UKSPA Bulletin: Q1 2024

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.

On 1st February, the Council and the European Parliament reached a provisional agreement on the Listing Act, which is designed to encourage small and medium-sized enterprises (SMEs) to obtain and maintain listings on EU public markets and allow companies to better diversify and complement currently available sources of funding. The Council and the European Parliament will formally adopt the texts once they are approved by the EU Member States and the Parliament.

ESMA launches common supervisory action with NCAs on MiFID II pre-trade controls

On 11 January 2024, ESMA in collaboration with the National Competent Authorities, launched a Common Supervisory Action (CSA) to evaluate how investment firms employing algorithmic trading techniques are implementing pre-trade controls (PTCs).

PTCs are mechanisms used by investments firms to conduct checks at the point of order entry, with the aim of mitigating the risk of sending erroneous orders to trading venues. The CSA is intended to provide ESMA and NCAs with a more comprehensive understanding of PTC usage across the European Union.

EU CSDR Refit Regulation

On 16 January, the Regulation amending the Central Securities Depositories Regulation (909/2014) (CSDR) (2023/2845) (CSDR Refit) came into force and became directly applicable to all EU member states.

The Regulation is designed to reduce the financial and regulatory burden on central securities depositories (CSDs) and improve their cross-border operational capabilities, while also strengthening financial stability. It includes provisions which will enable simpler passporting, improved supervision and settlement efficiency.

ESMA publications

The following reports were published by ESMA at the end of January:
i. The Trends, Risks and Vulnerabilities (TRV) report, setting out the key risk drivers and structural developments facing financial markets. Greenwashing and related malpractices are among ESMA’s highlighted risk drivers as they undermines the credibility of green finance. With the first outflows of ESG funds in 2023, future incidences, unless prevented effectively, may undermine investor confidence. ESMA warns a further key risk driver stems from social media driven investments by retail investors.

ii. a report on the cross border provision of services and the handling of passport applications from 2020 to 2022. The report highlights a general stability in the landscape of European Economic Area (EEA) central securities depositories (CSDs), distinguishing between international CSDs and other EEA CSDs. It also uncovers a diversity in strategies towards cross-border integration. The report identifies regulatory and market factors, notably the connection to TARGET2-Securities (T2S), as the primary drivers of the development of cross-border services.

Green Bond development

The digital green bonds issued by the Government of the Hong Kong Special Administrative Region of the People’s Republic of China (the HKSAR Government) on 7 February 2024 marks the first adoption of ICMA’s Bond Data Taxonomy (BDT) by a sovereign, supranational and agency (SSA) issuer. This is also a first for a green bond.

ICMA’s BDT is a standardised, machine-readable language that encapsulates key economic attributes of a bond, such as amounts, currency, maturity, interest, pricing and settlement dates. It also includes information typically found in a term sheet, such as governing law, involved parties, ratings, and selling restrictions. Where applicable, the BDT integrates existing ISO data definitions and formats.

The adoption by the HKSAR Government of the BDT paves the way for streamlining operational processes where bond information is stored and exchanged between different parties not only at the point of issuance but throughout the entire lifecycle of the bond.

ICMA and the Platform on Sustainable Finance publish reports on transition finance

On February 2024, ICMA published a paper on transition finance in the debt capital markets. The paper highlights the challenges of financing transition for fossil fuel sectors and hard-to-abate industries and proposes solutions for these industries.

The Platform on Sustainable Finance, an advisory body to the European Commission, has also published a report illustrating how the EU taxonomy, the European Green Bond Standard and other sustainable finance tools are helping industries to transition to a net zero emission.

Development of the ESG Ratings Regulation

The ESG Ratings Regulation is central to the EU’s sustainability landscape, as it aims to strengthen the quality and reliability of ESG ratings. As the market for sustainability-related financial products continues to grow, these ratings are increasingly becoming a key reference point.

In February, the Council and the European Parliament reached a provisional agreement on the ESG Ratings Regulation. The agreed text significantly differs from the Commission initial’s proposal.

The Council and the European Parliament have clarified the scope of the ESG Ratings Regulation, defined its key terms and made substantial changes to the originally proposed exemptions. New transparency, disclosure and organisational requirements have been introduced. Furthermore the concept of ‘operating in the Union´ has been clarified and an amendment has been incorporated to the EU SFDR regarding the use of ESG ratings in marketing communications.

MiFID II: ESMA publishes statement on reporting requirements under RTS 28

On 13 February, ESMA issued a public statement providing market participants with clarity concerning their reporting requirements under RTS 28, pending full application of the new rules under MiFID II. The reporting requirements under RTS 28 are designed to increase transparency over the execution of client orders on trading venues. To adhere to RTS 28, investment firms that execute client orders have been required to summarise and publish the top five execution venues in terms of trading volumes where they executed client orders in the preceding year, as well as information on the quality of execution obtained.

Under the new MiFID II/MiFIR framework, investment firms will no longer be required to annually report detailed information on trading venues and execution quality through RTS 28 reports. However, after the date of entry into force of the new directive amending MiFID II, Member States will have 18 months to transpose it into national law. Consequently, despite the removal of the RTS 28 reporting obligation, investment firms may still need to make public these reports in 2024 and until the date of transposition of the directive in the respective Member State.

The public statement sets out that ESMA does not expect NCAs to prioritise supervisory actions towards investment firms relating to the periodic RTS 28 reporting obligation. However, ESMA stresses the importance of the best execution requirements under both the current and the reviewed MiFID II framework. So, apart from the content of the public statement, investment firms are required to strictly adhere to best execution requirements and NCAs are expected to supervise their compliance.

ESMA withdraws Euronext’s DRSP authorisation at firms’ request

On 14 February, ESMA has withdrawn the authorisation of Euronext Paris SA (Euronext) as a data reporting service provider (DRSP) under MiFIR, following the notification by Euronext of its intention to renounce its authorisation under the conditions set out in Article 27e(a) of MiFIR.

All Euronext clients have switched to other authorised DRSPs of their choice or started to report transactions directly to national competent authorities.

MiFID II/EU MiFIR review: Council adopts new trading rules to enhance market data transparency

On 20 February, the Council adopted amendments to MiFIR and MiFID II to enhance market data transparency.

The changes will establish EU-level 'consolidated tapes', centralised data feeds that aggregate market data from various trading platforms, providing investors with real-time transaction information across the EU. The new rules also impose a general ban on 'payment for order flow' (PFOF), a practice where brokers receive payments for directing client orders to specific trading platforms, although exemptions apply until 30 June 2026. New regulations on commodity derivatives are also introduced.

The member states have until September 2025 to comply with the directive.

Benchmarks

On 4^th^ March, the European Parliament's Economic and Monetary Affairs Committee (ECON) published a report on the proposed amendments to the Benchmarks Regulation (BMR).

Regulation update

The new rules aim to apply to critical, significant, EU climate transition, EU Paris-aligned, and certain commodity benchmarks. ECON intends to retain the current threshold of a total average value of at least 50 billion euro to define a significant benchmark. The committee also plans for ESMA to have a supervisory role over these benchmarks. The transition to new rules will allow previously supervised benchmark administrators to keep their existing registration or equivalent status for nine months after the new rules come into effect.

However, the European Fund and Asset Management Association (EFAMA) has expressed concerns that the proposed revisions could harm the EU sustainable finance regime and create transparency gaps. EFAMA is advocating for the retention of a minimum level of transparency for all benchmarks, as is the case in the existing rules.

ECON expect that the negotiation between the Parliament and Council will take place after the Parliamentary elections in June 2024.

UK

Public Offers and Admissions to Trading Regulations 2024

The Public Offers and Admissions to Trading Regulations 2024 was published on 31 January. This statutory instrument, which is part of HM Treasury's to deliver a Smarter Regulatory Framework for financial services, supersedes the Prospectus Regulation and creates a new framework for the offering of securities to the public and the admission of securities to trading in the UK.

The new regulations simplify the process for companies, particularly SMEs, to raise capital on public markets by reducing the complexity and cost of producing a prospectus. The regulations also introduce a new "retail wrapper" requirement for offerings to retail investors, which provides key information in a concise, easy-to-understand format. Furthermore, the regulations establish the UK Listing Authority as the single competent authority for prospectus approval, streamlining the approval process.

It is anticipated that a consultation paper on the regulations will be released by the FCA this summer. Subsequent to the consultation paper, the regulations are projected to be fully functional by 2025.

UK and Switzerland sign financial services agreement

On 21 December 2023, the UK and Switzerland signed the Berne Financial Services Agreement, under which the two countries will mutually recognise each other's domestic laws and regulations in the financial sector.

The agreement aims to facilitate seamless cross-border financial operations in areas such as asset management, banking and investment services. For certain sectors it means that a firm based in the UK will be able to serve clients in Switzerland while largely following UK rules, and vice versa.

FCA’s director of market oversight discusses next steps for UK Listings Review

On 16 January, the FCA published a speech by its director of market oversight, Clare Cole, on the progress of the UK Listings Review and the forthcoming steps for reform. Cole highlighted that the FCA's proposed modifications represent the most wide-ranging reforms to the UK's capital markets in over thirty years, aimed at attracting top-tier companies and ensuring investors access to necessary information. Concurrently, the FCA is working on enhancing the National Storage Mechanism, the FCA's online repository of 3.9 million regulatory information items, to improve its user-friendliness and assist investors in making informed decisions

FCA publishes Primary Market Bulletin 47

On 26 January, The FCA published the 47th edition of the Primary Market Bulletin (PMB). The points covered are as followed:

i. UK Short Selling Regulations consultation: the government proposal for the FCA to retain emergency intervention powers on short selling requires further consultation.

ii. Changes to the notification threshold for the reporting of net short positions in shares to the FCA. Since 5 February, per the Short Selling (Notification Threshold) Regulations 2023, the threshold has moved from 0.1% to 0.2% of total issued share capital of an issuer.

iii. the Credit Rating Agency UK Market Share Report for 2022, highlighting that a 90% market share remains among the three global Credit Rating Agencies (CRA). The bulletin contains a reminder that issuers intending to appoint more than 1 CRA for the credit rating of the same issuance or entity should give consideration to appointing at least one CRA with no more than 10% of total market share.

Data Reporting Services Regulations 2024

The [Data Reporting Services Regulations 2024 (https://www.legislation.gov.uk/uksi/2024/107/pdfs/uksi_20240107_en.pdf) was published on 31 January. This statutory instrument, which is part of HM Treasury's programme to deliver a Smarter Regulatory Framework for financial services, sets the regulatory perimeter of the U.K.'s regime for Data Reporting Services Providers (commercial entities that allow investment firms to fulfil their regulatory reporting obligations). It also sets out the authorisation regime for providing a data reporting service, and restate the FCA's supervisory and enforcement powers.

Taylor v Bank of Scotland Plc: judgment on hedging agreements’ misrep

In the case of Mark William Taylor & Anor v Bank of Scotland Plc [2023] EWHC 3185 (Ch), the claimants alleged that the Bank of Scotland made misrepresentations about LIBOR rates and the necessity of hedging for a loan facility. The High Court, in its judgement on 19 December 2023, examined these claims in the context of interest rate hedging products. The court decided that the claims related to LIBOR misrepresentations required further consideration and did not warrant summary judgement. However, for the hedging requirement representations claim, the court found no prospect of success due to evidence that refuted the claimants' assertions.

This case sets a precedent for future misrepresentation disputes in the financial sector, underscoring the need for claimants to establish a realistic prospect of success and meet the objective standards for reasonable diligence in fraud discovery.

ISDA / ICMA

ICMA publishes Q1 2024 report on market practice and regulatory policy

ICMA has published an assessment of market practice and regulatory policy for the first quarter (Q1) of 2024.

Technology transformation, the stress and resilience in international capital markets, and the EU Sustainable Finance Disclosure Regulation framework are among other topics discussed in the assessment.

JBATA and ISDA statements on Euroyen TIBOR

On 6 March, the JBA TIBOR Administration (JBATA)'s announced that the calculation and publication of all the Euroyen TIBOR tenors will cease after final publication on 30 December 2024. After this date, fallbacks (i.e. the adjusted risk-free rate plus spread) will automatically occur for outstanding derivatives contracts that incorporate the IBOR Fallbacks Supplement (but adjustments may need to be made to the terms and conditions of structured products issued in the form of securities referencing Euroyen TIBOR).

Further to JBATA's announcement (which was intended to constitute a permanent cessation trigger), ISDA released a statement stating that the fallback spread adjustment published by Bloomberg is fixed for all Euroyen TIBOR settings as of 6 March 2024 (the date of the JBATA announcement).