With effect from 14 March 2022, a new model (the “New Model”) will apply for delivery versus payment (“DvP”) closings of syndicated bond issuances settling through Euroclear Bank SA/NV (“Euroclear”) and Clearstream Banking S.A. (“Clearstream”), the two principal international central securities depositaries (“ICSDs”). The stated aim of the New Model is to reduce credit and liquidity risk for all market participants. The ICSDs also consider the New Model to better meet issuers’ interests, in the event of a manager default, as well as to help all stakeholders meet their regulatory requirements and minimise costs.

Issuers, settlement banks and other banks acting as managers and advisors should consider whether their upcoming transactions are in scope of the New Model and, if so:

(i) How the New Model will work; and
(ii) How to reflect the New Model in issuance documentation and the underlying contracts and instructions.

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Which transactions are in scope?

The New Model will apply to all new bond issuances that are accepted by the ICSDs, deposited with a designated common depositary or an ICSD common safekeeper, distributed DvP by a settlement manager or lead manager and, in each case, classified as being distributed on a “syndicated” basis. Accordingly, the vast majority of DvP trades settled through the ICSDs are expected to be affected by the New Model.

The following transactions are out of scope of the New Model:

• Syndicated new issues that settle free of payment;
• Non-syndicated new issues that settle through the issuing and paying agent; and
• The distribution of domestic securities that settle through the relevant domestic central securities depositary.

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How does the New Model work?

Under the New Model, the common depositary or common service provider is removed from the payment process, and no ICSD irrevocable commitment to pay is issued. Instead, the ICSDs use a “commissionaire” legal structure, governed by Belgian law (in the case of Euroclear) or Luxembourg law (in the case of Clearstream). Under this structure:

• The managers open a commissionaire account with the ICSDs to be able to distribute syndicated new issues versus payment on the ICSDs books;
• The duly executed and authenticated Global Note is delivered free of payment to the common depositary or common safekeeper, conditionally upon:
  • (i) The bonds being credited to the relevant commissionaire account opened by the ICSDs for the benefit of the settlement bank (under which the issuer has third-party rights); and
  • (ii) The bonds being released from the commissionaire account on a DvP basis and in their entirety;
• Following confirmation of satisfaction of conditions precedent and instructions to proceed from the settlement bank (the so-called “green light”), the bonds are created in the commissionaire account;
• The ICSDs then execute the settlement instructions; and
• Payment is made directly from the commissionaire account of the settlement bank to the issuer in line with payment instructions received (formatted wire instructions must be submitted to the ICSDs by 18:00 (CET) two business days prior to closing).

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How does this impact new issuance documentation?

To reflect this new settlement procedure, certain amendments should be made to issuance documentation. In respect of drawdowns under programmes, the required amendments can be reflected in the drawdown documentation without requiring amendments to the base programme documentation.

Key amendments to be made in issuance documentation include:

• Subscription Agreement – a provision should be included which governs the position between the issuer and the settlement bank in respect of the commissionaire account, including in respect of the issuer’s third-party rights.
• Issuer’s instruction letter to the agent – instructions to the agent to deliver the Global Note to the common depositary or common service provider and for that entity to instruct the relevant ICSD to credit the bonds free of payment to the commissionaire account of the settlement bank should be included.
• Settlement bank’s instruction letter to the Common Depositary / Common Safekeeper – an instruction to credit the bonds to the commissionaire account on a free of payment basis and a description of the terms of the commissionaire account should be included.
• Issuer’s payment instruction to the settlement bank – additional details, such as reference to the commissionaire account should be included.
• Signing and closing memorandum – wording should be included to the effect that the steps necessary for creation of the bonds and the execution of the payment instructions to the issuer are deemed to take place simultaneously.

The International Capital Markets Association, or ICMA, has published a paper, which includes suggested modifications to standalone Regulation S bond transaction documentation, that is available here.