Ashurst Quarterly Debt Capital Markets Update

Welcome to the first edition of the Ashurst Quarterly Debt Capital Markets Update for 2021. In this edition we summarise the key developments in debt capital markets in the last quarter of 2020.

The Coronavirus/COVID-19 pandemic continues to dominate the news and specific information about this can be found on this dedicated page of the Ashurst website: Coronavirus and Financial Considerations. In addition to this, we have a number of developments to report on in this edition of specific interest to debt capital market participants.

• End of Brexit transition period
• FCA bans sale of investment products referencing cryptoassets to retail clients
• ICMA updates standard form ECP documentation
• ISDA Launches IBOR Fallbacks Supplement and Protocol
• ESMA confirms EU CRAs will be able to endorse credit ratings of UK CRAs after IP completion day
• Brexit: Choice of governing law and submission to jurisdiction clauses
• Brexit: ESMA updates Q&As for prospectus and transparency rules linked to Brexit
• Working Group on Euro Risk-Free Rates' consultations on EURIBOR fallbacks
• Brexit: New UK benchmarks register
• Green & Social Bond Principles launch new guidelines on climate transition finance
• ICMA publishes updated selling restrictions and legends
• EBA final report on EU contractual recognition of stay powers
• Brexit, BRRD II and contractual recognition of bail-in and resolution stays

End of Brexit transition period

Although the UK ceased to be an EU member state on 31 January 2020, the withdrawal agreement between the EU and the UK provided for a transition period during which, for most purposes, the UK continued to be treated as though it were a member state. This transition period ended at 11pm (UK time) on 31 December 2020 (known in UK law as "IP completion day"), at which point the UK left the EU single market and customs union and ceased to be bound to give EU law direct effect in the UK. Nonetheless, in order to provide a functioning legal framework and smooth transition on IP completion day, much of the then existing body of applicable EU law was converted into domestic UK law under the European Union (Withdrawal) Act 2018 and secondary legislation made under that Act (in the form of several hundred statutory instruments), in a process referred to as "onshoring".

This means that EU law will now only apply in the UK to the extent that it has been "onshored", and, if applicable, as amended in the relevant UK onshoring legislation. This new body of UK law is known as "retained EU law". As a result, for the most part, currently EU law and retained EU law is substantially the same. However, in future, new EU laws or any amendments to existing EU laws will only become effective in the UK to the extent that the UK decides to give effect to them by new UK legislation. Also the UK may decide to develop its onshored legislation in a manner specific to the UK. Accordingly, we can anticipate divergence between relevant EU and UK laws in the future.

FCA bans sale of investment products referencing cryptoassets to retail clients

On 6 October 2020, the FCA published a policy statement (PS20/10) prohibiting the sale to retail clients of derivatives and exchange traded notes referencing "unregulated transferable cryptoassets" – broadly, "cryptographically secured digital representations of value or contractual rights that use distributed ledger technology", subject to a number of qualifications and exceptions.

The prohibition took effect from 6 January 2021 by virtue of amendments to the FCA's Conduct of Business Sourcebook (COBS) set out in the policy statement.

ICMA updates standard form ECP documentation

On 6 October 2020 ICMA updated Appendix A7 to the ICMA Primary Market Handbook which contains the following standard form ECP documentation for investment grade issuers:

• Dealer Agreement
• Multicurrency Bearer Permanent Global Note
• Information Memorandum

These changes are the first since April 2016 but are relatively minor and largely represent a tidying-up exercise. The most noteworthy features are inclusion of provisions dealing with IBOR fallbacks, contractual recognition of bail-in and resolution stays and MiFID II product governance.

ISDA Launches IBOR Fallbacks Supplement and Protocol

On 23 October 2020 ISDA launched its IBOR Fallbacks Supplement and its IBOR Fallbacks Protocol. These are likely to go a long way to standardising approaches to contractual fallback provisions in many markets, not just derivatives. The supplement will amend ISDA’s standard definitions for interest rate derivatives to incorporate robust fallbacks for derivatives linked to certain IBORs, with the changes having come into effect on 25 January 2021. The protocol will enable market participants to incorporate the revisions into their legacy non-cleared derivatives trades with other counterparties that choose to adhere to the protocol. The protocol has been open for adherence from 23 October 2020, and has become effective on the same date as the supplement: 25 January 2021.

The fallbacks for a particular currency will apply following a permanent cessation of the IBOR in that currency. For derivatives that reference LIBOR, the fallbacks in the relevant currency would also apply following a determination by the FCA that LIBOR in that currency is no longer representative of its underlying market. In each case, the fallbacks will be adjusted versions of the risk-free rates identified in each currency.

ESMA confirms EU CRAs will be able to endorse credit ratings of UK CRAs after IP completion day

On 27 October 2020 ESMA issued a public statement (ESMA33-5-857) confirming that EU credit rating agencies (CRAs) will be able to endorse credit ratings issued by UK CRAs after the end of the Brexit transition period. Endorsement requires that an EU CRA is willing to endorse the credit ratings issued by a third country CRA from the same group and the EU CRA must notify ESMA of its intention to endorse the relevant credit ratings. We understand that most UK-based CRAs have taken the necessary steps to ensure that an EU CRA is able to endorse its credit ratings after the end of the transition period.

Brexit: Choice of governing law and submission to jurisdiction clauses

On 9 November 2020 Ashurst published this briefing on the likely impact of the end of the Brexit transition period on typical clauses in contracts governed by English law by which the parties agree a choice of governing law and/or agree to submit to the jurisdiction of a particular court or courts. In summary:

• there is no reason to change the current approach to choice of governing law clauses;

• the general approach of the English courts towards jurisdiction clauses should not change; and

• broadly speaking on IP completion day the automatic right to enforce judgments of UK courts throughout the EU fell away and the national law of each member state will now determine the enforceability of UK judgments (subject in limited circumstances to the potential availability of the Hague Convention on Choice of Court Agreements).

ESMA updates Q&As for prospectus and transparency rules linked to Brexit

On 9 November 2020 ESMA issued revised Questions and Answers (Q&As) concerning the EU's Prospectus Regulation and Transparency Directive regimes which discuss the effect of the end of the Brexit transition period. Of particular interest are ESMA's views on:

• the ineffectiveness in the EEA after the end of the Brexit transition period of prospectuses approved by the FCA during the transition period; and

• how to deal with an offer, or an admission to trading, which straddles the end of the transition period and which relies upon a passported FCA-approved prospectus.

For more information see this Ashurst briefing.

Working Group on Euro Risk-Free Rates' consultations on EURIBOR fallbacks

On 23 November 2020, the Working Group on Euro Risk-Free Rates announced the publication of two consultations on fallback rates for EURIBOR:

• €STR-based EURIBOR fallback rates. This consultation considers both forward-looking rates based on the derivatives markets referencing €STR and backward-looking rates. It also considers methodologies for calculating a spread adjustment to be added to the fallback rate and methodologies and conventions for calculating term €STR compounded in arrear (for example, whether to compound the rate or compound the balance and whether to use a lookback with or without observation shift convention).

• Trigger events to include within EURIBOR fallback provisions. This consultation considers various triggers. These include those relating to an announcement by the benchmark administrator or its supervisory authority that EURIBOR is being permanently discontinued, a pre-cessation trigger based on EURIBOR becoming unrepresentative, it becoming unlawful for any party to the contract to use EURIBOR and a material change being made to the EURIBOR calculation methodology.

Brexit: New UK benchmarks register

On 1 December 2020, the FCA published a new webpage on the UK benchmarks register (a parallel, under the UK's onshored version of the EU BMR, to the ESMA benchmarks register). This page is accessible from IP completion day and comprises the following two sections:

• The benchmark administrator register: a public record of all benchmark administrators that are authorised, registered or recognised by the FCA, or that benefit from an equivalence decision adopted by the UK.

• The third country benchmarks register: a public record of all benchmarks provided by third country benchmark administrators that are recognised by the FCA, endorsed by a UK-authorised or registered benchmark administrator (or other supervised entity) for use in the UK, or provided by benchmark administrators that have notified the FCA they benefit from an equivalence decision adopted by the UK.

Note that in September 2019, the UK extended the transitional period for third country benchmarks from the end of 2019 to the end of 2022 and is proposing in the Financial Services Bill 2019-21 to extend the transitional period for third country benchmarks again, from 31 December 2022 to 31 December 2025.

Green & Social Bond Principles launch new guidelines on climate transition finance

On 9 December 2020 the Climate Transition Finance Working Group (consisting of representatives from more than 80 entities participating in the international capital market) published: 

• a Climate Transition Finance Handbook, which clarifies the information that should be made publicly available to investors in connection with the issuance of ‘use of proceeds’ bonds; and

• a related Q&A document.

The recommended disclosures have four key elements:

• Issuer’s climate transition strategy and governance;
• Business model environmental materiality;
• Climate transition strategy to be ‘science-based’ including targets and pathways; and,
• Implementation transparency.

EBA final report on EU contractual recognition of stay powers

On 16 December 2020 the EBA published its final report on the technical standards for contractual recognition of stay clauses under BRRD II. For more information see this Ashurst briefing.

ICMA publishes updated selling restrictions and legends

On 17 December 2020 ICMA published the following documents for use after the end of the Brexit transition period:

• suggested updated ICMA selling restrictions (EEA and UK) for programmes;
• suggested updated ICMA Product Governance and PRIIPs Regulation language and legends (including public offer legend) for programmes;
• suggested ICMA UK retail cascade legends;
• updated ICMA stabilisation materials; and
• updated ICMA note on Article 29(2) of the Benchmarks Regulation.

These forms are not currently available in the ICMA Primary Market Handbook but ICMA envisages that the Primary Market Handbook will be revised to include these materials sometime in mid-2021 once market practice in relation to the use of this language has bedded down.

Brexit, BRRD II and contractual recognition of bail-in and resolution stays

On 28 December 2020 the UK complied with it obligations to implement the BRRD II Directive (Directive (EU) 2019/879 amending the BRRD), which is part of a package of measures commonly referred to as BRRD II. The UK did this by, amongst other things, making slight amendments to its rules governing contractual recognition of bail-in and resolution stays but, with effect from IP completion day, it then reversed those changes and essentially reinstated its previous rules governing contractual recognition of bail-in and resolution stays.

Nevertheless, as with effect from IP completion day the UK ceased to be bound to give EU law direct effect and English (UK) law ceased to be recognised as the law of an EEA member state, we can anticipate significant changes in the circumstances in which clauses giving effect to contractual recognition of bail-in and resolution stays are required in the terms and conditions of debt securities and related new issue and programme documents.

On 13 November 2020 ICMA published on its website an explanatory note to assist banks in their capacities as dealers or managers of securities offerings or programmes in their communications with issuer clients in this context. In particular, ICMA's explanatory note has two annexes which contain suggested forms of contractual recognition of bail-in clauses for:

• "other liabilities" under the EU BRRD regime; and

• "other liabilities" under the UK's onshored BRRD regime.

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.