current retail investor protection rules (in particular those contained in MiFID II and the EU PRIIPs Regulation regime) have been proven to be effective and efficient.  The deadline for responses was 31 May 2022 with the Commission looking to adopt legislative or non-legislative initiatives in Q4 2022.

At the same time the Joint Committee of the European Supervisory Authorities (ESAs) published a report (JC 2022 20) setting out their response to a call for advice on the Commission's review of the EU PRIIPs Regulation.  This report is intended not only to suggest amendments to the EU PRIIPs Regulation regime, but also to serve as input to the Commission's work developing a strategy for retail investments (above).

Amongst other things, the ESAs report recommends:

• that changes are made to the EU PRIIPs Regulation to specify more precisely which types of bonds fall within the scope of the EU PRIIPs Regulation and to specify that "make whole" clauses should not by themselves result in a bond falling into the scope of the EU PRIIPs Regulation;
• the development and inclusion in the EU PRIIPs Regulation of a significantly longer non-exhaustive list of products that are in or out of scope (although the report does not go into detail as to what the list should contain);
• that provisions are introduced to clarify the "made available" concept in Article 5 of the EU PRIIPs Regulation;
• replacing the current requirement for 'appropriate performance scenarios' with a requirement for 'appropriate information on performance', to allow more flexibility on the nature of the information provided in the performance section of the key information document (KID); and
• including a new section in the KID to show where a PRIIP has ESG characteristics.

ESAs supervisory statement identifying concerns with drafting of KIDs

On 9 May 2022, the Joint Committee of the European Supervisory Authorities (ESAs) published a supervisory statement, which

• discusses concerns identified with the drafting of the "What is this product?" section of numerous KIDs under the EU PRIIPs Regulation regime; and 

• sets out how the ESAs expect those concerns to be addressed.  

This supervisory statement is addressed to competent authorities but market participants will be expected to follow its guidance.

The issues identified in the supervisory statement concern product features that are primarily relevant for certain types of structured products or derivatives, such as auto-callability, the possibility for early termination, and the payment of coupons or leverage.  For each of the issues identified, a description is provided of some of the current practices observed, with reference to specific examples, followed by the ESAs expectations regarding how to improve the drafting of KIDs.  For more information, see this Ashurst briefing.

More from the FCA Primary Markets Effectiveness Review

On 26 May 2022, the FCA published Discussion Paper DP 22/2 which is a further instalment of its Primary Markets Effectiveness Review and which largely seeks views on the distinctions between standard listing and premium listing of shares, as well as the role of the sponsor regime.  There is nothing in this discussion paper of particular significance to listings of non-equity securities, except that it says that the FCA is still considering its response regarding the duplication between admission to the Official List and admission to a trading venue (such as the London Stock Exchange) and it will publish its views in due course as a further instalment of the Primary Markets Effectiveness Review.

What does "gross negligence" really mean?

In the recent decision in the proceedings between the Federal Republic of Nigeria (FRN) and JP Morgan Chase (JPMC) ([2022] EWHC 1447 (Comm)), where the FRN's factual case failed, detailed consideration was given to what is meant by "gross negligence" as distinct from "negligence". Since many contractual terms involve an acceptance of liability only where gross negligence can be shown, this case is a useful reminder of what that test involves in practice.  For more information, see this Ashurst briefing.

ESMA's overview of the EU market for ESG rating providers

On 27 June 2022, ESMA published a letter that it has sent to the European Commission setting out ESMA's overview of the market for ESG rating providers in the EU.

The letter identifies a number of key characteristics:

• the structure of the market among ESG rating providers is split between a small number of very large non-EU entities on one hand, and a large number of significantly smaller EU entities on the other;
• the majority of users of ESG ratings are typically contracting for these products from several providers simultaneously, most notably to increase coverage, either by asset class or geographically, or in order to receive different types of ESG assessments; and
• entities covered by these products indicated they are required to dedicate some level of resourcing to their interactions with ESG rating providers and highlighted shortcoming in these interactions, most notably on the level of transparency as to the basis for the rating, the timing of feedback or the correction of errors.

The letter concludes that the market for ESG rating and data providers is immature but growing and it bears some resemblance to that which currently exists for credit ratings.

FCA publishes views on integration of ESG topics in the UK capital market 

On 28 June 2022, the FCA published its Feedback Statement (FS 22/4) together with Primary Market Bulletin PMB 41, which together outline the FCA's current thinking on the integration of ESG topics in capital markets and describe what the FCA sees as likely future developments.

In summary the FCA's current position is to:

• encourage issuers of ESG-labelled Use of Proceeds (UoP) debt instruments to apply relevant industry standards, such as the ICMA Principles and Guidelines;
• remind market participants of their existing obligations to ensure any marketing material is accurate, not misleading, and is consistent with the information contained in the prospectus; and
• encourage the use of second party opinion (SPO) providers and verifiers who adhere to appropriate standards of professional conduct, such as ICMA’s Guidelines for External Reviewers.

The FCA go on to say that they see a clear rationale for regulatory oversight of ESG data and rating providers, verifiers and SPO providers and, together with HM Treasury, may in future bring them within the FCA's regulatory perimeter.  The FCA also states that, as part of HM Treasury's review of the UK Prospectus Regulation, it may be desirable for the UK authorities to develop an appropriate standard for UoP bonds.

FCA consults on wind-down of synthetic sterling LIBOR and considers future synthetic US dollar LIBOR

On 30 June 2022, the FCA launched a consultation on the wind-down of synthetic sterling LIBOR and how best to retire the remaining US dollar LIBOR tenors.  For more information, see this Ashurst briefing.

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