Structured products legal and regulatory bulletin: Q3 2021

• EU
• The Netherlands
• UK

EU

Prospectus Regulation

ESMA updates EU Prospectus Regulation Q&As

16 July 2021 and 27 July 2021: ESMA published updated versions of its Q&A on the EU Prospectus Regulation. The most recent updates include various new or updated questions and answers and cover the following matters (amongst others) which will be of relevance to structured products issuers:

• the availability of the exemption under Article 3(2) to the obligation to publish a prospectus where an offer of securities is made in multiple member states;
• whether the indication of secondary market pricing constitutes a public offer;
• choice of home member state for issuers of non-equity securities; and
• the basis for determining the ‘total consideration’ in respect of an offer of warrants or other derivative securities in the context of the related exemption to the obligation to publish a prospectus.

LIBOR transition and benchmark reform

European Commission consults on statutory replacement for CHF LIBOR and EONIA

3 August 2021: The European Commission consulted on draft Implementing Regulations relating to statutory replacement rates for EONIA and CHF LIBOR. These consultations closed on 31 August 2021.

CSDR

ESMA calls for action on postponement of buy-in under EU CSDR

24 September 2021: ESMA has called on the European Commission to take action to signal that it is considering postponement of the implementation of the mandatory buy-in framework under the EU CSDR, currently scheduled for 01 February 2022 (Link). The letter refers to challenges relating to open questions on the regime, together with the uncertainty the industry faces as to whether the Commission’s legislative proposal on amendments to the CSDR will include amendments to the mandatory buy-in rules.

Retail Investment Products

European Commission issues call for advice to ESMA on retail investor protection

27 July 2021: The European Commission has issued a call for advice to ESMA in connection with preparation of legislative proposals implementing aspects of the Commission’s retail investment strategy. This call for advice covers enhanced investor engagement with disclosure, digital disclosure and risks and opportunities presented by new digital tools and channels. The feedback received in response to this is likely to be informative of future measures which may be introduced as part of the retail investment strategy.

European Commission issues call for advice to the ESAs on the PRIIPs Regulation

27 July 2021: The European Commission has issued a call for advice to the Joint Committee of the European Supervisory Authorities (ESAs) regarding the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation (EU) 1286/2014, seeking information about the nature and use of key information documents (KIDs) and related topics. The Commission also asks whether the scope of the PRIIPs Regulation should be extended to additional financial products.

Commission adopts Delegated Regulation setting out content of PRIIPs KID

07 September 2021: The European Commission has adopted a Delegated Regulation which sets out what should be included in the PRIIPs key information document (PRIIPs KID) (Link). It is intended that the PRIIPs KID will be the only document given to private investors across major retail investment product types. The rules will be scrutinised by the European Parliament and the European Council and are scheduled to apply from 01 July 2022.

EU BMR

ESMA updates EU Benchmark Regulation Q&As

29 July 2021: ESMA has published updates to its Q&A on the Benchmark Regulation. The Q&A updates item 4.7 in relation to the ability of supervised entities in the EU to use benchmarks provided by non-EU public authorities after the end of the transitional period.

Five Benchmarks Regulation RTS published in Official Journal

13 August 2021: Five regulatory technical standards (RTS) under the Benchmarks Regulation, which are relevant to benchmark administrators and the function of their operations, have been published in the Official Journal. The Commission Delegated Regulations enter into force on 02 September 2021 and will apply from 01 January 2022:

• Commission Delegated Regulation (EU) 2021/1348 specifying the criteria under which competent authorities may require changes to the compliance statement of non-significant benchmarks;
• Commission Delegated Regulation (EU) 2021/1349 specifying the criteria for the competent authorities’ compliance assessment regarding mandatory administration of a critical benchmark;
• Commission Delegated Regulation (EU) 2021/1350 specifying requirements to ensure that an administrator’s governance arrangements are sufficiently robust;
• Commission Delegated Regulation (EU) 2021/1351 specifying the characteristics of systems and controls for the identification and reporting of any conduct that may involve manipulation or attempted manipulation of a benchmark; and
• Commission Delegated Regulation (EU) 2021/1352 specifying conditions to ensure that the methodology for determining a benchmark complies with applicable quality requirements.

ESMA final report and guidelines on methodology, oversight function and record keeping under the Benchmarks Regulation

24 September 2021: ESMA has published guidelines on the application of requirements under Benchmark Regulation relating to benchmark methodologies, record keeping and the oversight function. In relation to benchmark methodologies, the guidelines provide further clarity on requirements relating to the methodology for determining the benchmark to be applied in the event of exceptional circumstances and the process of consulting on material changes to the methodology.

These guidelines apply from 31 May 2022 and are of particular relevance for administrators of critical and significant benchmarks.

MIFID II

EU Commission Delegated Directive 2021/1269 integrating sustainability into MIFID II product governance obligations

02 August 2021: The Delegated Directive as regards the integration of sustainability factors into product governance obligations has been published in the Official Journal (Link).

The amendments introduce obligations on investment firms that are manufacturing and distributing financial instruments to consider sustainability factors in the product approval process of each financial instrument. The EU is seeking to integrate sustainability into the fiduciary duties of firms, by ensuring such factors are considered in the target market assessment, the review of financial instruments and in the information they provide.

The Delegated Directive entered into force on 22 August 2021, and the measures within it will apply from 22 November 2022.

Netherlands

The Dutch Authority for Financial Markets issues final decision on product intervention measures relating to turbos

30 June 2021: The Dutch Authority for Financial Markets (AFM) published its decision on measures to restrict the marketing, distribution and sale of turbos to retail investors after receiving an opinion issued by ESMA confirming that the measures are justified and proportionate. The measures are generally in line with the existing restrictions already applicable to contracts for difference (CFDs) in the Netherlands and throughout the EU, and includes a leverage cap; a prohibition on providing retail investors with a payment or other prohibited benefits in relation to the marketing, distribution or sale of a turbo; and the requirement of a risk warning. This decision entered into force on 1 October 2021.

UK

UK Prospectus Regulation

FCA issues CP21/27: Quarterly Consultation Paper No. 33 on amendments to the UK Prospectus Regulation Rules

03 September 2021: The FCA is consulting on proposed amendments to the FCA Handbook relating to, amongst other things, consequential changes to the UK Prospectus Regulation Rules. These changes include removal of the ESMA Prospectus Opinions relating to the Prospectus Directive (as it is no longer applicable) and the addition of the guidelines on disclosure requirements under the Prospectus Regulation in Prospectus Regulation Rules 1.1.5G.

Retail Investment Products

FCA provides details on consumer investments strategy

14 September 2021: The FCA has set out its aims in relation to enabling consumers to make effective investment decisions. The focus is on the following main areas: mainstream investments, higher risk investments, scams and fraud and consumer redress.

The FCA will take the following measures to achieve these aims:

• considering regulatory changes to help firms provide assistance to consumers who want to invest in relatively straightforward products;
• launching a new campaign to help consumers make better-informed decisions;
• taking more steps to protect consumers from fraud;
• addressing misuse of the appointed representative scheme;
• strengthening the financial promotions regime in relation to high risk investments; and
• reviewing the FSCS compensation framework to ensure it remains proportionate and appropriate.

The FCA plans to publish its strategy in early 2022.

UK PRIIPs Regulation

FCA consultation on targeted amendments to the UK PRIIPs regime

30 September 2021: The FCA’s consultation period in relation to its proposed amendments to the UK’s PRIIPs regime closed.

The proposals are focussed on addressing the following issues:

• Lack of clarity on the scope for corporate bonds and legacy trades. The suggested amendments would clarify what is within scope of being a PRIIP to enable increased liquidity and choice in the corporate bond markets and the secondary markets.
• Lack of clarity on when a PRIIP is “made available” to retail investors. The FCA is proposing guidance setting out its interpretation of what conditions must be met to avoid the need to publish a KID.
• Misleading performance scenarios. The FCA is proposing to replace these with narrative information to provide more flexibility.
• Concerns that the SRI produced under the current methodology have the potential of underestimating the overall level of risk. The FCA proposes to introduce a requirement whereby PRIIPs manufacturers would need to upgrade the SRI if they consider that the risk rating produced by the methodology is too low.
• Concerns that the slippage methodology can lead to negative transaction costs. The FCA is proposing to continue to use this methodology, but to make certain amendments to the calculation to avoid this.

The ESA has also proposed amendments to the EU PRIIPs regime. There is a significant divergence between the proposed approaches of the ESA and the FCA. This could be costly for PRIIPs manufactures as two different KIDs will be required for the same product distributed in the UK and Europe.

The FCA plans to make associated amendments by the end of 2021.

LIBOR transition

FMSB issues Standard for use of Term SONIA reference rates

28 July 2021: The FICC Markets Standards Board (FMSB) published its finalised standard on use of Term SONIA reference rates. The standard is intended to help market participants identify appropriate use cases for Term SONIA.

IBA publishes feedback statement on ceasing publication of the ICE Swap Rate settings based on GBP LIBOR

04 August 2021: ICE Benchmark Administration (IBA) has announced that it will cease the publication of GBP LIBOR ICE Swap Rate for all tenors based on feedback from its consultation in May 2021. The majority of respondents agreed with the IBA’s intention to cease publication of these rates immediately after publication on 31 December 2021. Respondents also generally supported cessation of the USD LIBOR ICE Swap Rate after 30 June 2023.

Contract continuity legislation

08 September 2021: The UK government has introduced the Critical Benchmarks (References and Administrators’ Liability) Bill. The bill aims to reduce uncertainty in relation to the wind-down of LIBOR by providing for references to LIBOR in certain contracts is to be treated as a reference to synthetic LIBOR. The bill is therefore a key legislative measure in ensuring contract continuity for legacy agreements and instruments that have not been transitioned to a suitable replacement rate prior to the end of 2021. Issuers should review the legislation carefully to consider its potential application to securities and related contracts which may not have been transitioned prior to the end of 2021, including in relation to the interaction of the legislation with any existing contractual fallbacks.

FCA announces publication of ‘synthetic’ LIBOR

29 September 2021: The FCA has announced that it will compel the continued publication of key Sterling and Yen LIBOR settings following the end of 2021 using a synthetic methodology in order to facilitate an orderly wind-down for tough legacy contracts. Synthetic LIBOR rates will not be representative for the purposes of the Benchmarks Regulation. For Yen LIBOR settings, the FCA does not intend to extend the requirement to continue publication beyond the end of 2022. The availability of Sterling LIBOR settings will be reviewed annually with a maximum period of availability of 10 years.

FCA consults on permitted use of LIBOR

29 September 2021: The FCA has launched a consultation on permitted use of synthetic LIBOR and new use of USD LIBOR. Importantly, the consultation indicates the FCA’s proposal to grant permission to use synthetic LIBOR in all contracts other than cleared derivatives, without limitations or conditionality until at least the end of 2022.

Although a number of questions remain in relation to the use of synthetic LIBOR, the results of the consultation will be important for determining the final scope of UK tough legacy legislation.

IBA launches ICE Risk Free Rate Indexes for U.S. Dollar, Euro and Japanese Yen

21 September 2021: IBA has launched risk free rate indices for SOFR, €STR and TONA, following the earlier launch of ICE SONIA indexes.

Like the ICE SONIA indices, these new indices are intended to facilitate lending by standardising calculation of interest through pre-calculated compound interest values for each business day.

FCA publishes Q&A on new powers under the UK Benchmarks Regulation

15 October 2021: The FCA has published Q&A in relation to its powers under the UK Benchmarks Regulation. The Q&A are principally relevant to the use of synthetic LIBOR.

ISDA and other trade associations

ISDA fallbacks for sterling and US dollar LIBOR ICE Swap Rate

23 July 2021: ISDA announced the results of its consultation on implementation of fallbacks for sterling and US dollar LIBOR ICE Swap Rates. ISDA reports that a significant majority of respondents were in favour of the fallback provisions set out in the draft amendments put forward in the consultation.

ISDA has since published Supplement 82 to the 2006 Definitions setting out fallbacks in relation to the sterling LIBOR ICE Swap Rate (with fallbacks in respect of the US dollar LIBOR ICE Swap Rate to follow). ISDA has also published a template form of amendment agreement which can be used to adopt the fallbacks.