Debt Capital Markets Update Q4 2019

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

• ESMA guidelines on risk factors under the Prospectus Regulation
• EONIA transition to €STR
• ICMA updates standard selling restrictions, legends and FAQs
• Publications from the working group on euro RFRs - transition to €STR
• ESAs release guidance on the scope of the PRIIPs Regulation and bonds
• Benchmark Regulation, LIBOR transition and Brexit - some uncertainties highlighted by FMLC
• Securities held in a clearing system - who has a right to compensation for misleading statements in a prospectus?
• FCA publishes Q&A on conduct risk during LIBOR transition
• Government departments and inside information - FCA practice note
• USD LIBOR Transition - useful publications from the ARRC
• ESMA publishes updated Q&As on the Prospectus Regulation
• EU's Action Plan on Financing Sustainable Growth - new EU Regulations published
• The London Stock Exchange's Sustainable Bond Market (SBM)
• UKLA Technical Note 632.1 withdrawn
• FSB 2019 progress report on reforming major interest rate benchmarks

ESMA guidelines on risk factors under the Prospectus Regulation

On 1 October 2019 ESMA published its Guidelines on Risk Factors under the Prospectus Regulation (ESMA31-62-1293) as required by Article 16(4) of the Prospectus Regulation. By their terms the Guidelines apply from 4 December 2019 and are to assist competent authorities when reviewing the specificity, materiality and presentation of risk factors. For more information see our briefing here.

EONIA transition to €STR

The European Central Bank (ECB) published €STR (the new euro short-term rate) for the first time on 2 October 2019 reflecting trading on 1 October 2019 and the European Money Markets Institute (EMMI) on that date published EONIA for the first time under the reformed determination methodology which directly tracks €STR.

Under the reformed determination methodology:

• EONIA is calculated as €STR plus a spread of 8.5 basis points (this spread was calculated by the ECB on 31 May 2019 and reflects the historical difference between the two benchmarks); and
• from 2 October 2019 onwards EONIA for day T will be available every TARGET day on T+1, at or shortly after 09.15 Brussels time.

To facilitate a smooth transition from EONIA to €STR, EMMI will continue to publish EONIA every TARGET day until 3 January 2022 after which date EONIA will be discontinued.

On 11 December 2019 EMMI announced it has been granted an authorisation by the Belgian Financial Services and Markets Authority (FSMA) for the provision and administration of EONIA under Article 34 of the Benchmarks Regulation and that consequently EONIA can continue to be used until 3 January 2022.

ICMA updates standard selling restrictions, legends and FAQs

On 15 March 2019 ICMA circulated to its Primary Documentation Group draft suggested forms of its standard form selling restrictions and legends relating to the PRIIPS Regulation and the Prospectus Directive etc which usually appear in Appendix A13 to its Primary Market Handbook. These suggested forms were designed for use in debt capital market documentation after the UK exits the EU either with a withdrawal agreement or without one.

On 22 October 2019 ICMA circulated to its Primary Documentation Group revised drafts of these suggested forms, primarily to take account of the repeal of the Prospectus Directive in the intervening period and its replacement by the Prospectus Regulation. At the same time ICMA circulated some revised Brexit FAQs. These documents are available from ICMA staff (legalhelpdesk@icmagroup.org) to ICMA members/Handbook subscribers on request.

Publications from the working group on euro RFRs - transition to €STR

During October and November 2019 the ECB's working group on euro risk-free rates published:

• a pack of slides to inform market participants about the transition to risk-free rates and the recommendations of the working group;
• a checklist for navigating the transition from EONIA to €STR including timelines, key recommendations and also covering: what is the problem with EONIA; what is the EONIA - €STR transition; and what is €STR;
• a useful Q&A on benchmark reform in a euro-zone context; and
• a report setting out its high level recommendations for fallback provisions in contracts for cash products and derivatives transactions referencing EURIBOR.

ESAs release guidance on the scope of the PRIIPs Regulation and bonds

On 24 October 2019, the European Supervisory Authorities (ESAs) published a Joint Supervisory Statement providing guidance to Member States' competent authorities on the scope of the application of the PRIIPs Regulation to bonds. The guidance considers certain types of bonds (perpetual bonds, subordinated bonds, fixed rate bonds, variable or floating rate bonds and convertible bonds) and certain features of bonds (put and call options (including make-wholes)) and whether or not such types or the inclusion of such features in bonds in and of themselves imply that the bond will be a PRIIP. For more information see our briefing here.

Benchmark Regulation, LIBOR transition and Brexit - some uncertainties highlighted by FMLC

In an insightful paper published on 23 October 2019 the Financial Markets Law Committee (FMLC) has raised a number of important questions concerning the Benchmark Regulation (BMR), the UK statutory instrument (BMR SI) which onshores the Benchmark Regulation (The Benchmarks (Amendment and Transitional Provision) (EU Exit) Regulations 2019 (2019 No. 657) and the relationship between Brexit and the transitional arrangements provided by the BMR and the BMR SI. These issues are also covered in the FMLC's response published on 31 December 2019 to the Commission consultation on its review of the BMR.

Securities held in a clearing system - who has a right to compensation for misleading statements in a prospectus?

The UK has a statutory liability regime in Part 6 of the FSMA to compensate investors in securities which are the subject of a prospectus or listing particulars and who suffer a loss as a result of any material untrue or misleading statement in, or omission from, the prospectus or listing particulars. To be eligible, investors must hold (or have disposed of) the relevant securities or an interest in them (see section 90 and 90A and Schedule 10A of the FSMA). For some time there has been doubt about how this liability regime would apply in the case of investors who do not hold the securities themselves but instead hold them through a clearing system, such as Euroclear, Clearstream or CREST, where the ultimate investor may be removed at many stages from legal ownership of the securities.

In an important judgement (SL Claimants v Tesco plc [2019] EWHC 2858) published on 28 October 2019 The High Court has found that:

• investors holding shares in CREST through the usual chains of custodians and sub-custodians etc have an "interest" in the securities and that such interest is equitable or proprietary, those being the hallmarks of beneficial ownership.
• the investors therefore have an "interest in securities" sufficient to enable them to maintain proceedings for the purposes of section 90A and Schedule 10A of the FSMA.

For more information see our briefing here.

FCA publishes Q&A on conduct risk during LIBOR transition

On 19 November 2019 the FCA published a set of Q&As for firms about conduct risk during LIBOR transition. The Q&As outline the FCA's expectation that firms have a strategy in place, that they will take necessary action during LIBOR transition, and that customers are treated fairly.

Government departments and inside information - FCA practice note

It is common to think of the Market Abuse Regulation (MAR) prohibitions on insider dealing and unlawful disclosure of inside information (Article 14) in terms of a company whose securities are listed on a stock exchange and people who work for or are employed by the company. But these provisions are in fact wider than this and also apply, for example, to the actions of government departments, as well as to industry regulators and public bodies and their staff.

The FCA believes that these organisations may not be clear about exactly how the provisions of MAR apply to them and in November 2019 decided to publish a best practice note clarifying how MAR applies and what that means in practice for such bodies.

USD LIBOR Transition - useful publications from the ARRC

During November 2019 the US Alternative Reference Rates Committee (ARRC) sponsored by the New York Federal Reserve published the following very useful, short and relatively easy to read documents:

• a summary of the ARRC's recommended LIBOR contractual fallback language for floating rate notes (published 25 April 2019), bilateral business loans (31 May 2019), syndicated loans (25 April 2019), securitizations (31 May 2019) and residential adjustable rate mortgages (15 November 2019); and
• an Appendix to the SOFR Conventions Matrix published in August 2019 by the ARRC.

ESMA publishes updated Q&As on the Prospectus Regulation

On 4 December 2019, ESMA published the third version of its Q&As on the new Prospectus Regulation. This updated version contains two new Q&As which deal with:

• The inclusion of pro-forma summaries in base prospectuses; and
• The application of prospectus disclosure annexes where securities do not fall neatly within a specific disclosure regime.

EU's action plan on financing sustainable growth - new EU Regulations published

As part of the EU's action plan on financing sustainable growth:

• the Low Carbon Benchmark Regulation ((EU) 2019/2089) was published in the Official Journal on 9 December 2019 and entered into force on 10 December 2019. Among other things, this Regulation extends the transition period under Article 51 of the Benchmark Regulation for critical and third-country benchmarks until 31 December 2021. For more about the Low Carbon Benchmark Regulation see our briefing here;
• the Disclosure Regulation ((EU) 2019/2088) was published in the Official Journal on 9 December 2019 and, by and large, will apply from 10 March 2021; and
• on 17 December 2019 the Council and the European Parliament reached political agreement on the proposed Taxonomy Regulation, on 18 December 2019 the Council published the final compromise text (COM (2018) 353 final). For more information see our briefing here.

The London Stock Exchange's Sustainable Bond Market (SBM)

In November 2019 the London Stock Exchange (LSE) announced two initiatives to extend and expand its existing effort (the Green Bond Segment) to support sustainable finance:

• the Sustainable Bond Market (SBM) which extends the Green Bond Segment to incorporate new Sustainability, Social and Issuer-Level Segments; and
• the Green Economy Mark, which recognises listed companies with 50% or more of revenues from environmental solutions.

From 1 January 2020, the LSE will require Issuers who wish their securities to be displayed on the SBM to complete an SBM Issuer Application Form. This is a simple form and is in addition to (though can be contemporaneous with) the other forms and documents which an Issuer is already required to submit to the LSE in order to have its bonds admitted to the Main Market, the ISM or the PSM.

For more information see the Sustainable Bond Market page of the LSE website.

UKLA Technical Note 632.1 withdrawn 

On 17 December 2019 the FCA published Primary Market Bulletin No. 26. Essentially this Bulletin describes small changes to the FCA's Knowledge Base driven by the Prospectus Regulation including the withdrawal of three Technical Notes on the basis that they are no longer relevant. The most significant of these is UKLA Technical Note 632.1. If a prospectus relates to Notes which have a denomination of less than EUR 100,000 and the prospectus is being approved by the FCA, for some years the FCA has said it will not approve the prospectus unless either it is drafted in accordance with the particular requirements of that Technical Note or offers of the Notes are restricted to qualified investors only and the Notes are not admitted to trading on a segment of a regulated market targeted at retail investors.

The FCA say this Technical Note has been withdrawn because it is no longer required as the Prospectus Regulation regime now contains detailed requirements for the scrutiny and approval of a prospectus. Initial indications are that the withdrawal of this Technical Note does not mark any change in practice on the part of the FCA to this particular category of prospectuses.

FSB 2019 progress report on reforming major interest rate benchmarks

On 19 December 2019 the Financial Stability Board (FSB) published a fifth progress report on reforming major interest rate benchmarks. It contains a comprehensive review of developments during the year covering not only the LIBOR currencies (GBP, USD, EUR, CHF and JPY) but also other countries including Australia, Canada, Hong Kong and Singapore.

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