Structured products legal and regulatory bulletin: Q1 2022

EU

Prospectus Regulation

ICMA and ESMA respond to the European Commission’s consultation on the Listings Act

On 11 February 2022, the International Capital Markets Association (ICMA) responded to the European Commission’s consultation on the Listings Act (Link). While the response stated that many ICMA members would welcome only necessary changes to the EU Prospectus Regulation, it was noted that some more ambitious proposals could be introduced in order to increase flexibility for issuers.

On 15 February 2022, the European Securities and Markets Authority (ESMA) published its response (Link) to the consultation. The response contains ESMA’s comments on adjusting parts of the regulatory framework to facilitate better access to capital for SMEs, as well as making public capital markets more attractive for EU companies, whilst ensuring strong investor protection. ESMA recommended that the Commission awaits the outcome of ESMA’s review on the scrutiny and approval of prospectuses (expected July 2022) and takes into account ESMA’s findings in relation to any potential amendments to be made to the Prospectus Regulation.

CSDR

European Commission proposes changes to EU Central Securities Depositories Regulation (EU CSDR)

On 16 March 2022, the European Commission published proposed changes to the EU CSDR (Link) as part of its Capital Markets Union Action Plan. The Commission has also published a set of FAQs on its review of the CSDR (Link). The proposed changes include amending the process under which mandatory buy-ins could become applicable and amending certain technical aspects of the regime to increase its effectiveness and proportionality.

The Council of the EU and the European Parliament will now consider the proposal.

EU BMR

ESMA Q&As on EU BMR

On 28 January 2022 and 1 April 2022, ESMA updated its Q&As on the EU BMR (Link).

The updates include new commentary on the impact of temporary disruptions in relation to implementation of written plans and the extent to which administrators need to provide information on the ESG factors listed in Delegated Regulation (EU) 2020/1816 where ESG factors are taken into account in a benchmark methodology.

UK

Prospectus Regulation

HMT reports on the outcome of its review of the UK prospectus regime

On 1 March 2022, HM Treasury (HMT) published the outcome of its review of the UK prospectus regime (Link). The overarching change confirmed by HMT is the separation of the two limbs that comprise the existing obligation to prepare a prospectus (i.e. listings on regulated markets and public offers). HMT confirmed that the rules for admission to trading on a regulated market will be replaced, and the Financial Conduct Authority (FCA) will be empowered to decide whether a prospectus is required for such admissions as well as the content and approval requirements. The regime for public offers will also be recast as a general prohibition on public offers, against which there will be a series of exemptions.

The expected changes will be relevant to structured products issuers accessing the UK market or having UK listings. In particular, the HMT paper suggests that public offers in the UK will be prohibited unless an exemption applies. This is a marked change from the current regime, where non-exempt public offers are permitted if an approved prospectus is published. The list of exemptions is expected to be broadened under the new regime, however.

UK PRIIPs Regulation

FCA publishes policy statement on amendments to the UK PRIIPs disclosure regime

On 25 March 2022, the FCA published a policy statement (Link) setting out the final rules for the UK’s version of the PRIIPs regime. After considering feedback from the consultation paper (CP21/23), the FCA set out amendments including:

• Scope: introducing rules setting out certain features of debt securities and indicating whether they are within scope of the UK PRIIPs Regulation.
• “Made available”: introducing guidance to clarify what it means for a PRIIP to be “made available” to retail investors.
• PRIIPs RTS: amending the PRIIPs RTS to replace the requirement for presentation of performance scenarios in the key information document (KID) with a requirement for the provision of narrative information on performance.

The FCA has explained that it is working with HMT to improve the UK PRIIPs disclosure regime in order to ensure that information provided is relevant, easy to analyse and assists consumers in making informed decisions.

The rules came into force on 25 March 2022, with a transition period until 31 December 2022, by which date firms must apply the new requirements.

UK MiFID

HMT publishes response to Wholesale Markets Review consultation

On 1 March 2022, HMT published its response to the Wholesale Markets Review consultation (Link).

HMT considers that the package of reforms set out in the document will create a simpler and less prescriptive regime, while maintaining or improving regulatory outcomes. Amongst other things, it will:

• Simplify the systematic internaliser regime to provide clarity and remove unnecessary regulatory burdens.
• Remove restrictions on firms’ ability to execute transactions to ensure that market participants can achieve the best outcomes for investors.
• Reconfigure the transparency regime for fixed income and derivatives markets so that only appropriate instruments are subject to enhanced transparency requirements, removing unnecessary burdens on firms.
• Reduce the scope of the commodities position limits regime and delegate this to trading venues to ensure market activity is not unnecessarily restricted, while ensuring that markets function efficiently.
• Ensure the FCA can help support the provision of a consolidated tape, which will better enable participants to identify the best available pricing for instruments.

HMT intends to deliver the most important changes as a priority, when parliamentary time allows. Where legislative changes are needed but respondents indicated that fast implementation is not key, HMT will wait until the outcomes of the Future Regulatory Framework (FRF) Review have been implemented to bring them forward. Where changes can be made to parts of the regime that are already set out in regulatory rules and guidance, the FCA has committed to progress these in line with its normal processes. HMT believes this step-by-step approach will ensure the most burdensome and unnecessary regulatory requirements are removed as soon as possible.

UK Consumer Duty

FCA publishes revised proposals for the new consumer duty

On 27 January 2022, the FCA published its revised proposals for the new consumer duty together with responses to feedback from its consultation paper (CP21/13) (Link). The revised proposals impose a higher standard of conduct on firms and include:

• Adopting an overarching consumer principle.
• Outlining the FCA’s expectations for the key elements of the firm-consumer relationship, in relation to products and services, price and value, consumer understanding and consumer support.
• Including cross-cutting rules to help firms interpret these key elements.

The FCA expects to make the new rules by 31 July 2022, with an implementation period starting from the date of publication of the final rules and ending on 30 April 2023, meaning firms have around a year to understand how the consumer duty will apply to them.

Other jurisdictions

Luxembourg

New Luxembourg securitisation legal framework

On 9 February 2022, a new securitisation law was voted on to clarify the existing securitisation legal framework (Link). The Luxembourg Securitisation Law offers an attractive framework for the use of Luxembourg securitisation vehicles, allowing for the securitisation of a broad type of risks and flexibility in relation to structure (availability of different legal forms, compartments, etc.). Some of the major themes of the amendments in the new law include: financing of securitisation vehicles, active management, CSSF supervision, new corporate forms available for securitisation companies, flexibility regarding compartmentalisation, equity financing, subordination waterfalls, flexibility in granting security interests and registration and publication of annual accounts at the Luxembourg Business Register.

LIBOR

LIBOR transition

ESMA publishes Working Group on Euro Risk-Free Rates work programme for 2022/23

On 3 March 2022, ESMA published the work programme of the Working Group on Euro Risk-Free Rates for 2022/23 (Link). Building on the recommendations already developed by the Working Group, it will focus on:

• Fostering the use of €STR in a diverse range of financial products.
• Assessing the implementation and any potential impediments to the adoption of EURIBOR fallback provisions by supervised entities.
• Identifying issues related to the discontinuation of LIBOR in the EU.
• Coordinating on cross-currency issues with other Working Groups.
• Informing, raising awareness and educating users about interest rate reforms in the EU.

USD LIBOR

Consolidated Appropriations Act signed into law in relation to USD LIBOR transition

On 15 March 2022, the Consolidated Appropriations Act, 2022 (Link) was signed into law. The legislation makes provision for replacement of key USD LIBOR tenors as reference rates under contracts governed by US law to the extent that they do not contain suitable fallbacks and have not otherwise been amended. It also provides a safe harbour for lenders electing to apply SOFR in contracts where there is discretion to select a successor rate. As the legislation applies to US law contracts, it builds on similar legislation that has already been enacted at state level.

ISDA/ICMA and other trade associations

ICMA and ESMA raise concerns about amendments to the proposed Regulation on European green bonds

On 5 January 2022, ICMA published analysis of the amendments to the Regulation on European Green Bonds (EuGB Regulation) proposed by the Rapporteur of the EU Parliament. In the response (Link), ICMA stated that the proposed amendments reflect a fundamental shift from the European Commission’s proposal. The suggested amendments add new requirements for bonds aligned with the EuGB Regulation and propose that it become mandatory for all green bonds between 2025 and 2028. Through these amendments, ICMA states that the aim is to regulate the entire European sustainable bond market via the EuGB Regulation and introduce comprehensive mandatory requirements for all sustainable bonds and their issuers.

In ICMA’s view, the amendments would lead to an unsustainable level of additional cost and liability for issuers, which would hinder the uptake of the label, as well as undermine the inclusive, voluntary and aspirational nature of the European sustainable bond market.

On 24 January 2022, ESMA published a letter sent to the Council of the European Union and the European Parliament’s Committee on Economic and Monetary Affairs (Link) setting out its observations on the EuGB Regulation. ESMA welcomes the Commission’s proposal on the grounds that harmonised standards on green bonds will be a key element of the sustainable finance agenda and will contribute to channelling investment into more sustainable activities. However, ESMA sets out some possible challenges with the proposal, focussed in particular around the timing of the implementing measures, the functioning of the third-country regimes, and the appropriateness of the resourcing and funding model provided for ESMA’s supervision.

ICMA publishes FAQs and best practice recommendations for EU CSDR penalty regimes

On 1 February 2022, ICMA published a list of FAQs and best practice recommendations with the intention of supporting the implementation of the EU Central Securities Depositories Regulation (EU CSDR) penalty regimes for the bond and repo markets (Link). The FAQs and best practice recommendations cover a range of issues, including scope, invoicing, billing, restitution as well as the confirmation and allocation process under Article 6 of CSDR.

ICMA updates its Primary Market Handbook

On 2 March 2022, ICMA published amendments to its Primary Market Handbook (Link). The changes include amendments to pro forma final terms and pricing supplements to cater for floating rates referencing the 2021 ISDA Definitions and to remove references to LIBOR, amongst other things.

ESG

ESMA publishes implementation timeline for EU sustainable finance legislation

On 21 February 2022, ESMA published an implementation timeline for the Sustainable Finance Disclosures Regulation (SFDR), the Taxonomy Regulation (TR) and various other sustainability-linked legislation (Link). The timeline covers the period to 2026.

European Commission publishes study on feasibility of ESG benchmark label

On 4 March 2022, the European Commission published details of its study on the feasibility, minimum standards and transparency requirements on an EU ESG benchmark label (Link). The study will provide a view on the existing ESG-related benchmarks market, aiming to highlight shortfalls and best practices. Through this, the European Commission hopes to be informed of the possible features for a new EU ESG benchmark label which can be used to align investments with long-term sustainability considerations.