Structured products legal and regulatory bulletin: December 2019

Please click on the links below to jump to the relevant section:

• Prospectus Regulation
• Delay to the review of the PRIIPs Regulation
• ESAs Consultation Paper on amendments to the PRIIPs KID
• European Commission consults on review of BMR
• Prospectus Regulation implementation in France
• Luxembourg Stock Exchange ESG guidelines
• Exemption legend for retail issuance in the Netherlands
• FMLC paper on legal uncertainties relating to retained EU law version of Benchmarks Regulation
• ISDA:
  • ISDA and AFME respond to technical expert group’s climate benchmarks interim report
  • ISDA publishes 2019 Narrowly Tailored Credit Events Protocol
  • ISDA Publishes Results of Consultation on Final Parameters for Benchmark Fallback Adjustments

EU

Prospectus Regulation

The Prospectus Regulation (2017/1129) (here) became fully effective on 21 July 2019.

The new Prospectus Regulation repeals the Prospectus Directive although base prospectuses approved before the Prospectus Directive was repealed can continue to be used during their validity period.

The Prospectus Regulation brings about a number of changes to the EU prospectus regime which are relevant to structured products issuers. In particular, there are significant changes to the required form and content of prospectus summaries and risk factor disclosure. Issuers and manufacturers will need to consider the impact of the Prospectus Regulation on their disclosure documents in advance of expiry of the validity of existing base prospectuses and ahead of trading any product which would require a “standalone” prospectus. The impact of the Regulation should also be considered in relation to products which are in public offer under a Prospectus Directive base prospectus when the validity of the base prospectus expires.

Issuers and manufacturers should also note that the definition of “advertisement” in the Prospectus Regulation has been expanded from covering “announcements” to covering “communications”. There has been a significant amount of discussion around the stage in the structuring process where a communication may come within the definition of an advertisement, whether communications with distributors are caught and the interaction with the PRIIPs KID.

In connection with the new Regulation, ESMA has on 12 July 2019 updated its publication Questions and Answers on the Prospectus Regulation (here). ESMA has also issued guidelines (here) on the requirements of the new Prospectus Regulation in relation to risk factor disclosure. These guidelines are addressed to National Competent Authorities which are responsible for review and approval of prospectuses but they will be of interest to issuers and manufacturers as guidance on how to interpret the requirements of the new Regulation in respect of risk factor disclosure, an area of significant change from the previous regime under the Prospectus Directive.

National Competent Authorities are required to notify ESMA whether they are in compliance with these guidelines or if they intend to comply with the guidelines within 2 months of the document's publication date on 01 October 2019.

Delay to the review of the PRIIPs Regulation

It is understood that the review of the PRIIPs Regulation that had been expected to occur by the end of this year (having been postponed from the end of 2018) is now unlikely to take place until the end of 2020 at the earliest. Instead the focus is going to be on the suggested amendments to the RTS put forward in the recent Consultation Paper (please see below).

ESAs Consultation Paper on amendments to the PRIIPs KID

On 16 October 2019, the ESAs (EIOPA, ESMA and the EBA) published a Joint Consultation Paper on amendments to the PRIIPs KID (available here). The aims of the CP are to:

• address issues that have been identified by stakeholders and supervisors since the implementation of the KID in 2018; and
• make specific changes to allow the rules to be applied to investment funds that are expected to have to prepare a KID from 1 January 2022 onwards.

The consultation period closes on 13 January 2020 and responses must be submitted in the template provided (otherwise they will not be considered).

The CP proposes changes relating to the following topic areas:

• illustrations of what the retail investor might receive in return from their investment (performance scenarios);
• information on what the costs of the investment are;
• specific issues for different types of investment funds; and
• specific issues for PRIIPs offering a range of options for investment (so-called “Multi-Option Products”).

European Commission consults on review of BMR

The European Commission has published a consultation on a review of the Benchmarks Regulation ((EU) 2016/1011) (BMR). The consultation covers:

• The extent to which competent authorities should have broader powers to require administrators to change the methodology of critical benchmarks.
• The extent to which benchmark cessation plans should be approved by regulators.
• To appropriateness of the system of supervision of critical benchmarks by colleges.
• Current powers of national competent authorities to allow continued provision and use of benchmarks in existing contracts.
• The suitability of the regulatory framework applying to non-significant benchmarks.
• Methodology for categorisation of different benchmarks.
• The ESMA register of benchmark administrators and whether this should also list benchmarks themselves.
• Usefulness and improvement of benchmark statements.
• Equivalence for third country benchmark administrators.

The consultation closes for comment on 06 December 2019.

France

Prospectus Regulation implementation in France

Although the new Prospectus Regulation is a European Union Regulation which should be applicable without the need to be implemented in French law, the previous French texts needed a significant refresh to correctly reflect the new Regulation. Therefore, with a little delay, the implementing Ordonnance (No 2019-1067) was finally released on 21 October 2019 and a first Decree (No 2019-1097) was released on 28 October 2019. The French market is still waiting for the relevant AMF regulations and doctrines to be updated; the answers to a public consultation which closed on 30 September 2019 are still being processed by the AMF.

In order to avoid any confusion, the AMF has clarified that the new Prospectus Regulation was effective from 21 July 2019 and for the transitional period between 21 July 2019 and the date of entry into force of the aforementioned French texts, issuers currently benefiting from the private placement exemption will continue to do so without need for further action.

Luxembourg

Luxembourg Stock Exchange ESG guidelines

In line with increased investor focus on sustainable development and finance, and its objective of promoting transparent capital markets, the Luxembourg Stock Exchange has published guidelines on Environmental, Social and Governance reporting. This reflects a general focus on ESG in Luxembourg and the report may be of interest to issuers of ESG products.

The Netherlands

Exemption legend for retail issuance in the Netherlands

The obligation to include the below exemption legend when offering securities to retail investors in the Netherlands partially no longer applies. The exemption legend was required to be included in offering and marketing materials when relying on certain prospectus obligation exemptions. However, due to the entry into force of the Prospectus Regulation, the prospectus obligation (and exemptions thereto) are largely regulated on a European level.

Previously, the exemption legend was required to be included when relying on the following exemptions:

(a) Securities are offered to fewer than 150 natural or legal persons in the Netherlands, other than qualified investors;
(b) Securities are offered whose denomination per unit amounts to at least EUR 100,000;
(c) Securities that are offered can only be acquired for a total consideration of at least EUR 100,000 per investor; and
(d) The total consideration of the securities that are offered in the European Economic Area amounts to less than EUR 100,000, calculated over a period of twelve months.

Exemptions (a), (b) and (c) are now included in the Prospectus Regulation, and can still be relied upon, but the exemption legend is no longer required when relying on one of these exemptions in relation to an offer of securities to retail investors in the Netherlands.

Exemption (d) no longer applies, but a local prospectus obligation exemption now applies to offerings in the Netherlands with a total consideration in the European Economic Area which amounts to less than EUR 5,000,000, calculated over a period of twelve months. When relying on this exemption and securities are offer to retail investors in the Netherlands, the exemption legend is still required to be included in offering and marketing materials.

UK

FMLC paper on legal uncertainties relating to retained EU law version of Benchmarks Regulation

The FMLC has published a paper on 23 October 2019 which looks at the challenges of providing a new benchmark into the EU once the UK is a third country following Brexit and some of the legal uncertainties arising from the changes proposed by the Benchmarks (Amendment and Transitional Provision) (EU Exit) Regulations 2019 (the BMR SI) (here). The BMR SI provides a framework for continued functioning of the BMR and related UK legislation in the UK in the case of a no-deal Brexit.

The FMLC paper highlights uncertainties relating to:

• the central bank exemption (and the fact that this has been onshored from BMR without amendment, thereby raising questions on that exemption which have already been raised in relation to BMR);
• transitional provisions in the BMR SI; and
• scope (in particular, jurisdictional scope),

and the FMLC encourages HM Treasury and HM Government to publish guidance to help affected benchmark administrators to begin planning for the future.

ISDA developments

ISDA and AFME respond to technical expert group’s climate benchmarks interim report

On August 7 2019, ISDA and AFME responded to the European Commission’s feedback consultation on climate benchmarks and benchmarks’ environmental, social and governance (ESG) disclosures.

The response comments on proportionality in relation to ESG disclosure requirements under the BMR and diversification of disclosure requirements for different asset classes. The response also comments on the need for additional and consistent data in relation to ESG products.

The response may be of interest to issuers of ESG products.

ISDA publishes 2019 Narrowly Tailored Credit Events Protocol

On 16 September 2019, ISDA announced the publication of a protocol (the 2019 NTCE Protocol), which enables parties to incorporate the 2019 Narrowly Tailored Credit Event Supplement (NTCE Supplement) to the ISDA 2014 Credit Derivatives Definitions into existing credit derivatives agreements.

ISDA describes narrowly tailored credit events (NTCEs) as arrangements with corporations that cause a credit event leading to settlement of credit default swap contracts while minimising the impact on the corporation.

ISDA published a statement in April 2018 noting concerns with the impact of such events on the efficiency, reliability and fairness of the overall CDS market.

The NTCS supplement amends the definitions of ‘outstanding principal balance’ and ‘failure to pay’ in the 2014 Definitions, and adds guidance on interpretation of the ‘failure to pay’ definition.

Implementation is scheduled for 13 January 2020.

The protocol will be of interest to issuers and manufacturers of credit-linked structured products who may wish to reflect the terms of the protocol in the terms applicable to credit-linked securities.

ISDA Publishes Results of Consultation on Final Parameters for Benchmark Fallback Adjustments

On 15 November 2019 ISDA published a report (here) which summarises market participant responses to the ISDA consultation on final parameters for the spread and term adjustments in derivatives fallbacks for key IBORs.

The final parameters consultation followed two consultations by ISDA which focused on technical issues related to fallbacks for derivative contracts that reference certain IBORs.

ISDA comments as follows:

“The [two earlier consultations] found the overwhelming majority of respondents preferred the ‘compounded setting in arrears rate’ to address differences in tenor between IBORs and overnight risk-free rates, and the ‘historical mean/median approach’ to deal with differences in credit risk and other factors.
The new report covers technical issues on specific methodologies for the two adjustments. Responses to the final parameters consultation show that a majority of participants preferred a historical median approach over a five-year lookback period. A majority also preferred not to include a transitional period in the spread adjustment calculation, not to exclude outliers, and not to exclude any negative spreads. For the compounded setting in arrears rate, a clear majority favored a two-banking-day backward shift adjustment for operational and payment purposes.”

Following these results, ISDA expects to make amendments to the 2006 ISDA Definitions to incorporate fallbacks with these adjustments for new IBOR trades. Bloomberg has been selected to publish the adjustments and ‘all in’ fallback rates.

ISDA also plans to publish a protocol to enable market participants to include fallbacks within legacy IBOR contracts.

The amended Definitions and the protocol are expected to be finalized by the end of 2019, with implementation in 2020.

The report is a helpful indication of how the OTC derivatives market will apply fallback adjustments and will be of interest to the structured products market insofar as the terms and conditions of structured products seek to reflect the terms of related hedging instruments.