Structured products legal and regulatory bulletin: Q1 2021

• EU
• The Netherlands
• Italy
• UK
• LIBOR cessation
• ISDA and other trade associations

EU

Prospectus Regulation

ESMA updates Q&As on the Prospectus Regulation
28 January 2021 and 31 March 2021: ESMA has updated its Q&A on the Prospectus Regulation (Link). The updates cover, amongst other things, the order of information in a prospectus, use of a prospectus for more than one offer and how to determine which disclosure annexes to use when preparing a prospectus.

PRIIPs

EIOPA adopts draft final report on RTS amending PRIIPs KID Delegated Regulation
03 February 2021: The European Supervisory Authorities (ESAs) submitted to the European Commission draft regulatory technical standards (RTS) (Link) on amendments to the key information document for packaged retail and insurance-based investment products (PRIIPs). This follows the previous notice from the European Commission giving the ESAs six weeks to agree to a draft RTS.

BMR

Regulation amending the BMR published in the Official Journal
12 February 2021: Regulation (EU) 2021/168 (Link) has been published in the Official Journal and entered into force, and applies from, 13 February 2021. With LIBOR cessation in mind, the Regulation modifies the BMR with the aim of providing for continuity of contracts which reference a widely used benchmark the cessation of which might result in negative consequences that significantly disrupt the financial markets.  Amongst other things, the Regulation introduces a new chapter 4A into the BMR which provides for a statutory rate replacement mechanism. The rate replacement mechanism is potentially relevant to a range of products and contracts and its potential application should be considered as part of firms' broader LIBOR cessation planning.

ESMA consults on guidelines on methodology to calculate a benchmark in exceptional circumstances
25 February 2021: ESMA has published a consultation paper (Link) which sets out draft guidelines on the obligations applicable to administrators which use a methodology to calculate a benchmark in exceptional circumstances (e.g. the COVID-19 pandemic) under the BMR. The consultation remains open for comment until 30 April 2021.

ESMA updates statement on BMR post-Brexit
24 March 2021: ESMA has updated its statement (Link) on the impact of Brexit on the BMR so as to reflect the extension of the transitional period. The update covers the EU's regulatory approach on UK third-country benchmarks as well as UK-endorsed and recognised benchmarks.

ESMA updates Q&As on the BMR
31 March 2021: ESMA has updated its Q&A on the BMR (Link). The Q&As are updated to further clarify the transitional provisions for third-country benchmarks under the BMR.

ESG

ESMA letter on ESG ratings and assessment tools
28 January 2021: ESMA has written to the European Commission (Link) in relation to ESG ratings and assessment tools where there is a perceived shortfall in regulatory coverage. In its letter, ESMA outlines what it would see as the fundamental elements of a regulatory framework in this area.

CSDR

Trade association letter on the CSDR mandatory buy-in regime
12 March 2021: Various trade associations, including ICMA and ISDA, have written to the European Commission (Link) and ESMA raising concerns in relation to the mandatory buy-in requirement under the CSDR, suggesting that the required revisions to the mandatory buy-in regime arising from the recent targeted review of the CSDR are made before the regime is implemented.

ESMA updates Q&As on the CSDR
31 March 2021: ESMA has updated its Q&A (Link) on the CSDR. The updated Q&As relate to the provision of central securities depository services in other Member States and the exemption from the application of cash penalties and the buy-in requirements for settlement fails relating to transactions involving central counterparties.

The Netherlands

AFM consultation on turbos
The Dutch Authority for the Financial Markets (AFM) has consulted (Link) on measures to restrict the marketing, distribution and sale of turbos (leveraged products, also referred to as sprinters or speeders) to retail investors. This follows the AFM's previous study on such products which are viewed as risky investments.

Italy

New framework on KIDs filing
The Italian Consob has published both the results of the public consultation launched in July 2020 (Link) on the proposal for amendments to be made to Consob Regulation no. 11971/1999 for the introduction of new methods of accessing the documents containing key information documents (KIDs) and the mandatory operating instructions (Operating Instructions) to be followed by manufacturers.

A new procedure for accessing KIDs of PRIIPs has been defined, with the obligation to make the PRIIPs-related information and structured data marketed in Italy accessible to Consob (Resolutions no. 21639 and no. 21640 of 15 December 2020) in compliance with the Operating Instructions.

According to the new framework:

• PRIIPs manufacturers are required to make the KIDs (in PDF format) and structured data (in XML format) available to Consob in their own reserved area within the Consob's SFTP server before the marketing of the product.
• Alternatively, but starting from 01 January 2022 only,  manufacturers will be allowed to use a web interface system both with reference to KIDs and structured data.
• Manufacturers may avail external data providers and therefore delegate these obligations to third parties.

UK

Law Commission launches call for evidence on smart contracts
17 December 2020: The Law Commission has published a call for evidence (Link) on smart contracts in which the Law Commission seeks views about, and evidence of, the ways in which smart contracts are being used, and the extent to which the existing law can accommodate them. The Commission will use responses to inform its scoping study which it intends to publish in autumn 2021.

House of Commons EU Scrutiny Committee report considers EU cryptoasset and DLT legislative proposals
18 December 2020: The House of Commons European Scrutiny Committee has published its thirty-third report of the 2019-21 session (Link). The report considers, amongst other things, the EU's proposed Regulation on markets in cryptoassets and distributed ledger technology in financial services. The Committee will maintain a watching brief of the EU proposals given the potential relevance to UK markets.

FMLC paper on the validity of electronic signatures for global notes
31 December 2020: The Financial Markets Law Committee (FMLC) has published a paper (Link) on issues of legal uncertainty around the use of electronic signatures in authenticating global notes. The paper briefly surveys the state of the law in various key jurisdictions and draws conclusions on the validity of use of electronic signatures.

Law Society Q&A on electronic signatures and virtual execution
06 January 2021: The Law Society's Company Law Committee has published a Q&A document (Link) on the use of electronic signatures in commercial matters. The document aims to assist lawyers with the practicalities of using electronic signatures under English law.

FMLC Letter to HMT
13 January 2021: The FMLC has published a letter (Link) to HM Treasury on the Financial Services Bill 2019-21, specifically in relation to its provisions relating to the UK Financial Collateral Regulations and uncertainties concerning the application of synthetic LIBOR.

FMLC responds to HMT cryptoasset and stablecoin consultation
19 March 2021: The FMLC responded (Link) to HM Treasury's consultation on the UK's regulatory approach to cryptoassets and stablecoins, drawing attention to a number of issues of legal uncertainty in the current environment. These include questions on definitions, such as identifying what a "token" is, as well as the difficulties arising from interpreting definitions under existing financial regulation in the context of token arrangements.

LIBOR cessation

IBA launches ICE Term SONIA Reference Rates
11 January 2021: ICE Benchmark Administration has launched ICE Term SONIA Reference Rates (ICE TSRR) as a benchmark for use in financial instruments (Link).

The ICE TSRR are designed to measure expected (i.e. forward-looking) SONIA rates over one, three, six and 12 month tenors. The rates are determined based on a waterfall methodology using eligible prices and volumes for specified SONIA-linked interest rate derivatives products.

FMLC responds to FCA LIBOR consultation
18 January 2021: The FMLC responded (Link) to the FCA's consultation on its proposed policy on the exercise of its powers in relation to LIBOR transition, noting areas of legal uncertainty in relation to tough legacy contracts and the use of LIBOR rates in foreign jurisdictions.

ISDA IBOR fallbacks come into effect
25 January 2021: The ISDA fallbacks for IBOR-linked derivatives, as set out in a protocol and supplement to the 2006 definitions published by ISDA, came into effect (Link). The fallbacks cover Australia's Bank Bill Swap Rate, the Canadian Dollar Offered Rate, euro LIBOR, EURIBOR, HIBOR, the Singapore dollar Swap Offer Rate, sterling LIBOR, Swiss franc LIBOR, the Thai baht Interest Rate Fixing, TIBOR, euroyen TIBOR, yen LIBOR and US dollar LIBOR.

£RFRWG consultation on successor rate to GBP LIBOR in legacy bonds
11 February 2021: The Working Group on Sterling Risk-Free Reference Rates (£RFRWG) has consulted (Link) on the successor rate to GBP LIBOR in legacy bonds which reference that rate. The consultation seeks feedback on whether it would be helpful for the £RFRWG, in its capacity as a relevant nominating body, to make a recommendation on the successor rate to GBP LIBOR for the purposes of the operation of Type 2 and Type 3 fallbacks. It also seeks feedback on the preferred successor rate to be recommended.

HMT consults on the wind-down of critical benchmarks
15 February 2021: HM Treasury has consulted (Link) on the extent to which additional protections may be required in relation to uncertainty over the continued application of a critical benchmark to contracts where the FCA has exercised its power to direct a change in how the benchmark is determined under the UK Benchmarks Regulation (UK BMR), and the risk of associated litigation.

£RFRWG paper on sterling non-linear derivatives referencing GBP LIBOR ICE swap rates
16 February 2021: The £RFRWG has published a paper which sets out a potential methodology using SONIA-based rates which could form a replacement for GBP LIBOR ICE swap rates (Link). The £RFRWG states that the paper is intended to support market participants to transition non-linear derivatives, structured products and cash market instruments that reference the GBP LIBOR ISR, in line with the target milestones in the Working Group's roadmap and priorities for 2021.

FCA statement on the end of LIBOR
05 March 2021: The FCA has announced (Link) the dates that panel bank submissions for all LIBOR settings will cease, after which representative LIBOR rates will no longer be available. In particular, LIBOR settings will either cease to be provided by an administrator or will no longer be representative:

• immediately after 31 December 2021, in the case of all sterling, euro, Swiss franc and Japanese yen settings, and the 1-week and 2-month US dollar settings; and
• immediately after 30 June 2023, in the case of the remaining US dollar settings.

This is a milestone event in LIBOR cessation because it triggers the fixing of the spread adjustments to be used under the ISDA IBOR fallbacks, in turn providing additional clarity on the future terms of derivative contracts which reference the ISDA IBOR fallbacks. The announcement is also potentially relevant to many structured products issuances which feature fallback provisions based on the ISDA fallbacks.

FCA statement of policy on the exercise of its powers under the UK BMR
05 March 2021: The FCA has published (Link) statements of policy on the designation of benchmarks under the proposed Article 23A of the UK BMR and the exercise of the FCA's powers under the proposed Article 23D of the UK BMR. Following publication, the FCA has confirmed its intention to consult in Q2 2021 on its approach to the exercise of its powers under the proposed Articles 21A and 23C of the UK BMR and thereafter to consult on any decision to exercise the proposed Article 23D power in respect of LIBOR.

FMLC responds to HMT consultation on a “safe harbour” for legacy contracts
15 March 2021: The FMLC has responded (Link) to the HM Treasury consultation on the possibility of introducing a "safe harbour" for legacy contracts so as to reduce the risk of contractual uncertainty and disputes in respect of legacy contracts referencing a benchmark that has been designated as unrepresentative.

FMSB standard on use of term SONIA
24 March 2021 : The FMSB has published a draft standard on the use of term SONIA (Link). The draft standard has been welcomed by the £RFRWG and remains open for comment until 28 May 2021.

PRA and FCA publish “Dear CEO” letter regarding LIBOR transition
26 March 2021: The PRA and FCA have published a "Dear CEO" letter (Link) regarding LIBOR transition. In the letter, the regulators note that, as the market enters the final phase of LIBOR transition, the PRA and FCA are intensifying their focus on firms' management and oversight of the risks associated with transition and that they will use firm meetings, management information and the LIBOR and RFR exposure data they collect to assess transition progress.

FCA and BoE statement regarding “SONIA first” from 11 May
29 March 2021: The FCA and the Bank of England have published a statement (Link) encouraging liquidity providers in the sterling non-linear derivatives market to adopt new quoting conventions for inter-dealer trading based on SONIA instead of LIBOR from 11 May 2021 (a so-called "SONIA first" approach). This is to facilitate a further shift in market liquidity toward SONIA.

£RFRWG roadmap paper on ending new use of GBP LIBOR in derivatives
24 February 2021 (updated April 2021): The £RFRWG has published an updated version of its priorities and roadmap for transition by end-2021 (Link). The core expectation remains that issuers should have, by end-Q1 2021, completed their identification of all legacy GBP LIBOR contracts expiring after end-2021 that can be actively converted, and they should progress active conversion where viable through to completion by end-Q3 2021.

ISDA and other trade associations

Updated ISDA derivatives compliance calendar
08 January 2021: ISDA has updated its regulatory compliance calendar (Link).

ISDA paper on ESG-related derivatives and transactions
11 January 2021: ISDA has published a paper (Link) on ESG-related derivatives and transactions. The paper is intended to help market participants further understand the potential role of derivatives in sustainable finance and outlines the range of product structures and transaction types that comprise the universe of ESG-related derivatives.

ICMA quarterly report
12 January 2021: ICMA has published its Q1 report for 2021 (Link). The report includes commentary on various topics including the transition from LIBOR to risk-free rates, Brexit, climate transition finance and sustainable bond markets.

ICMA publishes new material on green and social bonds
17 February 2021: ICMA has published new Q&A for sustainability-linked bonds which support ICMA's existing sustainability-linked bond principles. ICMA has also updated its guidelines for external reviews to include sustainability-linked bonds and published new forms which allow issuers to confirm that a bond is aligned with the sustainability-linked bond principles. The documents are available here: Link

ICMSA Recommendation with respect to requirements for Payment Business Days
19 February 2021: The ICMSA has published a bulletin (Link) which includes recommendations for payment business days for international securities. The publication follows the ICMSA observation that there is some uncertainty as to which financial centres in a transaction are required to be open in order to make payment on the next available payment business day.