A flurry of changes to stock exchange rules and capital markets regulation and practice have been introduced following the end of the Brexit transition period in the UK on 31 December 2020, as well as new initiatives launched in the EU. We set out below a summary of some of the most recent regulatory changes and initiatives for our clients and other market participants to be aware of:
- Post Brexit considerations in prospectuses, offering circulars and transaction documents: A number of technical changes to disclosure and transaction documents will need to be considered and implemented in transactions taking place since 1 January 2021, including:
- Updates to ICMA selling restrictions and other primary documentation: During the Brexit transition period, the general approach to selling restrictions was to include references to the UK alongside references to the EU and EEA, while EU law continued to apply in the UK. Following the end of the Brexit transition period, the UK is no longer an EU member state, and EU law is no longer applicable. Accordingly, the International Capital Markets Association (“ICMA”) has updated its standard form selling restrictions, product governance and PRIIPs regulation language and legends, retail cascade legends and stabilisation legends and other materials to reflect necessary post-Brexit changes. In general, the approach taken has been to separate EU and UK concepts so that existing EEA standard language is, for the most part, unchanged, and new UK language has been added to reflect the UK versions of the relevant legislation and regulation in effect following the end of the Brexit transition period. Accordingly, where in the past one legend or restriction has been used to cover the EEA and UK, now two sets will appear in relevant disclosure and transaction documents. The relevant documents are available to ICMA members and ICMA Handbook subscribers and are expected to form part of the ICMA Primary Market Handbook once market practice has had a chance to develop around the use of these updated restrictions, legends and other documentation. Updates to EEA and UK selling restrictions are not only relevant for those making an offer to the public or listing in the EEA and UK but to any transaction where there are expected to be sales into the EEA and UK and appropriate legends and restrictions are required to be added.
- Consideration of Bail-In Language: Following Brexit, English law has become “third country” law for the purposes of Article 55 of the EU Bank Recovery and Resolution Directive. Accordingly, EU bank issuers, as well as EU dealers and managers and agents will need to include contractual recognition of bail-in language of their “other liabilities” governed by English law, which may require the inclusion of such language in the terms and conditions of bonds issued by EU bank issuers, as well as, in certain cases, in subscription agreements, programme agreements and agency agreements where an EU bank is a party. Similarly, contractual recognition of UK bail-in language will be required in terms and conditions of UK bank issuer bonds and in “other liabilities” of UK bank issuers, dealers and managers and agents in contracts that are governed by the law of an EU member state.
- Updates to the ICMA Agreement Among Managers: Updates have been made to the ICMA Agreement Among Managers versions 1 and 2 to reflect an EU contractual recognition of bail-in of “other liabilities” in English law agreements and a UK contractual recognition of bail-in of “other liabilities” in the New York law Schedule.
- Covenants relating to maintenance of listings: It is common for issuers to be subject to a covenant to maintain a listing of their securities on a given market, usually the market on which the issuance was initially listed. In certain cases, the issuer may have the flexibility to change this listing (if the original listing becomes unduly burdensome or as a matter of free choice). Typically, if the securities were issued on an EEA regulated market (which, prior to 1 January 2021 included the London Stock Exchange’s main market), such replacement listing must be on an EEA regulated market. Post Brexit, the London Stock Exchange’s main market is not an EEA regulated market, accordingly, issuers may wish to update this clause to include specific references to a London listing and to retain this level of flexibility. This is particularly in light of the fact that for certain issuers, such as sovereign issuers, a listing on an EEA regulated market is significantly more burdensome post-Brexit than a listing on the London Stock exchange’s main market.
- Updates to the FCA’s Prospectus Rules: The FCA has published a number of changes to its Prospectus Regulation Rules sourcebook. Such changes include the expansion of the categories of prospectus exempt debt issuers to include any sovereign, local or regional authority or central bank (rather than EEA member states or EEA member state local or regional authorities or central banks).
- Post Brexit - Home Member State Elections: Under the EU Prospectus Regulation and Transparency Directive , issuers of equity and non-equity securities that are offered to the public in, or admitted to trading on a regulated market in, the EEA are required to elect a home member state in the EEA. Accordingly, post-Brexit non-EEA incorporated issuers (including UK incorporated issuers) and other issuers who have chosen or have the UK as their home member state must choose a new home member state in the EEA when they wish to offer securities to the public in the EEA or if they are intending to issue or currently have securities admitted to trading on a regulated market in the EEA. In particular, non-EEA incorporated issuers that have a mixture of securities issued on the main market of the London Stock Exchange and on regulated markets in the EEA and, accordingly, have previously chosen the UK as their home member state will now need to elect a new home member state in the EEA in respect of their EEA-listed securities. For non-EEA incorporated issuers of debt, this will typically be required to be the member state in which the securities are listed. Issuers should note that there may be a number of technical requirements (including the need to release announcements and register for information dissemination and document storage accounts in respect of any newly elected home member state). Issuers should note that the European Securities and Markets Authority (“ESMA”), has advised that an issuer with the UK as its home member state for purposes of the Transparency Directive at the end of the Brexit transition period should choose and disclose its new EEA home member state within three months (i.e., by the end of March 2021). If the issuer does not disclose its new EEA home member state within this time, the member state or member states (if more than one) where the issuer’s securities are admitted to trading will be considered to be that issuer’s home member state until the issuer has made and disclosed a subsequent choice of a single home member state.
- Withdrawal of UK-based Credit Rating Agencies’ Registration by ESMA: Following the end of the Brexit transition period, on 4 January 2021, ESMA, the supervisor of EU credit ratings agencies, withdrew the registration of UK-based credit ratings agencies (namely, AM Best Europe-Rating Services Ltd, DBRS Ratings Ltd, Fitch Ratings Ltd, Fitch Ratings CIS Ltd, Moody’s Investors Service Ltd and The Economist Intelligence Unit Ltd). Accordingly, the ratings issued by such agencies cannot be used in the EU unless endorsed by an EU credit rating agency (that is supervised by ESMA and appears on ESMA’s list of registered credit ratings agencies). In its communication on 27 October 2020, ESMA confirmed that all UK-based credit ratings agencies, other than The Economist Intelligence Unit Ltd, had taken steps to ensure that an EU credit rating agency is willing and able to endorse its credit ratings. As a practical matter, capital market issuers (and their advisers) will need to make sure that the appropriate credit rating agency registration and, if necessary, endorsement is disclosed in prospectuses and offering circulars.
- EU Capital Markets Recovery Package: On 26 February 2021, changes to the Prospectus Regulation and Transparency Directive proposed as part of the so-called EU Capital Markets Recovery Package were published as Regulation (EU) 2021/337. The amendments to the EU capital markets rules (which were endorsed by EU ambassadors in December 2020 and adopted by the European Parliament and the Council of the EU in February 2021) are targeted to support economic recovery from the impact of the COVID-19 pandemic. The amendments aim to facilitate access to finance for EU companies, particularly small- and medium-sized companies. In respect of changes to the Prospectus Regulation, the Capital Markets Recovery Package provides for the introduction of a new “EU recovery prospectus”, a short-form prospectus to facilitate companies’ ability to issue capital. The EU recovery prospectus will be available for capital increases of up to 150% of outstanding capital within a 12 month period and will apply until 31 December 2022. The amendment to the Transparency Directive provides Member States with the option to postpone, by one year, the requirement for listed companies to prepare annual financial reports in the “European Single Electronic Format” for financial years beginning on or after 1 January 2020. On 20 January 2021, the Commission de Surveillance du Secteur Financier in Luxembourg announced that it will only be applying such requirements for financial reports for periods beginning on or after 1 January 2021. Legislative changes to the markets in financial instruments directive (MiFID) II (through the simplification of certain targeted information requirements, targeted exemptions to bundle research and execution costs for certain small and mid-cap issuers and adaptation of the position limit regime for certain commodity derivatives to help EU businesses react to market volatility) were also published in February 2021 (Directive (EU) 2021/338). Legislative changes to the EU securitisation framework as part of the EU Capital Markets Recovery Package (including the extension of the existing EU framework for simple, transparent and standardised (STS) securitisations to cover synthetic securitisation and the introduction of new rules to remove regulatory obstacles to the securitisation of non-performing exposures) are expected to be voted on by the European Parliament at its plenary session in March 2021.