Debt Capital Markets Update Q3 2019

Welcome to the latest edition of the Ashurst Quarterly Debt Capital Markets Update for 2019. In this edition we summarise the key developments in debt capital markets in the third quarter of 2019.

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

• Prospectus Regulation now fully applicable
• Prospectus Regulation – new data submission requirements delayed
• Prospectus Regulation and ICMA recommended forms of selling restrictions etc
• ESMA - new Q&As on Prospectus Regulation
• EMMI granted authorisation under the Benchmark Regulation for administration of EURIBOR
• Initial Coin Offerings - FMLC Paper
• LIBOR Transition - Term Adjustments and Spread Adjustments
• LIBOR Transition - ARRC SOFR-linked FRN Conventions
• EONIA transition to €STR
• London Stock Exchange introduces “Professional Only” segments on its Main Market
• Brexit - the Prospectus (Amendment etc.) (EU Exit) Regulations 2019

Prospectus Regulation now fully applicable

With effect from 21 July 2019 the Prospectus Regulation regime, consisting of the Prospectus Regulation¹  and two Delegated Regulations made under it², became fully applicable, repealing and replacing the previous Prospectus Directive³  regime from that date for the purpose of establishing a harmonised format for prospectuses in the European Economic Area. The one exception to this is that elements of the Prospectus Directive regime remain applicable for any prospectus which was approved before 21 July 2019 and which remains valid.

In addition to the legislation making up the Prospectus Regulation regime, it also consists of six relevant ESMA publications ranging from Q&A documents and recommendations to ESMA's Final Report on its proposed guidelines on risk factors (the final form of these guidelines have not yet been published).

In the United Kingdom the Prospectus Directive regime was largely given effect through Part 6 of the Financial Services and Markets Act 2000 (FSMA) and the FCA's Prospectus Rules sourcebook (PR). Although the Prospectus Regulation regime has direct effect in the United Kingdom (as it does in all Member States) notwithstanding the UK's decision to leave the European Union, the government has repealed the relevant parts of Part 6 of the FSMA and the FCA has replaced its Prospectus Rules sourcebook with a new sourcebook, the Prospectus Regulation Rules sourcebook (PRR).

Prospectus Regulation – new data submission requirements delayed

The Prospectus Regulation requires ESMA to establish a public storage mechanism for prospectuses and related documents and to compile and publish related statistical reports. ESMA will require competent authorities to submit all of this information to ESMA, but the FCA proposes to transfer the burden of supplying this information to issuers and other competent authorities are likely to do the same.

However, in July 2019 ESMA advised EU authorities that it does not require the full data set to be submitted at present. This is pending system changes that are unlikely to be completed until mid-2020. In light of this delay, the FCA announced it would itself delay the implementation of changes to its ESS system that would enable it to collect the data and that until further notice issuers and their advisors should continue to use existing processes.

Prospectus Regulation and ICMA recommended forms of selling restrictions etc

During July and August ICMA circulated to its primary documentation group various materials related to the Prospectus Regulation, namely revised versions of:

• Appendix A8 (Final terms and pricing supplement);
• Appendix A13 (Selling restrictions and legends - PRIIPs Regulation, Prospectus Directive, UK); and
• Appendix A16 (Sub-€100,000 denomination bonds under the Prospectus Directive and retail cascade legends).

ICMA's view is that many of the implications of the new Prospectus Regulation regime may only become clear in the context of actual transactions, as competent authorities and market participants work together to apply its provisions in practice. Consequently, it is quite possible that these draft Appendices will be further revised following initial practical experience of the new regime. Accordingly ICMA will defer formal publication of the revised Appendices in the ICMA Primary Market Handbook until later in 2019. However, ICMA members and Handbook subscribers can request the current draft revisions from ICMA staff (legalhelpdesk@icmagroup.org).

ESMA - new Q&As on Prospectus Regulation

On 12 July 2019 ESMA published a revised (second) version of its Q&A document on the Prospectus Regulation (ESMA/2019/ESMA31-62-1258). This adds to the first version 22 Q&As from ESMA's Q&A document on the Prospectus Directive that have been updated in relation to the Prospectus Regulation. It also points out that ESMA has decided not to update 28 Q&As that were published in relation to the Prospectus Directive and as a result these Q&As will not be carried over in relation to the Prospectus Regulation.

ESMA intends to continue to publish the existing Q&As relating to the Prospectus Directive during the period in which prospectuses that have been approved under the Prospectus Directive may continue to be valid, which is until 21 July 2020. After this period, these Q&As will no longer apply.

EMMI granted authorisation under the Benchmark Regulation for administration of EURIBOR

On 3 July 2019, the European Money Markets Institute (EMMI) announced that it has been granted authorisation by the Belgian Financial Services and Markets Authority (FSMA) under Article 34 of the Benchmarks Regulation⁴ (BMR) for the administration of EURIBOR following its project to reform EURIBOR by moving to a new hybrid calculation methodology. EMMI intends to transition panel banks from the current EURIBOR methodology to the new hybrid methodology by the end of 2019.
This authorisation is important because under the BMR, subject to transitional provisions, supervised entities are prohibited from using a benchmark which is produced by an EU administrator (such as EURIBOR) to determine an amount payable under certain products, including securities, derivatives and residential mortgages, unless that benchmark has been produced by an EU administrator included on the ESMA register of administrators authorised or registered under the BMR.

Initial Coin Offerings - FMLC Paper

On 31 July 2019, the Financial Markets Law Committee published a paper discussing issues of legal uncertainty arising from Initial Coin Offerings (ICOs). The paper looks at how existing laws apply to ICOs and some of the challenges for regulators and market participants.

The legality of an ICO depends on the jurisdiction in which it is located. China and South Korea have banned or suspended ICOs; some jurisdictions (Malta and the United Arab Emirates) have attempted to regulate them through the creation of new rules, and others, such as the EU, have issued official warnings about potential dangers in investing in ICOs. In the United States, the SEC has taken the position that digital tokens issued in ICOs generally fall within the definition of a “security” under U.S. securities laws and has issued a framework for the analysis of digital assets as “investment contracts” as well as pursued a number of enforcement actions against ICOs.

LIBOR Transition - Term Adjustments and Spread Adjustments

On 30 July 2019 ISDA published a statement of the preliminary results of its supplemental consultation on spread and term adjustments for benchmark fallbacks in derivatives contracts referencing certain interbank offered rates (IBORs), including USD LIBOR, CDOR and HIBOR. These results are very much in line with the results of most other similar consultations. The overwhelming majority of respondents prefer the “compounded setting in arrear rate” for the term adjustment and the “historical mean/median approach” for the spread adjustment. Consequently ISDA expects to proceed with developing fallbacks for inclusion in its standard definitions based on the compounded setting in arrear rate for the term adjustment and the historical mean/median approach to the spread adjustment.

LIBOR Transition - ARRC SOFR-linked FRN Conventions

On 1 August the Alternative Reference Rates Committee (ARRC) released the Secured Overnight Financing Rate (SOFR) Floating Rate Notes (FRNs) Conventions Matrix. This short publication is very useful for anyone seeking to understand the different options for calculating SOFR-linked FRN interest payments.

EONIA transition to €STR

On 19 August 2019 by the ECB's working group on euro risk-free rates published a report on the impact the transition from the euro overnight index average (EONIA) to the euro short-term rate (€STR) will have on cash and derivative products. The report includes a very useful summary of significant developments and proposals relating to this transition.

London Stock Exchange introduces “Professional Only” segments on its Main Market

On 23 August 2019 the London Stock Exchange announced it now offers dedicated “Professional Only” segments on its Main Market (which is a regulated market for the purposes of the Prospectus Regulation). The significance of this is that there are advantages of listing on such a segment under the Prospectus Regulation (less onerous disclosure), the PRIIPs Regulation (restricting distribution to non-retail investors) and the MiFID II product governance regime (demonstrating a professionals only target market).

Brexit - the Prospectus (Amendment etc.) (EU Exit) Regulations 2019

On 5 September 2019 the UK government made the Prospectus (Amendment etc.) (EU Exit) Regulations 2019 (2019 No. 1234). In large part these Regulations amend the Official Listing of Securities, Prospectus and Transparency (Amendment etc.) (EU Exit) Regulations 2019 (2019 No. 707) made on 27 March 2019. Their purpose is to seek to ensure that the Prospectus Regulation regime as it now has effect in the UK continues to function effectively after the UK leaves the EU.

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

1. (EU) 2017/1129.
2. (EU) 2019/979 and (EU) 2019/980.
3. 2003/71/EC.
4. (EU) 2016/1011.