The European Commission is required, under PD3, to adopt certain Level 2 measures (delegated acts) by 21 January 2019.

The Commission sought technical advice from ESMA on various aspects of those Level 2 measures, and ESMA is now consulting across six key areas of PD3 to enable it to give technical advice to the Commission on Level 2 measures by March 2018.

Three consultation papers have been published, and this is the first in series of three briefings examining the aspects of those consultation papers that are relevant to debt issuers.

BACKGROUND

As mentioned in our recent briefing (Prospectus Regime: PD3 Published), the Commission sought technical advice from ESMA (by March 2018) on the Level 2 delegated acts that the Commission must adopt in six areas:

» the format of the Prospectus, the Base Prospectus and the Final Terms, and the specific information to be included in a Prospectus; 

» the minimum information to be included in the Universal Registration Document (URD);

» the reduced information to be included under the simplified disclosure regime for secondary issuances;

» the reduced content and the standardised format and sequence for the EU Growth Prospectus;

» the criteria for the scrutiny of Prospectuses and URDs and the procedures for their approval; and

» in respect of the URD, the procedures for filing it, the criteria for reviewing it, and the conditions under which frequent issuer status will be lost.

PUBLICATION OF CONSULTATION PAPERS BY ESMA

On 6 July 2017, ESMA published three Consultation Papers covering all of the above topics:

Consultation Paper: Draft technical advice on format and content of the prospectus

Consultation Paper: Draft technical advice on content and format of the EU Growth prospectus

Consultation Paper: Draft technical advice on scrutiny and approval of the prospectus

The consultation period closes on 28 September 2017.

As mentioned above, this briefing covers the first Consultation Paper (on the format and content of the prospectus) which addresses the Commission’s requests for advice in respect of the first three points. Further briefings will be published on the second and third consultation papers.

INITIAL POINTS TO NOTE

ESMA’s approach

The Commission asked ESMA to follow the “building block approach” set out in the existing EU Prospectus Regulation (i.e. to distinguish between the schedules for registration documents and those for securities notes, in addition to any other relevant building blocks), and to take account of the different information requirements of investors in equity securities and investors in debt securities. 

The basic format of the Prospectus (registration document, securities note and Summary) is already set out in PD3. Regarding the more detailed format and content of the Prospectus, ESMA carried out a detailed review of the existing EU Prospectus Regulation to establish which elements can be carried over into the new Level 2 measures under PD3, and which provisions may no longer be fit for purpose.

Prospectus Summary

As the content of the Prospectus Summary is prescribed in considerable detail in PD3 itself, ESMA does not propose to deal with the Summary in detail in Level 2 measures (save for the requirements around the presentation of key financial information).

Registration Document - Disclosure Annexes

ESMA has suggested that the method of putting together a Prospectus should remain the same, but that the number of disclosure annexes should be reduced.

While, for debt securities, there will be different annexes for retail and wholesale securities, vanilla debt is the focus of the core disclosure obligations.

Securities Note

Where identical requirements apply to the registration document and securities note for a particular issuance, and the Prospectus is prepared as a single document, ESMA’s proposal is that those requirements should be combined into a single section.

Incorporation by Reference

While PD3 contains a provision allowing for ESMA to develop Level 2 measures to broaden the list of documents that can be incorporated by reference, ESMA considers that, for the time being, the list of documents set out in PD3 is sufficient.

Cover Notes

As the inclusion of cover notes at the start of the Prospectus has become standard practice, ESMA is proposing to make the inclusion of a cover note mandatory. That cover note should:

» be written in plain language;

» avoid the use of legal disclaimers;

» clearly set out what actions national competent authorities (NCAs) have taken regarding the scrutiny of the Prospectus; and

» be limited to 3 pages.

Location of Risk Factors

ESMA proposes that risk factors be located after the Summary or, in the case of a Base Prospectus, after the general description of the programme.

Use of Proceeds

ESMA proposes that there be a dedicated section in the Prospectus dealing with use of proceeds, which should be prominent and provide clear information to investors.

Order of Disclosure

ESMA has suggested retaining the current flexibility for issuers to disclose required information in an order that suits them, as that gives issuers freedom to structure their “story” themselves.

Base Prospectus

In the case of a multi-product Base Prospectus, ESMA proposes that the principle of segregation should continue but there should be more signposting and more obvious segregation within the document so that the terms and conditions applicable to each type of security are more readily identifiable.

How to use the Base Prospectus

For offers of non-equity securities to retail investors, ESMA proposes that the Base Prospectus should include a section (of up to 2 pages) setting out how it is to be used (immediately after the cover note and table of contents). 

Final Terms

As the form of Final Terms is so well established, ESMA’s view is that changes should be limited.

Where items contained in the form of Final Terms in the Base Prospectus are not applicable to a particular issuance, there will no longer be a requirement to include those items with a reference to them not being applicable.

ESMA’s view is that an expanded list of what additional information may be included in Final Terms should be included as a new annex in the Level 2 measures. For example, where the PRIIPs Key Information Document (KID) is used as a constituent part of the Summary, any additional information contained in the KID which is not included in the Base Prospectus should be included in a new annex in the Final Terms.

Universal Registration Document

Notable points proposed by ESMA in this Consultation Paper are as follows:

» the URD should be a stand-alone document which is capable of allowing an issuer to issue securities of any type, while meeting the issuer’s publication requirements under the Transparency Directive (TD);

» the URD’s format should follow that of the share registration document while incorporating the additional disclosures (these should be dispersed throughout the document, rather than the issuer’s TD disclosures simply being appended to the end of the document); and

» ESMA has decided against putting in place a cross-reference list with the items to be disclosed in the annual or half-yearly reports under the TD in the URD annex to avoid duplication, and as the requirements under the TD could change. 

Additional Acts

ESMA’s view is that the Commission must clarify in a delegated act which schedules are applicable to which types of security, and how the schedules should be assembled.

CONTENT – KEY PROPOSED CHANGES

Retail Debt and Derivatives Registration Document

Key changes proposed by ESMA are as follows:

» Deletion of the requirement to disclose selected financial information.

» Requirement for issuers to include their website address, LEI and credit rating.

» “Investments” replaced by “information on the issuer’s borrowing requirements and funding structure”.

» Deletion of the disclosure requirement relating to board practices.

» Mandatory inclusion of outstanding and valid published profit forecasts and estimates in the Prospectus. » Deletion of the requirement to include an independent accountant’s or auditor’s report for profit forecasts and estimates.

» Documents on display must be electronically available.

Wholesale (Qualified) Debt and Derivatives Registration Document

Key changes proposed by ESMA are as follows:

» Requirement for issuers to include their website address, LEI and credit rating. 

» Requirement to restate financial statements has been removed.

» Alignment of the disclosure item relating to profit forecasts and estimates with the wording contained in the retail debt annex but with the inclusion of any such forecast still left to the discretion of the issuer.

» Requirement to make documents on display electronically available.

Retail Debt and Derivatives Securities Note

Key changes proposed by ESMA are as follows:

» Re-categorisation of type of securities being offered from Category B (information in respect of which the Base Prospectus must include all the general principles relating to the information, and only the details that are unknown at the time that the Base Prospectus is approved can be left blank for later insertion in the Final Terms) to Category A (information that shall be included in the Base Prospectus and cannot be left blank for later insertion in the Final Terms).

» Re-categorisation of type of investors to whom the securities are being offered from Category A to Category C (information in respect of which the Base Prospectus can contain a reserved space for later inclusion of that information which was not known at the time that the Base Prospectus was approved. That information must be inserted in the Final Terms).

» Reduction of tax disclosure in line with PD3.

» Requirement for the issue price of the securities to be disclosed in the Prospectus in case of admission to trading.

» Requirement to make details relating to the representation of security holders available electronically and free of charge.

» Obligation to include rating information on the securities where these are rated.

Wholesale Debt and Derivatives Securities Note

Key changes proposed by ESMA are as follows:

» Use of proceeds requirement to be added where the reason for the issuance is different from making a profit or hedging risks.

» Re-categorisation of type of securities being offered from Category B to Category A.

» Requirement to make details relating to the representation of security holders available electronically and free of charge.

Derivative Securities Building Block

Key changes proposed by ESMA are as follows:

» Regarding how any return on the securities takes place, a recategorisation from Category B to Category A.

» Amended requirements for more detailed disclosure on underlying securities and reference obligations by bringing the disclosure in line with the disclosure requirements for similar investments, especially in cases where investors could lose some or all of their investment.

» Regarding the description of an index provided by a legal entity or a natural person acting in association with, or on behalf of, the issuer, a re-categorisation from Category A to Category B.

» Requirement to provide disclosure in line with the Benchmarks Regulation regarding whether any benchmark referenced is provided by an administrator included in the register under the Benchmarks Regulation. 

Asset-Backed Securities Registration Document

The limited changes proposed by ESMA are as follows:

» Requirement for issuers to indicate their website address and LEI.

» Requirement for documents on display to be made electronically available.

» Restatement requirement for financial statements has been deleted in line with wholesale debt.

» Information on the parties of the securitisation program has been moved.

Asset-Backed Securities Building Block

Some of the changes proposed by ESMA are with a view to aligning the prospectus regime with the regime for simple, transparent and standardised (STS) securitisations (see our recent briefing: Securitisation Reform: Agreement Reached):

» Issuers should indicate whether an STS notification has been communicated to ESMA and explain its meaning. Investors should also be alerted to the fact that STS is not a static designation.

» Re-categorisation of the general description of the obligors, in the case of a small number of obligors, from Category A to Category C.

» Re-categorisation of the legal nature of the assets from Category C to Category A. This information should be known at the time of the approval of the Base Prospectus and is important information for investors and NCAs.

» Re-categorisation of the loan to value of level of collateralisation from Category C to Category B. 

» Inclusion of details of the guarantor as if it were the issuer.

» Inclusion of brief details and an electronic link to further information where the underlying securities are non-equity securities traded on a regulated market, equivalent third country market or SME Growth Market.

» Addition of a requirement to provide disclosure where the underlying is a collective investment undertaking which is not admitted to trading.

» Re-categorisation from Category A to Category B of other arrangements upon which principal and interest payments are dependent.

» Re-categorisation from Category B to Category A of the identity and expertise of the collateral manager.

» Re-categorisation of how payments are collected in respect of the assets from Category B to Category A, with the financial service table as Category C.

» Requirement for the description of the structure of the transaction to contain an overview of the transaction and the cash flows, including, if necessary, a structure diagram.

» Alignment of post-issuance reporting with the draft STS Securitisation Regulation.

Content of the building block for pro forma financial information

ESMA is not proposing substantive changes. Instead, it simply proposes to reorganise and regroup the existing requirements to make them easier to understand.

Content of the additional building block for guarantees 

ESMA is substantially basing the contents of this building block on the existing Annex VI of the EU Prospectus Regulation.

Universal Registration Document

Regarding the content of the URD, ESMA has based its proposal on the contents of the Share Registration Document (as required by PD3). It has suggested that the URD disclosure requirements be those for the Share Registration Document together with additional items relating to TD disclosure not replicated in PD3.

The new URD regime will allow issuers who have had a URD approved in 2 consecutive financial years to file and publish their subsequent URDs without prior approval. ESMA is proposing that each URD clarify whether it was approved before publication, or simply filed.

SECONDARY ISSUANCES

ESMA was asked to provide technical advice to the Commission on the content of the schedules applicable under the simplified prospectus regime for secondary issuances. It has proposed both a registration document and a securities note that can be used for equity and non-equity securities, irrespective of whether the securities are listed on a regulated market or on an SME Growth Market.

We will issue further updates as the Level 2 measures progress.