EU Prospectus and Primary Markets Issuance Conference 2018: key takeaways

Author: Amélie Labbé | Published: 4 Oct 2018
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Prospectus EventOpening remarks: Amanda Thomas, Allen & Overy

  • 'Three amigos’ of financial regulation: Benchmarks Regulation, Priips and Mifid II: EU financial legislation is the gift that keeps on giving;
  • EU regulators aiming for consistency, completeness and comprehensiveness – we aren’t there yet, progress still needs to be made and some aspects of EU legislation are proving troublesome for DCM markets;
  • There is plenty going on before we even get into Brexit.

National regulators’ views on the likely practical impact on issuers of the Prospectus Regulation, CMU and Brexit

  • New Prospectus Regulation aims to 'curb the exuberance of issuers and their lawyers who have tended to put everything into risk factors’. It aims to improve disclosure in the risk factors, since this section of prospectuses has grown exponentially over the years. But there is a conundrum: as a competent authority, what approach do you adopt to review risk factors in order to properly to balance investor protection and issuer flexibility?
  • Some regulators look at outside information (press releases, media and analyst reports etc) to understand the risks associated with issuers and their financial statements, and then enters into a discussion/dialogue with the issuer to understand why something may not have been covered. But other regulators do not generally involve information that is not included in a prospectus during the approval process;
  • Do investors understand the things that are contained in a Priips key information document (KID)? The reduced number of pages means investors should be more inclined to read the document, but do they actually read them? The KID has been based on research as to what information consumers / retail investors understand.
  • Prospectus approval isn’t and shouldn’t be a box-ticking exercise: the result will likely that investors won’t be properly informed. Approval also needs to rely on the context of the proposed issuance;
  • Leakage: it’s unlawful for anyone to sell to retail investors if the issuer can only sell to qualified investors, when it comes to segments on regulated markets that are restricted to qualified investors. On the Mifid II side, there is a strict product governance regime sets out strict conditions for this situation.

What are key regulator concerns for primary market industry participants?

  • Is the Prospectus Regulation meeting the aims of the CMU, notably by offering a broader range of securities while promoting investor protection?
  • It should make it easier to raise funds and open access to more investors but, in practice, the vast majority of DCM issuances (especially benchmark issuances) are placed in primary markets and placed with institutional investors. Products with a high coupon, and complex and structured products aren’t suitable for retail investors;
  • Dilemma: institutional investor base is deep and can absorb funding requests, but the layering up of regulation means it’s not that attractive for issuers to enter the retail market. Pricing between both types of issuers is different too;
  • Securities sold in US are subject to a different, lengthy disclosure regime. It’s interesting that the EU is going the other way so this could be a problem;
  • Is it sensible that the EU Commission has proposed prospectus approval to be centralised with Esma? Conceptually, if the CMU is the aim, there is no other option for a centralised regulator though Esma doesn’t necessarily fit the bill.

Assessing the effect of the latest geopolitical and regulatory developments on regulated markets - views from Ireland, the UK and Luxembourg

  • There has been mixed feedback from issuers on the CMU. Everybody agrees with its goals, but the aim was to reduce the need for bank financing and this has not happened. EU companies continue to over-rely on bank lending: only 14% of lending last year was from capital markets and 86% was from banks;
  • The CMU is failing to reduce costs. To make the market efficient, there needs to be the right balance of regulation to provide investors with the flexibility to invest;
  • It is difficult to answer whether we are on track to complete the CMU. Brexit has not helped speed up decision making. Calls have been received from issuers who are considering leaving the UK because passporting is a concern and they are worried about the possibility of a no deal;
  • Increased regulations are turning issuers away from EU markets. Those entities are going elsewhere and issuers are already admitting that they are looking further down the road. With PD3 on the horizon, more could be deterred from Europe;
  • Stock exchanges are worried about the potential move of certain prospectus approvals to Esma. A level playing field is important, but it doesn’t mean there is support to move the approval role away from national regulators to Esma. There seems to be coordination between regulators and no evidence of arbitrage; moving the approval role away from national competent authorities would be a big mistake.

Product governance – a practical guide to what you need to know

  • The principal challenge for primary market underwriting banks is that if you read the rules literally, it is difficult to see how in practice they apply to vanilla capital markets; what is primary one minute is secondary the next and then trading in the flow capital markets. You cannot just design something for the primary market, it has to work for the product still being in existence potentially many years down the line;
  • Decisions around the application of the rules extraterritorially involve a degree of proportionality, which itself will be a subjective decision from institution to institution;
  • Manufacturers wanting to focus on institutional-only deals need to decide how far they need to go to check whether any potential participation by private bank initial purchasers would be on a discretionary basis;
  • There was a lot of concern that in relation to scenario analysis stress testing could be applicable to vanilla capital markets, but nearly a year in it appears that the market has generally applied proportionality such that literal stress testing does not make sense in the vanilla capital markets - you either get paid or you don’t;
  • Teething problems around determining who is a 'manufacturer' on transactions have largely bedded down. Concerns arise from the lack of clarity around the scope of "creation, development, issuance and/or design". For issuers who are credit institutions, an analysis around licensing and whether were within Mifid II scope (and, therefore, manufacturers) is also required;
  • Industry clauses to address article 9.8 and collaboration were initially referred as 'co-manufacturer agreements'. To assuage concerns from some parties about being called a co-manufacturer, the phrase "collaboration clauses" is now more commonly used;
  • There are still occasional debates between and disagreements between manufacturers on the appropriate choice of Target Market.

Priips in practice – what can we learn from the last nine months?

  • We are not seeing a corporate bond with a KID. Corporates were told debt should be a Priip, but you would only need a KID if it is sold to retail, which suggested that they don’t need to sell to retail investors at all. Another way of dealing with this is to strip out all the things that would make it a Priip, and then sell it to retail investors anyway;
  • The issuer must translate the KID to the language of the nationality of the investor, even if they can read it in another language: if not, it’s s considered that it has not been published correctly;
  • Predefined increases in the coupon rate shouldn’t necessarily turn something into a Priip. A suggestion to the European Commission is that they don't simply look for a fluctuation but whether that fluctuation was a surprise;
  • The European Commission still sees Priips as a good thing. There is a review coming up that might even extend the Priips scheme; there is even a possibility that there could be a Priip for equities;
  • The fact that KIDs are made public has created some issues. Clients have said they don't want this, as competitors can see each others’ costs. These have been compared for very similar types of products and it has been found that there have been variations in KIDs;
  • The impact on retail investors is significant. Corporate debt markets have been shouting against it and it has resulted in a 60% reduction in lower denominated issuances.