Michael Cavers' notes from ICMA members' update


Introduction - MARTIN SCHECK

There is a general concern about the scope of recent regulation, particularly on the ability of REPO market to move collateral through the system.

Another general theme is that regulation moves into implementation phase - move from policy to detailed rules being put in place by ESMA. ICMA is good at providing input on this detail. MiFID II is a good example - more later.

ICMA continues to expand its reach, eg expanding in the Middle East.

A wide range of further activities for 2014 - keep posted on the ICMA quarterly report.

European Banking Union and the Capital Markets - PAUL RICHARDS

First step to EBU is set up of single supervisory mechanism - due to come in November. ECB will assess euro-area banks in advance. Not a straightforward exercise. If not a tough exercise, it won't be credible. If too tough, some national governments may not be able to recapitalise their banks without damaging their own finances. Stress-testing by US in 2009 helped restore confidence in banks. But in Europe there were doubts about the stress-testing, making it even more important that capital markets regard it as credible.

  • ECB previously hasn't had responsibility for banking supervision so it will need new staff.
  • Supervisory role of ECB in assessing banks must be separate from monetary policy and provision of liquidity.
  • Consistency of treatment across jurisdictions is important - eg valuation and rules for treatment of non-performing loans.
  • If a bank is to fail in future, there is agreement that investors and creditors (not tax-payers) should bear cost. But if private sector funds aren't enough, credible public sector backstop will be needed. Therefore, need to set up this credible backstop through single resolution mechanism. Outline agreement was reached by Council of Ministers last month - but still subject to European Parliament and discussions on how it will be funded. There are several outstanding issues that remain to be resolved.

Sovereign bond consultation paper - LEE GOSS

ICMA has recently discussed collective action clauses with various people including IMF. ICMA has prepared draft model language that can be adopted by emerging market issuers.

Also drafting on the pari passu clause following Argentinean case law and bondholder resolution clauses.

ICMA continues to discuss the language.

PRIPs and Market Abuse Regulation - RUARI EWING

  1. Market Abuse Regulation - new Regulation has not yet been finalised but ESMA has published discussion paper. Paris discussion hearing on 15 January. Anticipated follow-up is expected in May to July. Paper cover various things including delay to publication of information etc. ICMA plans to respond, but probably just on the sounding of new debt issues and stabilisation safe harbour provisions. Remember that safe harbours only needed if activity would otherwise be in breach of other provisions. Concerns are that detailed admin burdens on the safe harbours - including pre-sounding - might be at risk.
  2. PRIPs - European Parliament has finally released its report. Expands scope beyond structured products but still retail. Need to produce a kit on a website, notified to regulator and kept updated. Also annual report on the product. This would include not only bonds by banks but simple banks issued by companies. Potential logistics and liability issues that may jeopardise some bond issues. But this is just one of three proposals. It remains unclear whether the proposal will be adopted before next year's Euro elections.

Prospectus Directive - CHARLOTTE BELLAMY

The UK FCA's Primary Market Bulletin 7 has been released... Guidance on non-equity retail prospectuses. ICMA submitted response to UKLA. They said true retail prospectuses must have easy language but this was anything below EUR 100k denominations. But things directed only at wholesale investors would be covered if low denominations and this is inappropriate.

PMB 7 also covered final terms, supplemental prospectuses and zero-coupon notes.

MiFID II and CSD Regulation - JOHN SERACOL

MiFID II package is now in the final stages of negotiation. We can now see full importance of this legislation. Chief concerns of ICMA and members remain possibility of limited trading of bonds etc.

Transparency - welcome that they recognise importance of liquidity. ICMA have launched survey of current market conditions. The purpose is to gather statistics for the implementation of the new transparency regime.

Relationship between EU and other countries - final position will probably be compromise between status quo (need approval in individual countries) and a single market measure (ie once in one country can do business anywhere). There are some final points being worked out. Detailed rules will be discussed when Level 1 text agreed - this is expected before Easter. ESMA discussion paper expected soon about division of labour at Level 2.

Access to market infrastructure - MiFID once implemented should help move to market-based financing. This shift is in interests of ICMA members.

CSD Regulation - agreement on 18 December. Final text shortly and there is still work to be done at Level 2. Shift of standard settlement cycle to T+2. Impact on ICMA rules - should T+2 always apply or just where rules of platform require this? Changes should be manageable, but a lot will depend on the detail when finalised. Settlement discipline - possibility of daily penalties has been retained with a little flexibility for SMEs etc. Repo market needs flexibility - eg GMRA allows for different resolutions based on product.

Infrastructure bonds - KATIE KELLY

Infrastructure - see article in the quarterly bulletin for more details.

Alternative ways of funding infrastructure projects are necessary. For instance in the UK there is a large pipeline of infrastructure spending. The good news is that the appetite of the private sector is healthy, including from the pension sector.

There are various challenges for the investor side, including political risk (Heathrow Airport, HS2), lack of understanding of procurement process and the loss of monoline services to enhance credit. Some concerns can be met by enhancing credit of issuer - eg the EIB's PBCE initiative. Other initiatives should be encouraged. Better communication with investors is necessary.

Draft report on financing of European Economy encourages EIB credit enhancement initiative and encourages member states to come up with similar ways to enhance structures, eg with guarantees.

ICMA will keep an eye on developments with a view to pushing the initiatives forward with its own members - eg asset managers, public issuer forum - to help address the challenges. For instance, infrastructure bond focus groups.

Dealing commission rules - NATALIE AUBRY-STACEY

FCA published consultation last year on dealing commission. A review of the current regime. The FCA had evidence that investment managers were failing to put adequate controls in place. The aim is to help firms make better judgements about commissions. Deadline is end of February.

Pan-European private placements - NICHOLAS PFAFF

USPP market represented $55bn in 2012 financed by relatively small group of US insurers. The market benefits from standard documentation. Many European companies raised funds via this model. European debt capital markets are going to be necessary following squeeze on bank financing in coming years.

Some European countries already have active private placement markets - eg Germany. Euro PP market in France is helping drive a European market. The market represents EUR 6bn of issues with average size of EUR 100m with some EUR 20-40m. This market has been helped by a Banque de France initiative including standard documentation.

Dutch and British PP initiative in 2013 with a view to establishing a European market out of Amsterdam. Again, credit scoring and standard documentation are the goals.


  1. Re MiFID - explain likely timing of MiFID II? There is some uncertainty... But - in next few weeks, legislative partners should reach political agreement. It will be sealed by vote in Euro Parliament timetabled for March. Next step is for text to be translated into all official languages and published in OJ. That publication will mark the start of the deadlines in the text. Translation usually takes about 3 months but it is a busy time for the translators because of the end of the parliament. Let's say end of July - much implementation is about 18 months after that. But there is a lot more to be done on implementation measures in the meantime. Parliamentary vote is the next thing of important - English text will then be available.
  2. Market Abuse Regulation - what are the main concerns that ICMA are likely to express? Main areas are likely to be on pre-sounded and stabilisation safe harbours. On pre-sounding, people are a bit worried that issuers may have obligation to "cleanse" insiders. How do you "privately" cleanse? Either info stops being price-sensitive OR it enters public domain. If transaction happens, that is easy. If the transaction doesn't happen, it is difficult to make things public. Also on soundings, ESMA discussion implies that obligations will be required when soundings are carried out in relation to information that ISN'T inside information. But that mis-understands the regime. If there is no inside information, then you don't need a safe harbour. On stabilisation - there isn't anything very worrying but ESMA needs to clarify how new safe harbour will work given new Market Abuse Regulation. Market Abuse Directive only applied to regulated markets so it used to be easy to know how to make information public. More difficult with other markets.
  3. Liquidity - when will we see output from liquidity survey? Deadline for contributions is Friday. Public output is expected by the end of Q1 once initial draft is ready.
  4. Private placements - what is the timeline for possible pan-European set-up after Amsterdam EPPA after February? Is aim to mirror USPP? There is no firm schedule for EPPA. Objective is to make progress this year. Current understanding is that work has been done on documentation. From structure and documentation perspective, it is close to the USPP model. Hopefully more information will be available after working group meeting in February.
  5. When will PRIPs trilogue start? It isn't all that clear. No trilogue meetings have yet been scheduled by Greek presidency, partly because MiFID is the priority. Impression ICMA gets is that Greek may want it for first half of their presidency given complexity but nothing is fixed yet.