Structured products bulletin: Q4 2023

Welcome to our structured products bulletin for Q4, 2023, where we round up key legal and regulatory developments in the structured products space over the previous quarter.

EU

Reforms to the EU Prospectus Regulation (EU Listing Act)

The EU is reforming certain markets regulations through the forthcoming EU Listing Act. The EU Listing Act comprises a package of three legislative proposals, including a regulation that will amend the EU Prospectus Regulation (as well as the Market Abuse Regulation and MiFIR).

The EU Listing Act will amend the EU Prospectus Regulation by introducing targeted reforms intended to provide greater flexibility and reduce issuer burdens (for example, the initial EU Commission proposals remove the requirement to supplement base prospectuses to update annual or interim financial information incorporated by reference), although it does not mark a radical departure from the existing regime.

In October 2023, the EU Parliament’s Commission for Economic Policy (ECON) committee agreed on the three legislative proposals. This follows the EU Council finalising its negotiating mandate in June 2023.
The legislative proposals relating to the EU Listing Act will continue to be negotiated amongst the EU institutions, so may change before they are finalised. The precise timing for its entry into force is unknown, and may be subject to delays if not finalised before the end of the current legislative cycle (June 2024).

Benchmarks Regulation Update

On 23 October 2023, Commission Delegated Regulation (EU) 2023/2222 was published in the Official Journal. The regulation extends the transitional period for the use of third-country benchmarks under the Benchmarks Regulation to 31 December 2025 (from 31 December 2023).

On 20 December 2023, the EU Council issued a press release stating that it has reached a consensus on its position for the proposed amendments to the Benchmarks Regulation.

Detailed in a Council note dated 15 December 2023, the mandate outlines a tailored approach for commodity benchmarks and specifies which benchmarks fall under the regulation, including critical, significant, EU Paris-aligned, EU climate transition, and certain commodity benchmarks.

The proposal seeks to ease regulations for non-critical EU benchmark administrators by excluding them from current rules and narrowing the range of administrators it covers, while also streamlining the treatment of non-EU benchmarks.

EU Green Bond Regulation

On 30 November 2023, the European Union has issued Regulation (EU) 2023/2631 on European Green Bonds, which has been made available in the Official Journal.

This regulation sets consistent criteria for bond issuers who want to label their environmentally sustainable bonds with the 'EuGB' designation, ensuring they align with the EU taxonomy. It includes specific disclosure requirements presented in standardised templates, which can also be adopted by issuers of bonds that do not fully meet the EuGB standard, but aim to demonstrate their commitment to environmental sustainability.

Additionally, the regulation introduces a registration and oversight system for independent evaluators of these green bonds. Until the EU taxonomy is fully operational, issuers must allocate at least 85% of the proceeds from a EuGB to activities consistent with the EU Taxonomy Regulation. The remaining 15% may be directed towards other activities, as long as the issuer transparently details the use of these funds.

Regulation (EU) 2023/2631:

• Introduces consistent standards for bond issuers seeking to label their offerings as "European green bond" or "EuGB."

• Creates a system for registering and overseeing external evaluators of these bonds.

• Offers optional templates for disclosing information on bonds promoted as environmentally friendly or linked to sustainability within the EU, aiming to deter deceptive environmental claims in the green bond market.

Issuers should pay close attention to this standard, which requires rigorous third-party validation and can enhance the trustworthiness of bonds, appealing to investors who seek clear and authentic green credentials.

Regulation (EU) 2023/2631 enters into force on the 20th day following that of its publication in the Official Journal and applies from 21 December 2024. However, by way of derogation, certain provisions apply from 20 December 2023 and others from 21 June 2026.

ESMA launches Common Supervisory Action on ESG disclosures under the Benchmarks Regulation

On 13 December 2023, ESMA initiated a Common Supervisory Action (CSA) with Member State competent authorities to review ESG disclosures under the Benchmarks Regulation (BMR).

Scheduled to run through 2024 and into Q1 of 2025, the CSA targets EU and third-country benchmark administrators who have secured authorisation, registration, recognition, or endorsement under the BMR.

ESMA's initiative promotes consistent supervision of ESG disclosures in the EU, aiming to enhance benchmark information comparability, transparency, and investor protection, while also addressing greenwashing in line with its strategic goals for a reliable ESG market.

This represents ESMA's first effort as a direct supervisor of benchmark administrators.

Council of the EU adopts mandate for EU EMIR review negotiations

The EU Council has approved its mandate on 6 December 2023 to negotiate with the European Parliament on revising the European Market Infrastructure Regulation (EMIR) and its associated directive that lays down rules on over-the-counter (OTC) derivatives, central counterparties (CCPs) and trade repositories.

The Council's press release outlined that the review aims to enhance EU clearing services by simplifying processes, ensuring regulatory coherence, bolstering supervision of central counterparties, and mandating that market participants clear certain systemically important products through EU CCPs as identified by ESMA.

ESAs update Q&As on the PRIIPs KID

On 5 December 2023, the European Supervisory Authorities released a revised version of their Q&As on the PRIIPs Key Information Document. The updated Q&As include, incorporating one new question into section I and III A, three additional questions into section VI, and one new question into each of sections X and XI.

• Section I: ESMA advises that for products with both single and regular premium options, it's non-compliant to include separate risk, performance, and cost details for each payment type in one KID; separate KIDs are required for each.

• Section III A: ESMA clarifies that a PRIIP's category is based solely on the linearity of its returns.

• Section VI: ESMA has clarified that for life annuities, only guaranteed amounts should be included in the minimum investment return scenario. Monthly data is required for performance scenario calculations, even if more frequent data is available. ESMA addressed a potential contradiction by confirming that benchmarks can be used for performance scenario calculations, and the PRIIP's category for the Summary Risk Indicator (SRI) should be determined using historical prices if available.

• Section X: ESMA considers whether manufacturers of insurance-based investment products may reference KIDs created by fund managers instead of creating Specific Information Documents  (SIDs) for their Multi-option Products (MOPs).

• Section XI: ESMA considers whether the manufacturer of a PRIIP can be an entity delegated with portfolio management or other functions by the fund, its ManCo, or AIFM.

See also the recently published article by Simmons, 'ESMA has updated its PRIIPs KID Q&As document'.

EMMI consults on proposed changes to the EURIBOR methodology

On 11 October 2023, the European Money Markets Institute (EMMI) sought feedback on a paper to refine the EURIBOR methodology. The changes aim to expand the panel and ensure benchmark integrity.

Principal changes include:

• Modifying Level 2.3 by implementing several adjustments, notably broadening the base for its calculation and altering the Market Adjustment Factor (MAF) to more accurately represent shifts in interest rates and perceived credit risks.

• Eliminating Level 3: The restructured Level 2.3 and its intended attributes would render Level 3 obsolete.

This would considerably reduce the operational and financial demands on EURIBOR Panel Banks, potentially allowing for the expansion of the EURIBOR Panel without compromising the benchmark's dependability and essential qualities.

Feedback closed on 11 December 2023, with a summary expected by February 2024.

ESMA to conduct common supervisory action on MiFID II sustainability requirements

In 2024, the ESMA will partner with National Competent Authorities (NCAs) to assess how firms have integrated sustainability into their product assessments and governance which were implemented in 2022 subsequent to changes made to the MiFID II Delegated Acts.

This coordinated supervisory action began following ESMA's recent revision of guidelines on suitability and product governance, both of which entered into application 3 October 2023.

ESMA believes this collaboration and best practice sharing will standardise EU rule application and bolster investor safeguards.

UK

UK Prospectus Regulation / Public Offers and Admissions to Trading Regulations 2023

On 28 November 2023, the Government submitted a revised version of The Public Offers and Admissions to Trading Regulations 2023 (POAT Regulations) to Parliament, together with a draft explanatory memorandum, which will define the UK's approach to regulating public securities offerings if they are passed into law.

This new approach is intended to take over from the UK's current system for offering securities once the existing UK Prospectus Regulation, which is based on EU rules, is repealed.

The POAT Regulations will be followed by a detailed set of FCA rules concerning the obligation to produce a prospectus and its contents, aligning with the FSMA model of regulation and marking a departure from the EU system of regulation.

A near-complete version of these regulations was shared by the Government in July 2023.

The new version presented to Parliament remains largely unchanged, except for some adjustments regarding the rule-making authority of the Financial Conduct Authority including the following:

• FCA rules relating to admissions to trading on primary MTF.
• Waiver or modification of the FCA's designated activity rules (DAR).
• Procedure and right to refer to tribunal.
• Transitional and saving provisions.

The aim is to develop a regulatory framework that is streamlined, adaptable, and more closely aligned with the unique requirements of the UK's financial markets.

POAT Regulations are expected to be enacted in Q1 2024.

FCA Engagement feedback on the new Public Offers and Admissions to Trading regime

On the 12 December 2023, the FCA published the engagement feedback to its six engagement papers concerning the upcoming changes to the Public Offers and Admissions to Trading regime designed to take the place of the UK Prospectus Regulation.

During consultations, the FCA involved various stakeholders, including capital market participants, legal and accounting advisors, independent panels like the Listing Authority Advisory Panel and the Financial Services Consumer Panel. The UKSPA's working group on the Public Offers and Admissions to Trading regime submitted a written response to the FCA on 29 September 2023. The FCA may engage further and plans to consult on the proposals in summer 2024.

Of the four initial engagement papers published in May 2023, two were particularly relevant to the Structured Products community:

Engagement Paper 1: Admission to trading on a regulated market

The FCA presented its thoughts on potential changes to the regulations for issuers looking to list securities on a regulated exchange.

14 of the 21 respondents favoured initially mandating a prospectus for listing securities on regulated markets and maintaining most existing prospectus obligations. These respondents concurred on pursuing specific enhancements to the current framework.

4 respondents raised issues regarding overlapping obligations and inconsistencies between the prospectus regime and other disclosure mandates.

7 respondents favour keeping the existing exemptions to the obligation of publishing a prospectus.

Generally, respondents support maintaining the current prospectus exemption when an exemption document is produced during a takeover.

The FCA received varied opinions regarding the prospectus contents, but noted that there is a consensus for gradual modifications to the current framework.

Engagement Paper 4: Non-equity securities

In the context of wholesale debt capital markets, the UK prospectus regime is generally considered effective, with 19/20 respondents favouring the maintenance of current exemptions.

The FCA noted a call for broadening the exemption for non-equity securities guaranteed by sovereigns.

The idea of incorporating financial information by reference is supported, though its benefit is debated. Some oppose extending the validity period of non-equity prospectuses beyond 12 months. Additionally, there is a call for greater flexibility relating to supplements to prospectuses, aimed at further improving the efficiency of wholesale debt capital markets and the effectiveness of debt programmes.

There was complete consensus (except for one respondent) to remove dual disclosure standards for retail and wholesale non-equity securities, with a preference for adopting the wholesale standard on the proposal. One respondent calls for consumer testing before any changes to retail disclosures.

The FCA's proposals are expected to be subject to a formal consultation in the summer of 2024. The proposals will take account of the feedback received from the engagement papers published in 2023, as summarised in the engagement feedback published on 12 December 2023.

The FCA will seek to make final rules in the first half of 2025, pending consultation feedback and approval.

UK Government announces response to its consultation on financial promotion exemptions

The UK government has released a draft of the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) (No 2) Order 2023, which includes several key changes aimed at updating the finance promotions exemption framework contained in the Financial Services and Markets Act 2000.

The draft addresses HM Treasury's response to the consultation on exemptions for high net worth individuals (HNW) and sophisticated investors.

Proposed amendments to investor exemptions include:

• raising the financial thresholds for HNW individual exemptions, an income of at least £170,000 in the last financial year or net assets of at least £430,000 throughout the last financial year are required to qualify.

• revising the criteria for self-certified sophisticated investor exemptions.

• requiring that businesses include their details in any communications that make use of these exemptions.

• updating the title of the HNW individual exemption by removing "certified," and the statements for HNW individuals and self-certified sophisticated investors will be refreshed.

These updates will also be applied to the corresponding exemptions in the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001 (SI 2001/1060).

Additionally, the draft Regulations correct an oversight in the Financial Services and Markets Act 2000 regarding the financial promotions gateway, clarifying that approved communications can be shared by unauthorised persons.

The exemption amendments will increase the financial criteria for investor eligibility, tighten the qualifications to prevent retail investors from mistakenly qualifying, and mandate more comprehensive declarations for exemption claims.

The changes are set to be implemented on January 31 2024 with the Financial Conduct Authority expected to provide further on rule changes.

HM Treasury extends the transitional period for third-country benchmarks in the UK

HMT has released a policy paper stating it will lay a statutory instrument to prolong the interim phase for the third-country benchmarks framework under the UK Benchmarks Regulation.

This regulation requires that non-UK benchmark administrators obtain approval to operate in the UK after the transition. There is a potential for a reduced range of benchmarks in the UK if administrators opt not to seek approval, possibly due to inadequate economic incentives.

Extending this policy aims to ensure that UK businesses retain access to essential benchmarks, which are necessary for their ongoing operations and the country's economic stability.

The extension shifts the end of the transitional period from 31 December 2025 to 31 December 2030, and was intended to become effective from 1 January 2024.

ISDA / ICMA

ISDA plans to update FX Definitions

On 1 November 2023, ISDA announced its intention to update the 1998 FX and Currency Option Definitions and accompanying materials. This decision was influenced by a survey conducted by ISDA to determine the necessity and potential enhancements, in light of market evolution since their inception.

ISDA anticipates completing the revised FX Definitions by November 2025 and plans to present them to SWIFT in May 2026. The implementation of the new FX Definitions is expected to take place in November 2027.

ISDA Launches Independent Review of DC Process

On 14 December 2023, ISDA initiated an independent review to evaluate and potentially enhance the governance and structure of the Credit Derivatives Determinations Committees (DCs).

The assessment will gather input from market participants and other stakeholders to inform a report, which will be published on ISDA's website for a market-wide consultation in 2024.

The aim is to ensure the DCs remain a robust, centralised, and transparent system for resolving credit events crucial for the central clearing of credit default swaps. ISDA will consider implementing changes based on the consultation's findings and feedback.

ICMA updates Primary Market Handbook

On 18 December 2023, the International Capital Market Association (ICMA) published amendments to its Primary Market Handbook. Amongst other things, the changes include amendments to the selling restrictions in Singapore.