Debt Capital Markets Update Q1 2018

Welcome to the second edition of the Ashurst Quarterly Debt Capital Markets Update for 2018. In this edition we summarise the key developments in debt capital markets in the first quarter of 2018.

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

• ESMA proposes new rules on the format and content of prospectuses and their regulatory scrutiny
• UK prospectus regime after Brexit
• PRIIPs Regulation: key information document (KID) filing requirements
• The London Stock Exchange's new International Securities Market (ISM) and the Quoted Eurobond Exemption
• IOSCO statement on benchmarks
• Transitioning from IBORs to risk-free rates (RFRs)
• Benchmark Regulation and use of EONIA after 1 January 2020
• ESMA Interactive Single Rulebook

ESMA proposes new rules on the format and content of prospectuses and their regulatory scrutiny

On 28 March 2018 ESMA delivered its final technical advice to the European Commission proposing new rules on both the form and content of prospectuses and on the regulatory scrutiny and approval of prospectuses. The new rules will take effect as “delegated acts” under the new Prospectus Regulation, which was published in June 2017. Assuming the rules are passed without amendment, they will come into effect together with the new Prospectus Regulation on 21 July 2019.  For more information, see Ashurst briefing here.

UK prospectus regime after Brexit

The European Union (Withdrawal) Bill (EUWB) currently going through Parliament is intended to ensure that, to the greatest practical extent, the same rules and laws will apply in the UK on and after the day (Exit Day) on which the UK exits the EU (scheduled for 29 March 2019) as on the day before.  But a crucial element of the EUWB is that any directly applicable EU law, such as the new Prospectus Regulation¹, will only form part of UK law on and after Exit Day if on the day before Exit Day it was not only in effect in the UK but also "operative".  On its face this would mean that the UK would not apply the new Prospectus Regulation in accordance with its terms from 21 July 2019 because it would not have been "operative" on the day before Exit Day.

However, on 19 March 2018 the UK and the EU announced that they had reached agreement on a transition or implementation period which, as part of the agreement governing the UK's withdrawal from the EU, is scheduled to last from Exit Day until 31 December 2020.  This agreement provides that, during the transition period, the UK will continue to apply EU law in such a way that it produces in the UK the same legal effects as those which it produces within the EU (subject as otherwise provided in the agreement).  One consequence of this would be that the UK would in fact apply the new Prospectus Regulation in accordance with its terms from 21 July 2019.  It remains to be seen, however, if the transition period is implemented as in the EU's phrase "nothing is agreed until everything is agreed".  Also the text of the UK implementing legislation remains to be published let alone enacted.

PRIIPs Regulation: key information document (KID) filing requirements

Article 5(2) of the PRIIPs Regulation² provides that any member state may require the ex ante notification of the key information document (KID) by the PRIIP manufacturer or the person selling a PRIIP to the competent authority for PRIIPs marketed in that member state.  To date we are aware of three member states (Belgium, Finland and Italy) that have chosen to implement this pre-notification requirement and four member states (Croatia, Luxembourg, Portugal and Slovenia) that are proposing legislation which will require, amongst other things, prior notification of the KID to national competent authorities.  For more information on these member states' pre-notification requirements and proposals see the PRIIPs portal on the Ashurst website (Ashurst.com).

The London Stock Exchange's new International Securities Market (ISM) and the Quoted Eurobond Exemption

By virtue of section 34 of the Finance Act 2018 (which received the Royal Assent on 15 March 2018), section 987 of the Income Tax Act 2007 (ITA) has been amended to bring debt securities which are admitted to trading on a multi-lateral trading facility (MTF) within the scope of the quoted Eurobond exemption provided that the MTF is operated by a stock exchange which is already a "recognised stock exchange" for these purposes and is also regulated in the European Economic Area.  This amendment was introduced specifically to bring within the quoted Eurobond exemption debt securities admitted to trading on the London Stock Exchange's International Securities Market (ISM).  This amendment has effect in relation to payments made on or after 1 April 2018.

However one of the conditions for this new exemption is that the relevant MTF is operated by a stock exchange which is regulated in the European Economic Area.  If as anticipated the UK exits the EU on 29 March 2019 and does not at that time become a member state of the EEA then securities admitted to trading on the ISM would thereafter fall outside of the quoted Eurobond exemption.  The London Stock Exchange is seeking to ensure the government provides expressly for this in Brexit legislation.

IOSCO statement on benchmarks

On 5 January 2018, the International Organization of Securities Commissions (IOSCO) published a statement adding its weight to the other bodies, guidelines and regulations around the world (such as the EU's Benchmark Regulation) urging users of benchmarks to develop contingency plans for the cessation of a relevant benchmark IOSCO says these plans should include users’ having sufficiently robust fall back provisions in their financial contracts and instruments which should ideally involve at least one alternative or fall back rate and/or other figure as a substitute for the benchmark originally referenced should it no longer be available. Users should also seek to reflect their contingency plans in their contractual arrangements.

The statement encourages users to keep themselves informed about, and to consider engaging in, market initiatives to develop contingency plans to be followed in the event of a material change to, or a cessation of, an interbank offered rate (or IBOR) or other benchmark as these initiatives may be helpful to users, particularly in considering fall back provisions which may be used in standard documents.  

Transitioning from IBORs to risk-free rates (RFRs)

On 1 February 2018 the International Swaps and Derivatives Association, Inc. (ISDA), the Association of Financial Markets in Europe (AFME), the International Capital Market Association (ICMA) and the Securities Industry and Financial Markets Association (SIFMA) and its asset management group (SIFMA AMG) launched a roadmap that highlights key challenges involved in transitioning financial market contracts and practices from interbank offered rates, or ‘IBORs’, to alternative risk-free rates (RFRs).

Benchmark Regulation and use of EONIA after 1 January 2020

The European Money Markets Institute (EMMI) is the administrator of the Euro OverNight Index Average (EONIA), a benchmark which was declared "critical" by the European Commission on 28th June 2017 under Article 20 of the Benchmark Regulation .  In 2016 EMMI launched a review of EONIA which sought to enhance the governance and control framework for the EONIA benchmark, and align it with the requirements of the Benchmark Regulation.  However on 2 February 2018 EMMI announced that pursuing this EONIA review is no longer appropriate given its findings to date of the lack of depth and breadth of relevant underlying markets.  In the same announcement EMMI stated that:

• should market conditions and dynamics remain unchanged, EONIA's compliance with the Benchmark Regulation by January 2020 cannot be warranted;
• the daily publication of EONIA will continue “as-is”;
• EONIA may still be used as a reference rate until 31 December 2019 under the transitional provisions of the Benchmark Regulation;
• after 1 January 2020, the provision and use of EONIA in existing contracts (but not new contracts) may be permitted under the conditions set out in Article 51(4) of the Benchmark Regulation (which permits the continuing use after 1 January 2020 of a benchmark which does not meet the requirements of the Benchmark Regulation in certain extreme circumstances).

ESMA Interactive Single Rulebook 

On 14 February 2018, ESMA launched the Interactive Single Rulebook.  This is an on-line tool that aims at providing a comprehensive overview of and easy access to all level 2 and level 3 measures adopted in relation to a given level 1 text (EU Directive or Regulation).   So for example in relation to a particular EU Directive, say, MiFID II, the Rulebook would contain links to all Implementing Acts (“IA”) or Delegated Acts (“DA”) adopted by the European Commission (including Technical Standards developed by ESMA and endorsed by the European Commission: “RTS” or “ITS”), as well as Guidelines, Opinions and Q&As issued by ESMA.

Currently the Rulebook only contains the interactive text of the UCITS Directive with links to all relevant Level 2 and Level 3 UCITS measures already available elsewhere on ESMA’s website.  During the course of 2018 ESMA aims to provide an interactive version of each of the Credit Rating Agencies Regulation and MiFID II/MiFIR.  ESMA’s stated objective is in due course to provide an interactive version for each key level 1 text under ESMA’s remit.

1. (EU) 2017/1129.

2. (EU) No 1286/2014.