EU
Prospectus Regulation
European Commission consults on EU Listing Act
On 19 November 2021, the European Commission published its consultation on attracting EU companies to public capital markets and facilitating access to capital for SMEs (Link). The consultation seeks to ascertain whether to further simplify the rules under the EU Listing Act. It has also been interpreted as the EU’s review of the EU Prospectus Regulation.
The consultation raises questions on a number of areas that are significant to structured products, such as the perimeter / exemptions in the current regime which are commonly relied upon by repack and structured note issuers.
The consultation will close on 11 February 2022.
CSDR
ESMA statement on the implementation of the CSDR buy-in provisions
On 17 December 2021, ESMA issued a statement indicating that NCAs are not expected to prioritise supervisory actions regarding the application of the CSDR mandatory buy-in regime (the MBI regime) when it becomes effective on 1 February 2022 (Link). ESMA expects NCAs not to prioritise supervisory action until the provision for postponing the application of the MBI regime is formally in place. An expected amendment to the EU CSDR should allow ESMA to propose a later start date for the MBI regime. The application and supervision of the other EU CSDR settlement discipline requirements, such as the settlement fails reporting and the cash penalties regimes, will go ahead as planned.
The ESMA statement follows agreement between the European Commission, the Council, and European Parliament at the trilogue meeting for the DLT Pilot Regime Regulation on 24 November 2021 (Link). In light of the European Commission review of CSDR, it was agreed that the MBI regime should be decoupled from the CSDR Settlement Discipline package in order to delay its implementation, with amendments to the regime and implementation timeline expected in the first half of 2022. The aim of the ESMA statement is to bridge the legislative gap until a new date of application has been passed into law.
Thereafter, the Joint Associations issued a joint statement (Link) in which they set out their common interpretation of the ESMA statement, including that they believe that EU legislators do not expect market participants to take further action towards implementation of the mandatory buy-in requirements, including but not limited to the contractual obligations of Article 25 of RTS (EU) 2018/1229 on Settlement Discipline.
ESMA updates Q&As on CSDR
On 19 November 2021 (Link) and 17 December 2021 (Link), ESMA published updated versions of its Q&As on the implementation of CSDR.
Amongst other things, ESMA has added a new Q&A clarifying which settlement fails should be taken into account when calculating a participant’s rate of settlement efficiency.
PRIIPS
ESAs update Q&As on the PRIIPs KID
On 17 December 2021, the Joint Committee of the European Supervisory Authorities (ESAs) updated Q&As relating to the EU PRIIPs Key Information Document (KID) (Link). Additional Q&As have been inserted covering, amongst other things, performance scenarios and costs.
Council of the EU publishes proposed EU PRIIPs Regulation amendments
On 17 December 2021, the Council of the EU published a revised version of the proposed amendment to the EU PRIIPs Regulation (Link), which extended the transitional arrangements for a number of asset managers such as management companies, investment companies and persons advising on, or selling, units of UCITS and non-UCITS. The proposed related amendment to the EU UCITS Directive regarding the use of KIDs by management companies was also revised.
Delegated Regulation amending PRIIPs KID RTS published in Official Journal
On 20 December 2021, Commission Delegated Regulation (EU) 2021/2268 amending the regulatory technical standards (RTS) in Commission Delegated Regulation 2017/653 (PRIIPs KID Delegated Regulation) was published in the Official Journal of the European Union (Link).
EU BMR
ESMA updates Q&A for EU BMR
On 19 November 2021, ESMA updated its Q&A document covering the EU Benchmarks Regulation (Link). The updates relate to (i) ESG disclosure requirements in the benchmark statement and (ii) the terminology of “taking into account ESG factors” and “pursuing ESG objectives”.
UK
UK Prospectus Regulation
HMT publishes summary of responses to its consultation on the UK prospectus regime
On 16 December 2021, HM Treasury (HMT) published a summary of the feedback received on its Consultation launched in July 2021, which requested views on proposals to reform the UK prospectus regime (Link).
The consultation was launched in response to Lord Hill’s recommendations in his UK Listing Review Report, which was driven by the UK’s departure from the EU. The government agreed to take forward all of Lord Hill’s recommendations directed to HMT, including the launch of a fundamental review of the UK’s prospectus regime.
Please refer to our client note for further details on HMT's summary of responses (Link).
UK PRIIPs Regulation
FCA delays implementation of changes to UK PRIIPs RTS
On 1 November 2021, the FCA indicated a delay in publication of the Policy Statement that will set out the scope of rules and changes to the UK PRIIPs RTS (Link). This will now be published in Q1 2022.
As a result, changes to UK PRIIPS KIDs are no longer required from 1 January 2022.
The FCA had intended its UK PRIIPs regime to apply from 1 January 2022, however it now feels that it requires more time to “consider further the implementation date of the new requirements”. This is due to the feedback received from the industry on the short timing of the intended implementation date.
The Policy Statement, which is now due to be published in Q1 2022, will contain the final rules and confirm the date from which they will take effect, outlining the implementation period.
France
Update to marketing of complex structured products
On 9 December 2021, certain ESG factors in the AMF Position No 2010 relating to the marketing of complex structured products were updated (Link).
AMF Position No 2010 established four criteria used by the AMF to evaluate the risk of mis-marketing of complex structured products. If any one of the criteria was met by the relevant product, the marketing materials would have to include a warning stating that the AMF views the relevant product as too complex to be distributed to non-professional investors.
The four criteria are:
poor presentation of the product’s risks and pay-out profile;
retail clients’ lack of familiarity with the financial instrument due to the underlying product(s) used;
a payout profile that depends on a number of conditions across at least two asset classes being satisfied at the same time; and
number of mechanisms included in the formula for calculating the financial instrument’s gain or loss.
Following the update, the first criteria (risk of poor presentation) can now arise from a disproportionate emphasis on the ESG theme compared to the specific characteristics of the product. This risk is potentially greater where the product is linked to an index involving a sustainability theme in its construction, but whose funds raised during the marketing of the product were not directly intended to finance projects related to such theme. Consequently, the presentation of the information relating to ESG should not allow any ambiguity in relation to how the funds will be allocated.
Regarding the fourth criteria (number of mechanisms included in the formula), where the formula of a structured product was based on an index, the use of ESG themed filters to select or rebalance the components of the index was previously not considered as an additional complexity mechanism only if (i) the index was constructed within a universe representative of one or more ESG themes, (ii) the ESG assessment used for the ESG themes was established by an independent and recognised entity, and (iii) the ESG themed filters corresponded to simple operations of “selection”, “exclusion” and/or “weighting” of the components of the index or to any combination of these operations so long as they were not excessive.
Following the update, the index need only qualify as a Climate Transition Benchmark or a Paris-Aligned Benchmark to avoid being considered as an additional complexity mechanism under the fourth criteria. The three conditions mentioned above do not need to be accounted for unless the index is deemed to be neither a Climate Transition Benchmark nor a Paris-Aligned Benchmark.
In addition to the four criteria, distributors of complex structured products were also required to verify that the “sole” purpose of the product was not to allow the indirect marketing of an underlying product which could not be offered directly to retail investors. Following the update, the adjective “sole” has been replaced by “main”, meaning that this requirement would apply in relation to many more structured products.
LIBOR transition
FCA publishes final notices on synthetic LIBOR
Following 31 December 2021, the FCA published the following final notices in connection with the ongoing availability of synthetic LIBOR:
Notice of permitted legacy use by supervised entities (Article 23C UK Benchmarks Regulation) (Link)
Notice of requirements (Article 23D UK Benchmarks Regulation) (Link)
Notice of modifications (Annex 4 UK Benchmarks Regulation) (Link)
Additional notice of proposed modifications (Annex 4 UK Benchmarks Regulation) (Link)
From 1 January 2022, the modified UK Benchmarks Regulation and the Relevant BMR Delegated Regulations applied to Article 23A LIBOR benchmarks Sterling LIBOR (with one, three and six month tenors) and Yen LIBOR (with one month, three month and six month tenors), which are now published on the basis of a changed methodology, referred to as “synthetic LIBOR”.
Critical Benchmarks (References and Administrators’ Liability) Act
On 17 November 2021, HMT published updated explanatory notes in relation to the Critical Benchmarks (References and Administrators’ Liability) Bill (Link). The explanatory notes have not been endorsed by Parliament but they provide useful assistance in clarifying the application of synthetic LIBOR to contracts which were not transitioned before the end of 2021.
The Bill, which amongst other things is intended to provide for contractual continuity in respect of legacy contracts referencing LIBOR, received Royal Assent on 15 December 2021 and is now in effect as the Critical Benchmarks (References and Administrators’ Liability) Act 2021 (Link).
ARRC releases fallback recommendations for one-week and two-month LIBOR contracts
On 3 December 2021, the ARRC published a statement containing the selected and recommended forms of the Secured Overnight Financing Rate (SOFR), with associated spread adjustments and conforming changes, to replace references to one-week and two-month USD LIBOR (Link). Only LIBOR-based contracts which are affected by the New York and Alabama State LIBOR Legislation (State LIBOR Legislation) are affected by the recommendations. The ARRC and State LIBOR Legislation both recommend SOFR as an alternative rate to USD LIBOR.
European Commission to designate statutory replacement rates for GBP/JPY LIBOR
On 22 December, the European Commission (EC) announced it would, in Q1 2022, issue implementing acts to designate replacement rates for certain GBP LIBOR (Link) and certain JPY LIBOR (Link) tenors. The designated replacement rates would operate in conjunction with the statutory replacement benchmark provisions under the EU Benchmarks Regulation, as amended.
The announcement follows a formal request for designation of statutory replacement rates from the Euro Risk Free Rate Working Group (Link).
The EC is expected to collect feedback on the two draft Implementing Acts before they are adopted.
ISDA/ICMA and other trade associations
ISDA publishes GBP ISR, USD ISR and JPY TSR fallbacks amendment agreement
On 10 November 2021, the International Swaps and Derivatives Association (ISDA) published its second ‘Form of Amendment’ to allow parties to amend one or more existing confirmations to incorporate the GBP LIBOR ICE Swap Rate (ISR) Fallback Provisions, the USD ISR Fallback Provisions and/or the JPY LIBOR Tokyo Swap Rate (TSR) Fallback Provisions (Link). These provisions respectively introduce fallbacks in the 2006 ISDA definitions where there are references to the GBP ISR, USD ISR and/or the JPY TSR.
ICMA amends its Primary Market Handbook
On 19 November 2021, the International Capital Market Association (ICMA) updated its Primary Market Handbook to reflect the end of the Brexit transition period on 31 December 2020 (Link). The updates included amendments to selling restrictions and legends under the EU PRIIPS and EU Prospectus Regulations (Link).
The post-Brexit amendments to appendix A7, ECP documentation for investment grade issuers, and appendix A8, final terms and pricing supplement will be published at a later date.
ESG
FCA Discussion Paper DP21/4 Sustainability Disclosure Requirements (SDR) and investment labels
On 3 November 2021, the FCA published a discussion paper outlining its plans for Sustainability Disclosure Requirements (SDR). These requirements would affect corporates, asset managers and products, as well as introduce a sustainable investment categorisation and labelling scheme for retail investment products (Link).
European Commission to delay application of SFDR RTS until 2023
On 29 November 2021, the European Commission wrote to the European Parliament and the Council of the EU stating that the regulatory technical standards (RTS) required to effect the Sustainable Finance Disclosure Regulation (EU) 2019/2088 (EU SFDR) will be delayed by another six months to 1 January 2023 (Link).
Commission delegated regulation relating to the EU Taxonomy Regulation published in the Official Journal
On 9 December 2021, the Commission Delegated Regulation (EU) 2021/2139 of 4 June 2021 supplementing the EU Taxonomy Regulation (Regulation (EU) 2020/852) (the EU Taxonomy Delegated Regulation) was published in the Official Journal of the EU (Link).
Applying from 1 January 2022, the EU Taxonomy Delegated Regulation provides technical screening criteria to determine whether an economic activity qualifies as contributing substantially to climate change mitigation or climate change adaptation, and whether an economic activity causes no significant harm to any of the other environmental objectives under Article 9 of the EU Taxonomy Regulation.
Enhancing climate-related disclosures by asset managers, life insurers and FCA-regulated pension providers
On 17 December 2021, the FCA announced a new Environmental, Social and Governance (ESG) sourcebook containing rules and guidance for asset managers and certain FCA-regulated asset owners to make disclosures consistent with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) (Link).
The FCA states that the new rules aim to proportionally increase transparency on how firms are managing climate-related risks and opportunities and enable clients and consumers to make considered choices.
This policy statement will directly affect asset managers, life insurers, non-insurer FCA-regulated pension providers and FCA-regulated pension providers, and will also be of interest to other stakeholders.
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