RECENT DEVELOPMENTS ON THE AMENDMENT OF THE SECURITIES MARKET ACT
ACT ON RESOLUTION OF CREDIT INSTITUTIONS
Act 11/2015 of 18 June, on the recovery and resolution of credit institutions and investment firms (Resolution Law) introduces significant changes to the Securities Market Act of 28 July (LMV).
Firstly, the LMV is amended in relation to the clearing, settlement and registration of securities. As part of the reform process of the Spanish system for the clearing, settlement and registration of securities, the amendment of the LMV is a necessary step in order to implement significant changes on the clearing and settlement of all equity transactions intended for the first quarter of 2016. Among such changes are the interposition of a central counterparty (CCP); the change of a registration references-based register into a balance-based register; the establishment of an information system for supervision purposes; and a decrease in the settlement cycle, which will be two days following the relevant transaction date (D+2), i.e. one day shorter than it is currently, pursuant to Regulation (EU) 909/2014 of the Parliament and the Council, dated 23 July 2014, on improving securities settlement in the European Union and on central securities depositories (Regulation 909/2014).
Secondly, the LMV is amended with respect to transparency requirements in relation to information about issuers of securities admitted to trading on a regulated market, in order to transpose Directive 2013/50/EU (the latest Transparency Directive) by the European Parliament and the Council, dated 22 October 2013.
Clearing, settlement and registration of securities
Registration of securities
The LMV includes certain aspects regarding securities registration which are already in the system and contained in a number of rules: the required representation of securities admitted to trading on multilateral trading facilities in book-entry form; the required granting of a public deed for the issue of equity securities; and the two- tier securities registration system.
The following are among the new changes regarding the registration of securities:
- The principle of irreversibility for securities represented in book-entry form is cancelled.
- A basic description of the accounts structure in the central registry of central securities depositories (CSDs) is introduced, including, in addition to own accounts and general third-party accounts, the possibility of having individual accounts.The individual accounts shall contain the securities balances, segregated from the rest of the accounts, for any such clients of the participating entities requesting that their securities are held in this type of account in the central registry.
- The pro-rata rule is adapted to the new type of accounts and shall apply in the event of the insolvency of any participating entity and an insufficient securities balance. Thus, the clients of an insolvent participating entity that had securities in an individual account on the CSD’s central registry shall not be affected by the pro-rata rule in the event of a potential deficit in the third-party general account.
Settlement of transactions and financial rights or obligations linked to the securities
The LMV incorporates the rule that, from the execution of a transaction, both the purchasers and sellers of securities admitted to trading on official secondary markets shall be required to deliver the relevant cash and securities, even where settlement is performed at a later stage. Additionally, the LMV sets forth that the purchaser shall become the owner of the securities upon their registration in the purchaser’s name into the securities accounts.
When managing corporate events, issuers shall bear in mind the rules applicable to the execution, clearing, settlement and registration of transactions in their notifications to the governing body of the market and the CSD.
It is worth mentioning that a separate regime is set forth in connection with the profits, rights and obligations inherent to the ownership of securities, for shares or equivalent securities, than for other securities. In relation to shares or securities equivalent to shares, these shall be borne by and benefit the purchaser from the date of purchase in the official secondary market. However, profits, rights and obligations inherent to the ownership of fixed income securities, and other securities which are not equivalent to shares, shall be borne by and benefit the purchaser from the date of settlement of the relevant transaction.
Safeguards against clients’ defaults
In order to ensure an orderly settlement of transactions and mitigate systemic risk, the members of the markets and CCPs, and the participating entities in the CSDs, are protected against their clients’ insolvency or failure to comply with their securities or cash delivery obligations.In such cases, an in-rem right by way of pledge over the securities and cash resulting from the relevant transaction shall be granted in their favour, as well as the possibility of transmitting orders contrary to such clients’ transactions, where these have not yet been settled.
Information system (post-execution interface)
For the purposes of supervising the new securities clearing, settlement and registration system, a specific information system, named “post-execution interface”, is created and shall be managed by the CSD. This information system shall consider the information provided by all the parties involved in the post-execution process. Its ultimate purpose is to enable traceability of transactions, the control of risks and guarantees, the proper management of registration levels and the proper settlement of transactions, given that registration references cease to exist as a controlling element.
The LMV incorporates the governing principles applying to the control and surveillance roles of the markets, the CCPs and the CSDs, and the duties of their members and participating entities.
The LMV incorporates Regulation 909/2014 for the purposes of duly coordinating both legal provisions.
The scope of application of the LMV’s sanctioning regime is extended to include the members and participating entities of the markets, CCPs and CSDs, so that any infringement of such infrastructure rules will be subject to administrative penalties.
Transparency requirements in relation to securities issuers
The LMV is amended to extend from five to ten years the period within which issuers shall keep and make available to the general public their annual and half-yearly financial reports. With regard to the latter, the maximum term for disclosure thereof is increased from two to three months. These new terms shall apply to the annual and half-yearly financial reports to be published six months after the entry into force of the Resolution Law.
Additionally, the LMV provides for the obligation to notify, within the major shareholdings regime, the ownership of any financial instruments granting the right to acquire shares, regardless of the fact that they are physically settled or cash settled. Therefore, cash settled derivatives granting the holder a long position over the shares of an issuer shall be now notified to the Comisión Nacional del Mercado de Valores (CNMV). However, such obligation shall not apply until a date is provided by the relevant implementing rules (Royal Decree 1362/2007 and CNMV Circular 2/2007).
Lastly, tougher penalties are imposed for very serious infringements of the LMV as regards to transparency requirements.