Liability and enforcement

Territorial scope of regulations

What is the territorial scope of the laws and regulations governing listed, cleared and uncleared equity derivatives transactions?

All German legislation applies to counterparties acting within Germany. The scope of European legislation is, in general, also limited to the EU. However, third-country entities may also be affected by German and European legislation to the extent that they are conducting cross-border business (ie, entering into transactions with counterparties located in Germany or the EU, respectively). Some legislation (eg, EMIR) is addressing the direct, substantial and foreseeable effect in the EU or whether the purpose of the transaction is aimed at evading the obligations under EMIR. Consequently, the legislation may also have, although only limited, extraterritorial effect.

Registration and authorisation requirements

What registration or authorisation requirements apply to market participants that deal or invest in equity derivatives, and what are the implications of registration?

Market participants may require a banking licence, depending on their activities in the equities derivatives market (see question 3). Other types of registration now exist that are specific to the equity derivatives market.

Reporting requirements

What reporting requirements apply to market participants that deal or invest in equity derivatives?

See question 9.

Legal issues

What legal issues arise in the design and issuance of structured products linked to an unaffiliated third party’s shares or to a basket or index of third-party shares? What additional disclosure and other legal issues arise if the structured product is linked to a proprietary index?

There are not any specific issues with this type of product. However, whenever reference is made to an underlying third party, the issuer of the relevant structured product needs to ensure sufficient information (public or otherwise) is available. This is particularly the case where a disclosure document needs to be drawn up (eg retail prospectus). Furthermore, with the new Regulation (EU) 2016/1011 of 8 June 2016 on indices used as a benchmark for financial instruments and financial contracts or to measure the performance of investment funds, and amending Directives 2008/48/EC and 2014/17/EU and Regulation (EU) No. 596/2014 (Benchmark Regulation), specific rules on the use of indices may apply. In the case of proprietary indices, the Delegated Regulation (EU) No. 862/2012 of 4 June 2012 amending Regulation (EC) No. 809/2004 as regards information on the consent to use of the prospectus, information on underlying indexes and the requirement for a report prepared by independent accountants or auditors needs to be complied with. In particular, conflicts of interest need to be addressed and disclosed.

Liability regime

Describe the liability regime related to the issuance of structured products.

The liability regime may apply in respect of the structured product (ie, an error of the product or the covenants or representations provided by the issuer of the relevant product). This regime is based on the principles related to breach of contract.

A further liability regime exists in respect of wrong or insufficient disclosure as regards the underlying risk or the mechanism of the relevant structured product. This so-called ‘prospectus liability’ may be established on the basis of sections 21 and 22 of the German Securities Prospectus Act, if a prospectus under this regime has been drawn up. If no prospectus has been drawn up under this regime, an issuer may still be liable for any information provided to investors under the prospectus liability regime established by case law.

Finally, detailed and extensive case law exists in relation to the misselling of structured products in Germany. Sellers of structured products need to comply with the principles established by courts in respect of providing appropriate financial advice to investors. See question 13.

Other issues

What registration, disclosure, tax and other legal issues arise when an issuer sells a security that is convertible for shares of the same issuer?

The principles set out in question 30 apply in respect of convertibles as well. Apart from specific rules applicable to convertible issuers under section 221 of the AktG requiring specific authorisation for the share capital underpinning the issuance of convertibles, convertibles are treated as a form of securitised equity derivative.

What registration, disclosure, tax and other legal issues arise when an issuer sells a security that is exchangeable for shares of a third party? Does it matter whether the third party is an affiliate of the issuer?

Exchangeable bonds are regarded as equity derivatives and no specific rules apply in that respect. If the third party is an affiliate of the issuer, the relevant corporate rules in relation to convertibles may apply.