Opening 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.