Highs and lows on the markets in 2014
It has been another rollercoaster year for the UK's capital markets. The start of 2014 looked promising as more companies jumped on the IPO bandwagon on both sides of the Atlantic, taking advantage of the momentum built by high profile businesses choosing to IPO in 2013. We even saw the first few companies launch a listing on the High Growth segment of the Main Market, the new LSE market which offers a launch pad for companies looking to transfer to a premium listing in due course. Private equity backed IPOs were also very popular in 2014, and some have commented that their volume has fuelled a strong exit market.
On the global debt capital markets, overall, we have seen a strong recovery. Activity on the global debt capital markets was up 34% at US$4.5 trillion in the first nine months of the year compared to the same period in 2013, the strongest nine month start since 2009. This is despite the lack of liquidity in the bond market, as reported in ICMA's Secondary Market Survey. However, this was largely due to a very strong first half; the third quarter saw a decrease of 29% compared to the second.
In the second half of 2014, we witnessed significant fluctuations in confidence on the global debt and equity markets. Market commentators blamed the dips on rumours of poor company valuations, a tentative after-market and fears of market saturation. Market confidence has been further dented by the continuing global political turbulence, most notably, in Russia, Ukraine and the Middle East. The Scottish referendum may also have had an impact on the UK markets, with businesses cautiously waiting to review the outcome before pursuing their capital markets transactions. The UK markets have been resilient however and have made a steady recovery as we approach the New Year.
2014 regulatory round-up
Regulation affecting domestic and European capital markets continued to evolve as 2014 proved to be another busy year for the regulators. Here is a round-up of some of the key regulatory highlights:
- At the start of the year, the LSE published its revised AIM Rules for Companies and Nominated Advisers. This was closely followed by the FCA's publication of its anticipated new Listing Rules, which came into force in May 2014, and were designed to offer greater protections to minority shareholders, particularly in premium-listed companies with controlling shareholders.
- In Europe, the new Market Abuse Regulation (MAR) was published in the Official Journal of the European Union in July 2014. MAR updates and strengthens the existing European framework by extending its scope to new markets and trading platforms. The recast Markets in Financial Instruments Directive and regulation (known as "MiFID II") were published in the Official Journal on 12 June 2014 and most of the rules in MiFID II will become effective in January 2017. MiFID II introduces new rules relating to transparency, dealing commission, product governance, point of sale requirements and product intervention.
- We also saw the impact of the political conflict between Russia and Ukraine reach London's capital markets. New EU regulations came into force which imposed certain restrictive measures on capital markets transactions involving specific Russian companies and resulted in additional confirmation requirements from the UKLA and AIM for capital markets issuers.
- Another notable development was the European Commission's proposed changes to the Shareholders Rights Directive to enhance the effective and long-term shareholder engagement with listed companies. The key elements of the proposal include provisions concerning the identification of shareholders and facilitation of shareholders rights; the transparency of asset managers, institutional investors and proxy advisors; the shareholders' right to vote on directors' remuneration; and related party transactions.
What can you expect from 2015?
With the general election around the corner, the regulatory outlook for 2015 is uncertain. A possible EU referendum on the political agenda may also influence future policy relating to the UK's capital markets. As usual, we will continue to update you on the key regulatory developments affecting the capital markets next year.
In the meantime, here are some highlights to note which have been announced for next year's regulatory agenda.
- Europe is preparing for the implementation of the new market abuse regime in 2016. We expect ESMA to report back on the feedback received during its consultations on the implementing measures in relation to MAR in 2015, together with publishing its final technical guidance. It is also likely that the FCA will consult on changes to the UK market abuse regime towards the end of next year as we approach the implementation deadline.
- We also expect to see further debate around the European Commission's proposals on the amended Shareholder Rights Directive next year before an expected publication of the final text in late 2015 or early 2016. Member states will have 18 months from the coming into force of the amendments to implement the proposals.
- In the UK, the new Listing Rules on sponsor competence will come into force in February 2015. The FCA is also expected to report back on whether the sponsor conflicts regime should be subject to reform, following its call for views this year.
- The European Commission is required to review the Prospectus Directive and present a report to the European Parliament and European Council by 1 January 2016. We expect that the Commission will need to start engaging with market participants in 2015. The Commission is required to report on certain areas such as the liability regime and the definition of a "public offer".
- We expect the interest in "green bonds" to continue to rise, as increasing numbers of corporate issuers have issued green bonds, the proceeds of which are used to fund environmental and socially responsible projects.
- Now the final PRIPS text has been published and the discussion paper on the Key Information Documents which particularly addresses how cost, risk and performance scenarios could be disclosed, there will be more discussion on this in the coming months.
- Work on the proposed financial transaction tax (FTT) in 11 member states through the "enhanced cooperation" procedure is likely to intensify. The first phase of the FTT is expected to be implemented from 1 January 2016. Participating member states are in agreement that transactions in shares of companies listed on stock exchanges should be subject to the FTT but further work is required on derivatives to be subject to the FTT. The current proposal is for a minimum 0.1% tax rate for transactions in all types of financial instruments, except for derivatives that would be subject to a minimum 0.01% tax rate.
- Following the announcement by Jean-Claude Juncker of the initiative to create a capital markets union, in 2015, the Commission plans to consider the development of a true European private placement market and intends to launch a public consultation with a pan-European capital markets action plan, due in the summer of 2015. The Commission will look at ways of encouraging greater diversity of funding, such as new ways to channel non-bank finance to businesses and infrastructure projects, increasing the efficiency of the EU capital markets, greater convergence of supervision amongst regulators and increasing the attractiveness of the EU capital markets for investors.
Happy holidays to you from Hogan Lovells Capital Markets
Whilst the global political climate looks likely to be a key factor in investor confidence and market performance, we expect that 2015 will mark another busy year for the UK's capital markets.