Primary Markets

发布时间:2018年12月28日 10:10

Prospectus Regulation

The EU Prospectus Regulation is due to apply from 21 July 2019 and work is under way on developing Level 2 and Level 3 measures. There have been two significant developments for debt capital markets participants recently.

First, ESMA published its Final Report on Draft RTS under the new Prospectus Regulation, covering key financial information for the prospectus summary, data and machine readability of prospectuses, advertisements, prospectus supplements and prospectus publication in July.

Second, ESMA published a Consultation Paper on Guidelines on Risk Factors, also in July.

ESMA Final Report on Draft RTS under the new Prospectus Regulation

ESMA was mandated to prepare draft regulatory technical standards in certain specific areas of the Prospectus Regulation, namely key financial information for the prospectus summary, data and machine readability of prospectuses, advertisements, prospectus supplements and prospectus publication.

As reported in the 2018 Q2 edition of this Quarterly Report, ICMA responded to ESMAs consultation paper on the proposed draft RTS in March 2018, broadly supporting the RTS in areas where ESMA had carried across existing certain Prospectus Directive Level 2 provisions and raising certain queries on other areas.

Overall, the final draft RTS is improved from the original proposal in some areas, although other areas remain as originally proposed and so may require some thought in terms of their practical application.

An area that has been improved for debt capital market participants is the requirements on key financial information for the prospectus summary. One of the key concerns in this area was the relatively prescriptive approach that had been proposed, together with a cap on the number of additional line items or APMs that could be included in the summary. ICMA members urged ESMA to remove this cap; and were pleased to see that ESMA understood the concerns of debt capital markets participants and removed the cap in the final draft RTS. Another key area of concern for ICMA members related to the advertisements provisions, where the expanded definition of “advertisement” at Level 1 (now capturing “communications” rather than “announcements”) gave rise to some questions as to how the proposed provisions would work in practice for underwriters. This area of the RTS remains relatively unchanged. For example, in many cases the requirements still relate to both oral and written advertisements. This may be an area of focus for ICMA members in advance of the implementation date in July 2019, as they consider how to implement the new regime in practice across a broader range of “advertisements”. The original proposals for RTS relating to prospectus publication and supplements were relatively uncontroversial and there have been very few changes to the final draft RTS. In relation to supplements, ESMA has helpfully provided some clarification in relation to withdrawal rights, which has long been an area of uncertainty under the current PD and, given the drafting of the Prospectus Regulation, could have been a continuing area of uncertainty under the new regime. ESMA states that it believes that withdrawal rights “do not apply to prospectuses for the admission to trading of wholesale non-equity securities as these do not fall within Article 23(2) of the Prospectus Regulation, under which withdrawal rights relate to offers of securities to the public. This in ESMA’s view does not encompass exempt offers of wholesale securities being admitted to trading.” This is a welcome clarification.

In relation to data and machine readability, ESMA had suggested that issuers may be required to submit significant amounts of data to NCAs, if required by the relevant NCA. These proposals have been carried through to the final draft RTS largely unchanged. Depending on the approach that individual NCAs take, this could represent a significant additional regulatory reporting burden for issuers.

The final area of the RTS relates to a notification portal. ESMA did not consult on this area of the RTS. The notification portal is a portal through which NCAs will submit Prospectus Regulation-related documents to other NCAs for the purposes of passporting. ESMA states that issuers and other stakeholders will have no direct interaction with the portal.

The draft RTS were delivered to the European Commission in July. The Commission must decide whether to endorse the RTS within three months of receiving it (ie by mid- October 2018). If the Commission decides to adopt the RTS without amendment, the European Parliament and the Council will then have a one month “non-objection period” within which to consider the RTS. This period can be extended by one month. If the Parliament and the Council do not object to the RTS within the relevant non-objection period, or both the Parliament and the Council tell the Commission before the end of the period that they do not intend to object to the RTS, then the RTS will be published in the Official Journal and will enter into force on the date specified in the RTS. This means that if the Commission adopts the draft RTS with no amendments and neither the European Parliament nor the Council object, the RTS could be published in the Official Journal before the end of this year.

ESMA Consultation Paper on Guidelines on Risk Factors

For ICMA members, one of the most significant changes to the current prospectus regime is the introduction of new, specific provisions relating to risk factors under the Prospectus Regulation.

The background to this change was a concern among authorities that risk factor sections in prospectuses could be too lengthy and general in nature, or contain language which negated the risk. This was a finding of the 2016 ESMA Peer Review on the Prospectus Approval Process. In the light of this, new provisions were introduced to the Prospectus Regulation regime at Level 1, which (broadly) require risk factors to be limited to risks that are specific and material and presented in a limited number of categories depending on their nature, with the most material risk factors mentioned first in each category.

ESMA was mandated to develop guidelines to assist competent authorities in their review of the specificity and materiality of risk factors and the presentation of risk factors across categories depending on their nature. Following this mandate, ESMA consulted market participants on proposed draft guidelines on risk factors under the Prospectus Regulation. ICMA responded to that consultation ahead of the 5 October deadline.

The draft guidelines are addressed to national competent authorities, but ESMA expects that persons responsible for the prospectus will take the draft guidelines into account before submitting a draft prospectus for approval.

ESMA has proposed 12 draft guidelines relating to specificity, materiality, corroboration of specificity and materiality, presentation of risk factors across categories, focused/concise risk factors and risk factors in the summary.

Generally, many of the draft guidelines appear to be flexible and proportionate, and the position set out in the consultation paper is a helpful starting point. The precise impact of the draft guidelines on issuers will depend on the approach taken by NCAs in applying the guidelines. It is hoped that NCAs will make use of the flexibility envisaged in the guidelines (in particular by not viewing the “example” risk factors as templates to which risk factors should be matched). As with all areas of prospectus regulation application, it is important that NCAs consider the intended audience of the prospectus (ie retail or wholesale investors) and calibrate their review accordingly. Issuers will also need to ensure that they are able to make consistent and compliant risk factor disclosure in markets beyond Europe, and it is hoped that NCAs will also bear this in mind.

One specific area of concern with the guidelines might be the focus on the need for quantitative information to illustrate the potential negative impact of a risk factor. Disclosure of quantitative information to illustrate the potential negative impact of risk factors is currently rare in debt securities prospectuses. It is likely to be very difficult to disclose quantitative information on the negative impact of the risk factor in a manner that is not misleading for investors. By way of example, it would be very difficult to quantify and disclose in a non-misleading way the negative impact of any reputational damage an issuer or guarantor might suffer as a result of a particular risk factor. In addition, the draft guidelines seem to indicate that qualitative information can only be provided when quantitative information is not available. This could be problematic for issuers because it may not always be clear whether quantitative information is “available” or not. It could be challenging for issuers to diligence whether quantitative information is available internally or externally for a particular risk factor and, if so, model that information to ensure it can be appropriately disclosed in a non-misleading manner. It is hoped that ESMA may reconsider the emphasis on the need for quantitative information in the final guidelines.

Overall, it is anticipated that risk factor disclosure could be a key area of the Prospectus Regulation that will require some time and thought in the lead-up to next summer as the first Prospectus Regulation-compliant prospectuses are prepared and submitted. This was reflected in comments from both official sector and market participants at IFLR’s 9th EU Prospectus and Primary Market Issuance conference on 27 September, which ICMA supported.

Level 2 delegated acts: next steps

ESMA issued its Final Report on Technical Advice under the Prospectus Regulation at the end of March 2018, which included technical advice relating to the format and content of the prospectus and scrutiny and approval of the prospectus. The last edition of this ICMA Quarterly Report included an article on page 22-23 on the content of that Final Report.

Following receipt of ESMA’s Final Report, it is anticipated that the Commission will publish draft delegated acts on its Better Regulation portal in mid-October, and there will be a four week period during which market participants can submit feedback. The overall deadline for the Commission to adopt the delegated acts is 21 January, which is six months ahead of the date on which the Prospectus Regulation will be fully implemented.

Other prospectus-related matters

ICMA is monitoring developments related to the European Commission Action Plan on Financing Sustainable Growth published in March 2018, under which the Commission is intending to specify by Q2 2019 the content of the prospectus for green bond issuances to provide potential investors with additional information.

Overall, we are expecting a busy period ahead for ICMA primary market members as they begin to prepare for the implementation of the Prospectus Regulation on 21 July 2019. For many members, the impact of Brexit will be one part of those considerations. ICMA will aim to support members through this implementation period.

Contact: Charlotte Bellamy charlotte.bellamy@icmagroup.org


ICMA Primary Market Handbook: recent updates

On 26 September 2018, ICMA published several updates to the ICMA Primary Market Handbook and communicated this to ICMA members and ICMA Primary Market Handbook subscribers and holders via a circular (ICMA login details are required to access the circular online).

The changes were as follows.

In Chapter 5 (Bookbuilding and launch) certain terminology used in Recommendation R5.1 was amended to align with the title of the recommendation, initial price thoughts. In addition, a new item 5.7B flagging certain considerations relating to X accounts (confidentiality, transparency, potential impact on demand disclosure and allocation/pricing recommendations and only issuers having the ability to review and reconcile) was included.

In Appendix A1 (Agreement Among Managers (Versions 1 and 2), a new section titled Version 1 Asia Pacific (ex- Japan) Subscription Agreement Amendments was added.

In Appendix A7 (ECP documentation for Investment Grade issuers), a note relating to the MiFID II product governance regime was added.

Several changes were made to Appendix A8 (Final terms and pricing supplement) namely: (i) language relating to the PRIIPs Regulation was included; (ii) a note relating to the MiFID II product governance regime was added; (iii) placeholders for legal entity identifiers (LEIs) and certain other codes were added; (iv) a note relating to the UKs withdrawal from the European Union and the implementation of the Prospectus Regulation was added; and (v) certain other minor, corrective changes were made.

Appendix A13 (Selling restrictions and legends (EEA PRIIPS Regulation, EEA Prospectus Directive, UK), previously titled Selling restrictions (UK & EEA Prospectus Directive)) was significantly revised to include language relating to the PRIIPs Regulation, to update the EEA Prospectus Directive selling restrictions and legends and to include a note relating to the UK’s withdrawal from the European Union and the implementation of the Prospectus Regulation.

Appendix A16 (Sub-€100,000 denomination bonds under the EEA Prospectus Directive and retail cascade legends, previously titled Sub-€100,000 denomination bonds in the EEA and retail cascade legends) was amended to include language relating to the MiFID II product governance regime, to update certain aspects related to the Prospectus Directive, to include a note relating to the UK’s withdrawal from the European Union and the implementation of the Prospectus Regulation and to make certain other minor, corrective changes.

Minor amendments were made to Appendix A17 (Withholding tax) to achieve consistency with prior amendments.

Hard copy updates will be printed and distributed to ICMA members and ICMA Primary Market Handbook “hard copy update service” subscribers in due course.

Further information (including open links to the amended pages) is available on the ICMA Primary Market Handbook amendments/archive webpage.

Contacts: Ruari Ewing and Charlotte Bellamy ruari.ewing@icmagroup.org charlotte.bellamy@icmagroup.org


FMSB: Information & Confidentiality and Risk Management Transactions

On 31 August, ICMA responded to the FICC Markets Standards Board (FMSB)’s Information & Confidentiality for the Fixed Income and Commodities Markets Transparency Draft Statement of Good Practice (SGP). The response notes generally that much of the proposed SGP seems to replicate common sense or concepts already enshrined in law or regulation (which renders it challenging to identify and assess any aspects that are distinct or intended to be so).

The response also appreciates FMSB’s avowed intention that the SGP (i) will not create any presumption or implication that a firm has failed to meet its regulatory or other obligations or that it has been negligent and (ii) does not impose legal or regulatory obligations on FMSB members – though whether this is so in practice is not within FMSB’s gift.

The response queries a few other aspects of technical clarity, including in terms of conflating confidential information with non-public information generally (rather than just client or third party non-public information). Information merely being non-public does not necessarily make it confidential information, let alone inside information. Regarding the ability of a market participant to treat public information as “public” being subject to a proviso that that participant has not made the information public, the response notes that bond syndicate desks frequently make previously non-public information public (notably in new issue announcements) and do not themselves treat that information as confidential thereafter.

Also, in terms of traders having to act and behave independently where they are competitors, the response notes that bond syndicate desks, once they have been mandated by their issuer client to work together as a syndicate, act and behave in concert and no longer act as competitors.

Distinctly, the FMSB’s Risk Management Transactions final Standard on was published on 3 July. This follows ICMA’s December 2017 comments on the preceding transparency draft (reported at page 25 of the First Quarter 2018 edition of this Quarterly Report). The final Standard seems to address ICMA’s key comment that the draft Standard’s Core Principle 9 seemed to prohibit market soundings. The final Standard also seems to address a couple of ICMA’s other comments – namely that, in the table listing the three core scenarios, the text (i) use “pricing” rather than “issuance” terminology and (ii) cover both the issuer vs investor angles.

Contact: Ruari Ewing ruari.ewing@icmagroup.org


FCA: Call for Input on PRIIPs

On 28 September, ICMA responded to a UK FCA Call for Input on PRIIPs.

The ICMA response notes that the product scope of the PRIIPs regime has been confusing in practice. It seems to have been interpreted by some as wider than initially expected, eg to include some vanilla bonds. This needs to be rectified given the potential sanctions for PRIIPs availability to EEA retail investors without a KID and the apparent consequential avoidance of retail investors by many borrowers (see further below). In this respect, the ESAs’ suggestion of granular scope clarifications in their 19 July letter are helpful – for example that make-whole features are not “packaging” if the discount rate “mechanism” is known in advance (so including where this involves observation of a specified value at a specified time). To the extent a conceptual, rather than a granular, approach to scope clarification is desired, the response suggests some possible wording.

The response notes that challenges within the KID include the fact that vanilla bonds involve no costs and charges. Also, the synthetic risk indicator involves seemingly arbitrarily weighted components. And lastly, the prescribed performance scenario methodology seems flawed, potentially misleading and needs to be amended.

The response flags that the clear purpose of short-form disclosure should be as a quick first point of information and not as the basis for an informed investment decision. However, the vague position under the PRIIPs regime raises civil liability risk to the point of undermining a borrower’s certainty of funding (ie confidence that the borrowed amount can be used for the whole bond term) – certainly for investment grade benchmark-funding borrowers in the international markets. Such borrowers consequently prefer to avoid retail investors unless they are clearly outside the product scope of PRIIPs.

In this respect, ICMA’s full first half 2018 findings seem to indicate a 30%-40% decline in low denomination non-financial corporate (LD NFC) issuance, in contrast to high denomination (HD) and financial institution (FIG) issuance – see chart. (Same basis first quarter data had indicated a 60% decline as reported in the Second Quarter 2018 edition of this Quarterly Report.) This recent decline comes on the back of a long-term decline in low-denomination bonds over the past 15 years, originally driven by the EU Prospectus Directive’s low denomination regime. (See further separate article in this edition: Bond denominations 2000-2018.)

Source: ICMA/Dealogic

The response recalls that there are non-PRIIPs regulatory, as well as non-regulatory, disincentives to retail supply. Also, in attempting to promote direct retail access to investments, one should not disrupt EEA wholesale funding markets that are crucial for the economy. Lastly, the response flags a couple of apparent inaccuracies in the text of the Call for Input.

Contact: Ruari Ewing ruari.ewing@icmagroup.org


Bond denominations 2000-2018

ICMA has reviewed denomination data since 2000 for EUR benchmark bond issues (with an aggregate size of €500 million or more), with its findings combining industrial & utility issuers from the public & private sectors set out in the chart below. These are split between low denominations (LD / up to €10,000), medium denominations (MD / €50,000) and high denominations (HD / €100,000 upwards). Leaving aside 651 excluded tranches (€637.5 billion) with no recognisable denomination, the data relates to a meaningful 12,546 tranches worth €11.6 trillion. (First half 2018 data was doubled to extrapolate roughly some full year 2018 figures.)

The timing of this decline seems to correlate with the EU’s Prospectus Directive (PD) regime: the PD (which formalised an alleviated regime for €50,000 or higher denominations) was initially adopted at Level 1 in 2003 and implemented 2005; and the PD’s first revision (which increased the alleviated regime’s threshold to €100,000) was adopted at Level 1 in 2010 and implemented 2012. However, it is worth noting that the high denomination concept has at least enabled the wholesale markets to continue significant operations in Europe. In any case, it now seems this historic decline is being accentuated by the PRIIPs and MiFID II product governance regimes in further curtailing the availability of low-denomination bonds to retail investors (see further separate article in this edition reporting a 30%-40% decline in the first half of 2018: FCA Call for Input on PRIIPs). This does not seem consistent with the EU’s CMU policy intent (expressed in the 2015 CMU Action Plan) that “retail investors should also have easy access to a range of suitable and cost-effective investment products”.

Contact: Ruari Ewing ruari.ewing@icmagroup.org