Debt Capital Markets Update Q2 2018

Welcome to the latest 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 second quarter of 2018.

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

• Brexit and the UK approach to amending financial services legislation
• SOFR data available and futures contract launched
• SONIA reformed
• Will LIBOR continue after 2021?
• LIBOR administrator included in ESMA register of benchmark administrators
• ESMA Q&A on benchmarks
• EIB issues market’s first sterling SONIA FRN
• New Prospectus Regulation:  some parts apply from 21 July 2018

Brexit and the UK approach to amending financial services legislation

On 26 June 2018 the EU (Withdrawal) Bill received Royal Assent and became an Act of Parliament.

The purpose of this Act (now the EU (Withdrawal) Act 2018 (EUWA)) is, with effect from the day the UK exits the EU (scheduled for 29 March 2019):

a) to repeal the European Communities Act 1972; and
b) to seek to ensure that the UK's laws are the same on the day after the UK exits the EU as they are on the day before the UK exits the EU, subject as expressly provided otherwise in the EUWA.  It seeks to do this by transferring EU law into UK law where appropriate and creating temporary powers to correct the laws that will no longer operate appropriately.

On 27 June 2018 HM Treasury published a statement describing how the UK intends to approach amending financial services legislation to deal with the issues thrown up by the Brexit process.  There are two principal themes to this approach:

1. Transition period:  planning to proceed on the basis that the transition or implementation period, agreed in principle between the UK and the EU earlier this year, will be in place between 29 March 2019 and 31 December 2020; and
2. No deal:  planning to proceed on the basis that the UK and the EU fail to reach an agreement on the terms of the UK's withdrawal from the EU with the result that the transition or implementation period never comes into effect when the UK exits the EU on 29 March 2019.

Under the terms of the agreement on the implementation period the UK will continue to implement new EU law that comes into effect and the UK will continue to be treated as part of the EU’s single market in financial services during the implementation period. This will mean that access to each other’s markets will continue on current terms until 31 December 2020 and any new EU legislation that becomes applicable in member states during the implementation period will equally become applicable in the UK.

If the UK and the EU fail to reach an agreement on the terms of the UK's withdrawal from the EU with the result that the implementation period never comes into effect then it is likely that on 29 March 2019 the UK will exit the EU and simply become a "third country" as far as EU legislation is concerned.  In this event retained EU law will on exit day become UK law and ministers will have powers (so-called "Henry VIII powers") under the EUWA to prevent, remedy or mitigate any failure of EU law to operate effectively, or any other deficiency in retained EU law, through statutory instruments.  Furthermore, HM Treasury envisages:

• delegating powers to the UK’s financial services regulators to address deficiencies in the regulators’ rulebooks arising as a result of exit, and to the EU binding technical standards that will become part of UK law;
• legislating to provide the financial services regulators with powers to introduce transitional measures that they could use to phase in any onshoring changes;
• introducing what it calls a Temporary Permissions Regime which would:

allow EEA firms which have lost their passporting rights on the UK’s exit from the EU to continue operating in the UK for a time-limited period after the UK has left the EU;

and provide those firms wishing to maintain their UK business on a permanent basis with sufficient time to apply for full authorisation from UK regulators.

The Bank of England and the Financial Conduct Authority also made corresponding announcements in similar terms about the process and their respective roles on 27 June 2018 ( see Bank of England announcement and Financial Conduct Authority announcement).

For more information see the Ashurst briefing on this subject.

SOFR data available and futures contract launched

The Secured Overnight Financing Rate (SOFR) is the alternative risk free rate (RFR) identified by the US Working Group, the Alternative Reference Rates Committee, for use to transition away from USD LIBOR.

As from 2 April 2018, the Federal Reserve Bank of New York is making available Secured Overnight Financing Rate (SOFR) data and on 8 May 2018 the Chicago Mercantile Exchange (CME) announced the first trades of its new Secured Overnight Financing Rate (SOFR) futures contract, launched on 7 May 2018.  

SONIA reformed

The Sterling Overnight Index Average (SONIA) benchmark has since 2017 been identified as the  preferred alternative risk-free rate for use instead of Sterling LIBOR.  From 23 April 2018 the Bank of England has reformed the SONIA interest rate benchmark and assumed responsibility for its calculation and publication.  In addition to the methodological changes, the publication time of SONIA has been moved, such that the SONIA rate for a given London business day is now published at 09:00 (London time) on the following London business day.  For more information, see the Bank's SONIA-benchmark website.

Will LIBOR continue after 2021?

On 25 April 2018, ICE Benchmark Administration Ltd (IBA), the administrator of the London Interbank Offered Rate (LIBOR), published a report on the evolution of LIBOR.  Much of the report outlines plans for changes to the methodology for calculating LIBOR which IBA intends to implement gradually between now and the first quarter of 2019.

However the report also says that IBA will continue to work with regulators, banks, market participants and other stakeholders regarding the future of LIBOR beyond the end of 2021, even though the FCA does not intend to sustain LIBOR through its influence or legal powers beyond that date.  It therefore remains a distinct possibility that LIBOR will continue to be calculated and published after the end of 2021.

LIBOR administrator included in ESMA register of benchmark administrators

On 30 April 2018, Intercontinental Exchange Inc. (ICE) published a press release announcing that ICE Benchmark Administration Ltd (IBA), which is the administrator of LIBOR, has become an authorised benchmark administrator under the Benchmark Regulation ((EU) 2016/1011) with effect from 27 April 2018.  

With effect from 30 April 2018 IBA is included in the register referred to in Article 36 of the Regulation and on 14 May 2018 IBA published its first benchmark statement under the Regulation in respect of LIBOR.

ESMA Q&A on benchmarks

On 24 May 2018 the European Securities and Markets Authority (ESMA) published a revised version of its Q&A document on benchmarks (ESMA70-145-11 Version 6) the purpose of which is to promote common, uniform and consistent supervisory approaches and practices in the day-to-day application of the Benchmark Regulation.  In particular, a new Q&A was added dealing with how prospectuses approved under the Prospectus Directive (2003/71/EC) should include reference to the register of administrators and benchmarks referred to in Article 36 of the Benchmark Regulation.  

EIB issues market’s first sterling SONIA FRN

On 22 June 2018 the European Investment Bank (EIB) launched what it says is the market’s first SONIA benchmark with a Sterling 1bn 5-year Floating Rate Note which pays a quarterly coupon of SONIA+35bps.

New Prospectus Regulation:  some parts apply from 21 July 2018

The new Prospectus Regulation (Regulation (EU) 2017/1129) came into effect on 20 July 2017, but the vast bulk of it will only apply from 21 July 2019.  However, as an exception, a few provisions have applied since 20 July 2017 and two provisions will apply from 21 July 2018.  In the UK these two provisions have been given effect by the Financial Services and Markets Act 2000 (Prospectus and Markets in Financial Instruments) Regulations 2018) through amendments to the Financial Services and Markets Act 2000 (FSMA), namely:

• the threshold for offers to the public that are exempt from the obligation to publish a prospectus is increased from €100,000 to €8,000,000 in section 86(1)(e) of FSMA; and 
• the threshold for an offer of securities to the public that is exempt from the regime is reduced from €5,000,000 to €1,000,000 in paragraph 9(1) of Schedule 11A of FSMA 2000.