Ashurst Quarterly Debt Capital Markets Update for 2023

Welcome to the first edition of the Ashurst Quarterly Debt Capital Markets Update for 2023. In this edition we summarise the key developments in debt capital markets in the last quarter of 2022.

We have a number of different developments to report on in this edition:

• UK Green Finance Strategy: onshoring the EU taxonomy framework
• Climate Resilient Debt Clauses (CRDCs) in sovereign bonds
• PRIIPs Regulation in the EU and the UK - more divergence
• MiFID II product governance: sustainability-related amendments
• EU Prospectus Regulation to be revised
• UK's repeal and reform of retained EU financial services law - UK Prospectus Regulation
• LIBOR settings continue to disappear
• Changes in withdrawal rights under the EU Prospectus Regulation

UK Green Finance Strategy: onshoring the EU taxonomy framework

On 7 October 2022 the UK government's Green Technical Advisory Group (GTAG) published a report confirming that the UK should at least match the ambition of the objectives of the EU Sustainable Finance Action Plan and recommending the UK should approach onshoring the EU taxonomy framework by taking an "adopt some and revise some" approach.

However, while the European Commission has already published a number of technical screening criteria under the EU Taxonomy Regulation and the UK Taxonomy Regulation requires the Treasury to make the relevant UK regulations by 1 January 2023, on 14 December 2022, the House of Commons published a written statement made by Andrew Griffith, Economic Secretary to the Treasury, to the effect that the Treasury will not now be making the relevant regulations by this deadline and will provide a further update as part of its publication of the Green Finance Strategy in early 2023.

Climate Resilient Debt Clauses (CRDCs) in sovereign bonds

On 9 November 2022 ICMA published an indicative Term Sheet and an explanatory Summary Note in connection with Climate Resilient Debt Clauses (CRDCs) for use in sovereign bonds. These papers reflect the work of a Private Sector Working Group, established by the UK government, which brings together international financial institutions, including International Monetary Fund (IMF) and World Bank Group (WB) staff, G7 and borrowing countries, and the private sector, including major US and European banks and investment firms, legal and financial advisors specialising in sovereign debt, as well as academic experts.

A Climate Resilient Debt Clause is a clause in a sovereign borrower's debt instrument which can lead to a deferral of a country’s debt repayments in the event of a pre-defined, severe climate shock or natural disaster. CRDCs have been introduced into bonds issued by Barbados and Grenada as part of debt restructurings and more recently in a primary issuance by Barbados guaranteed by the Inter-American Development Bank (IADB) and The Nature Conservancy (TNC).

ICMA's indicative Term Sheet also provides for additional Pandemic Event Resilient Debt Clauses, which may be considered in addition to any CRDCs or on a standalone basis for low-income countries, small island developing states or other particularly vulnerable developing countries.

PRIIPs Regulation in the EU and the UK - more divergence

Since 1 January 2021 the EU and the UK have had slightly different PRIIPs regimes as a result of the UK's exit from the EU. With effect from 1 January 2023 the EU PRIIPs Regulation regime and the UK PRIIPs Regulation regime will diverge even further due to various legislative changes in the EU and the UK. The changes essentially relate to the mandatory template for a KID and the ways that certain information in a KID must be presented, all as set out in the PRIIPs KID RTS. Also the temporary exemption for UCITS funds from the requirements of the UK PRIIPs Regulation has been extended until the end of 2026 whereas the corresponding exemption from the EU PRIIPs Regulation regime expired on 31 December 2022.

In light of this, on 14 November and 21 December 2022, the Joint Committee of the European Supervisory Authorities published updated versions of its Q&As (JC 2017 49) on the Key Information Document (KID) requirements of the EU PRIIPs Regulation. These include new Q&As that relate to the legislative changes that apply from 1 January 2023.

Furthermore, in its consultation document "PRIIPs and UK Retail Disclosure", published on 9 December 2022 as part of the package of measures known as the Edinburgh reforms (see below), the UK government says that the UK PRIIPs Regulation is not fit for purpose and will be repealed by the Financial Services and Markets Bill as a matter of priority. In its place the consultation proposes that the FCA will have the power to determine the format and presentation requirements for disclosure when investment products are offered to retail investors in the UK and that these requirements will be set out by the FCA in new FCA rules. It envisages that in most cases, the new FCA requirements will be incorporated into firms’ other existing information documents and only in some cases, for example where an investment is high risk or complex, will prescriptive disclosure requirements be necessary.

MiFID II product governance: sustainability-related amendments

In August 2021 Commission Delegated Directive (EU) 2021/1269 was published in the Official Journal introducing sustainability-related amendments to the MiFID II Delegated Directive which member states were required to adopt into domestic legislation by 21 August 2022 and which they were required to apply from 22 November 2022.

These amendments require:

• the target market assessment to include clients' sustainability related objectives (if any);
• manufacturers to determine whether the securities' sustainability factors, where relevant, are consistent with the target market;
• manufacturers presenting information to distributors to present sustainability factors of the securities in a transparent manner; and
• regular reviews of securities manufactured offered or recommended to include sustainability factors.

These amendments have led ESMA to propose amendments to the ESMA Guidelines covering the target market categories to be considered and the negative target market assessment (ESMA Consultation paper of 8 July 2022 ESMA-43-3114). This ESMA consultation closed on 7 October 2022 and ESMA expects to publish revised Guidelines in Q1 2023.

EU Prospectus Regulation to be revised

On 7 December 2022, as part of a Capital Markets Union package on listing and corporate insolvency, the European Commission adopted proposals for a Regulation which will, among other things, make detailed amendments to the EU Prospectus Regulation regime, including:

• removal of the need to supplement a base prospectus to update the annual or interim financial information incorporated by reference; and
• removal of the requirement to present risk factors in order of materiality and a new prohibition on risk factors that are generic or only serve as disclaimers.

For more information see this Ashurst briefing.

UK's repeal and reform of retained EU financial services law - UK Prospectus Regulation

On 9 December 2022 the UK government announced a package of measures for the reform of the UK's financial services regulation (known as the "Edinburgh Reforms") which includes three "illustrative" statutory instruments designed to give market participants a more detailed understanding of the approach the government is taking. Two of these relate to the reform of the UK Prospectus Regulation and the UK Securitisation Regulation while the third relates to the FCA's rulemaking powers in relation to payments regulation.

This reform will be a development of what the government refers to as the "FSMA model" for regulation which was introduced by the Financial Services and Markets Act 2000 (FSMA). This approach requires operationally independent and expert financial services regulators, such as the PRA and the FCA, which generally set the direct regulatory requirements which apply to firms in their rulebooks and which operate within a framework established by primary legislation.

LIBOR settings continue to disappear

Apart from certain US dollar LIBOR panels (which are scheduled to cease on 30 June 2023), all LIBOR panels ceased on 31 December 2021 and since then, as a transitional measure, the FCA has used its statutory powers to require continued publication on a changed methodology (also known as a 'synthetic') basis for the 1-month, 3-month and 6-month sterling and Japanese yen LIBOR settings.

On 23 November 2022 the FCA announced the extension of three-month synthetic sterling LIBOR until 31 March 2024 and proposed publication of synthetic US dollar LIBOR until 30 September 2024. For more information see this Ashurst briefing.

While publication of the 1- and 6-month synthetic sterling LIBOR settings is scheduled to continue until 31 March 2023 (after which they will permanently cease) and publication of the 3-month synthetic sterling LIBOR setting is scheduled to continue until 31 March 2024 (after which it will permanently cease), publication of the 1-, 3- and 6-month synthetic Japanese yen LIBOR settings ceased after 30 December 2022.

Changes in withdrawal rights under the EU Prospectus Regulation

As part of the EU's response to the Covid pandemic, from 18 March 2021 the period during which withdrawal rights under Article 23(2) of the EU Prospectus Regulation are exercisable was temporarily extended from two working days after the publication of the supplement to three working days (a period which may be extended by the issuer or the offeror). This temporary extension came to an end on 31 December 2022 following which the period has reverted to two working days.

As part of its Capital Markets Union package on listing and corporate insolvency (see this Ashurst briefing), the European Commission has adopted proposals for a Regulation to make detailed amendments to the EU Prospectus Regulation regime, one of which is to make permanent the three working day period during which withdrawal rights may be exercised. However these are currently just proposals and as yet there is no provision for this change to be made effective until some time in 2024.

Visit our Finance Hub for analysis and commentary on developments affecting global financial markets, including the EU Prospectus Regulation, the EU Benchmarks Regulation, PRIIPs/KID, EU EMIR and LIBOR transition.

Authors: Anna Delgado, Partner; Alex Biles, Partner; Scott Chatterton, Counsel; Tim Morris, Expertise Counsel