Overview

Typical types of transactions

Other than transactions between dealers, what are the most typical types of over-the-counter (OTC) equity derivatives transactions and what are the common uses of these transactions?

There are no public statistics about the use of OTC equity derivatives in Spain, but dealers and market participants are quite sophisticated and it can be expected that all the most common OTC equity derivatives are used. The most important of these include:

  • margin loans, used to finance or leverage large shareholdings of listed shares;
  • collars and collar loans;
  • put and call transactions or swaps used to acquire an economic interest in a company, including listed companies in takeover situations;
  • call spreads;
  • share loans, share sale and repurchase transactions and zero strike call options on convertible debts;
  • other credit default swaps; and
  • other agreements to be settled in cash (by differences).

In addition to the above, we have recently received a number of legal enquiries regarding the use of prepaid forward contracts and regulatory capital optimisation transactions.

Borrowing and selling shares

May market participants borrow shares and sell them short in the local market? If so, what rules govern short selling?

Yes. Since 2011, short selling in Spain has been heavily influenced and governed by EU directives and regulations. The most relevant are the following:

  • Regulation (EU) No. 236/2012 of the European Parliament and of the Council of 14 March 2012 on short selling and certain aspects of credit default swaps, and all the related implementing regulations:
    • Commission Delegated Regulation (EU) No. 826/2012 of 29 June 2012, supplementing Regulation (EU) No. 236/2012 with regard to regulatory technical standards on notification and disclosure requirements with regard to net short positions, the details of the information to be provided to the European Securities and Markets Authority (ESMA) in relation to net short positions and the method for calculating turnover to determine exempted shares.
    • Commission Implementing Regulation (EU) No. 827/2012 of 29 June 2012, laying down implementing technical standards with regard to the means for public disclosure of net position in shares; the format of the information to be provided to ESMA in relation to net short positions; the types of agreements, arrangements and measures to adequately ensure that shares or sovereign debt instruments are available for settlement; and the dates and period for the determination of the principal venue for a share according to Regulation (EU) No. 236/2012.
    • Commission Delegated Regulation (EU) No. 918/2012 of 5 July 2012, supplementing Regulation (EU) No. 236/2012 of the European Parliament and of the Council with regard to definitions, the calculation of net short positions, covered sovereign credit default swaps, notification thresholds, liquidity thresholds for suspending restrictions, significant falls in the value of financial instruments and adverse events, corrected by Commission Delegated Regulation (EU) No. 2015/97 of 17 October 2014, as regards the notification of significant net short positions in sovereign debt.
    • Commission Delegated Regulation (EU) No. 919/2012 of 5 July 2012, supplementing Regulation (EU) No. 236/2012 with regard to regulatory technical standards for the method of calculation of the fall in value for liquid shares and other financial instruments.
  • Spanish Securities Markets Law, as approved by Royal Legislative Decree 4/2015 of 23 October 2015 (Securities Market Law).

The legislation set out above focuses on three main aspects:

  • notification to competent authorities of significant net short positions in shares;
  • public disclosure of significant net short positions in shares; and
  • restrictions on certain uncovered short sales of shares.

In this regard, any person who has a net short position in relation to listed shares in a Spanish market must notify the National Securities Market Commission (CNMV), the competent authority in Spain, of any position that reaches or falls below a percentage equal to 0.2 per cent of the issued share capital and of every 0.1 per cent increment above that. Net short positions must be disclosed to the public if the percentage is equal to 0.5 per cent of the share capital, and thereafter, when it increases by 0.1 per cent increments.

Article 12 of Regulation No. 236/2012 sets forth certain restrictions on uncovered short sales of shares, which may be carried out only if one of the following conditions is fulfilled:

  • the person has borrowed the share or has made alternative provisions resulting in similar legal effect;
  • the person has entered into an agreement to borrow the share or has another absolutely enforceable claim to be transferred ownership of a corresponding number of securities of the same class so that the settlement can be effected when its due;
  • such claim may arise under either contract or property law; or
  • the person has an arrangement with a third party under which that third party has confirmed that the share has been located and has taken measures with regard to third parties necessary for the person to have a reasonable expectation that settlement can be effected when it is due.

In addition to the EU Regulations and the potential communications and recommendations from ESMA, the CNMV has, from time to time, issued certain recommendations and guidelines on this issue that must also be considered when performing any short sale of shares that are listed on Spanish markets.

Applicable laws and regulations for dealers

Describe the primary laws and regulations surrounding OTC equity derivatives transactions between dealers. What regulatory authorities are primarily responsible for administering those rules?

OTC equity derivatives contracts are not legally defined in the Spanish Civil Code or Commercial Code.

Notwithstanding, in addition to the contractual terms of the OTC itself, when analysing the law and regulations that apply to OTC transactions in Spain, the regulations contained in the Spanish Civil Code and Commercial Code must be considered, in particular regulations relating to option agreements and sale and purchase agreements (which are legally defined contracts) expressly included in those Codes.

Moreover, the conditions for netting of obligations in Spain are regulated in Royal Decree-Law (RDL) No. 5/2005 of 11 March 2005, providing urgent reforms for the increase of productivity and public contract (RDL 5/2005), which is the Spanish implementation of Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements. RDL 5/2005 establishes the formalities needed for swap agreements, other derivatives and collateral securities transactions, which only require those agreements to be executed in writing (and not as a Spanish public deed to be valid with regard to third parties); the procedure for the enforcement of collateral arrangements; the right of substitution or replacement of collateral; and certain bankruptcy protections with respect to those types of agreement and related guarantees (see question 19). Obviously, with respect to dealers, all applicable European regulations on the recovery and resolution of credit institutions and investment firms under Directive No. 2014/59/EU (BRRD), as implemented in Spain by Law No. 11/2015 of 18 June 2015, and Royal Decree 1012/2015 of 6 November 2015, must be observed.

Finally, the Securities Market Law establishes some reporting obligations. In addition to the reporting obligations under Regulation No. 236/2012, as detailed in question 2, Regulation (EC) 600/2014 (MiFIR) and Directive 2014/65/EC (MiFID II), fully implemented in Spain, requires, as per article 21 MiFIR and CNMV criteria, the volume and price of all OTC transactions traded on a trading venue being published through an approved publication arrangement. Also, article 14 MiFIR requires, for any OTC derivatives traded on a trading venue (and as long as there is a liquid market for that product), that dealers make public their firm quotes.

The main regulator of dealers is the CNMV and, in addition, if the dealer is a credit institution, the Bank of Spain (or European Central Bank as applicable).

Entities

In addition to dealers, what types of entities may enter into OTC equity derivatives transactions?

Typically, issuers and shareholders of publicly traded common securities are frequently the counterparties of OTC equity derivatives transactions, mainly for margin loans or to purchase certain protections with respect to issuances of shares and convertible notes. Other private funds and investment funds normally participate in this market. Although individual shareholders may enter into these transactions, usually only sophisticated investors or insiders participate in them owing to MiFID restrictions on dealing with individuals in these transactions. However, there are no general regulations prohibiting individuals or certain types of companies from entering into OTC equity derivatives transactions.

In the past few years, more companies have started using OTC equity derivatives as a first stage of approach to acquire or maintain strategic stakes in other publicly traded companies and for regulatory or risk optimisation.

Applicable laws and regulations for eligible counterparties

Describe the primary laws and regulations surrounding OTC equity derivatives transactions between a dealer and an eligible counterparty that is not the issuer of the underlying shares or an affiliate of the issuer? What regulatory authorities are primarily responsible for administering those rules?

In general terms, dealers having as counterparty an entity that is not the issuer of the underlying shares or an affiliate of the issuer, are affected by the same regulations as they are when dealing with the issuer itself. However, the reporting obligations of OTC equity derivatives arranged with the issuer or the affiliate of the issuer or the directors of such issuer apply for much lower thresholds, as detailed in question 9.

Securities registration issues

Do securities registration issues arise if the issuer of the underlying shares or an affiliate of the issuer sells the issuer’s shares via an OTC equity derivative?

No. Notwithstanding, issuers are subject to the same short sale restrictions as other market participants pursuant to Regulation No. 236/2012. Equity lines are commonly used by some Spanish issuers in a limited way.

Repurchasing shares

May issuers repurchase their shares directly or via a derivative?

Issuers may repurchase their shares directly or via a derivative. Issuers must observe the general limitations included in the Spanish Corporations Law, which establishes a general limit for companies of 20 per cent of their share capital to acquire their own shares or shares in their parent company, or of 10 per cent for shares in a listed company. In any case, such acquisition will require the prior authorisation of the company’s general shareholders’ meeting. Furthermore, in Spain, there are strict limits on financial assistance and, as a general rule, third parties are not allowed to have assistance when purchasing their own shares (with certain exceptions, such as for banks acting in the ordinary course of business and in relation to their own shares). The consequence of breaching this prohibition is the consideration that the transaction is null and void.

In addition, an issuer dealing in OTC equity derivatives must also consider the additional restrictions and particularities established in Regulation (EU) No. 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (Market Abuse Regulation) and the rules and guidelines published by ESMA on the public disclosure and conditions for issuers acquiring their own shares so as not to be considered market abuse.

Risk

What types of risks do dealers face in the event of a bankruptcy or insolvency of the counterparty? Do any special bankruptcy or insolvency rules apply if the counterparty is the issuer or an affiliate of the issuer?

OTC equity derivatives have special rules in relation to insolvency proceedings in the event of insolvency of the counterparty. According to those specific rules, as determined by article 16 of RDL 5/2005, the early termination, cancellation, termination, enforcement or other clauses with a similar effect under a netting agreement (such as an OTC derivative) or the financial transactions carried out under such netting agreement, shall not be limited, restricted or affected in any other way by the starting of a bankruptcy process. There are special rules limiting potential clawback actions under the bankruptcy process and protections if the dealer wants to maintain the derivative during the bankruptcy process.

RDL 5/2005 also includes certain protections with respect to the collateral related to such OTC equity derivative, including that such collateral may be enforced and executed even after the opening of the bankruptcy process and that clawback action shall be limited to fraud cases.

Notwithstanding these special protections, dealers must carefully consider the commingling risk (owing to the fungible nature of money under Spanish laws) and that if the counterparty is also a credit institution, these protections may be affected by bail-in and bail-out actions developed under BRRD regulations.

Reporting obligations

What types of reporting obligations does an issuer or a shareholder face when entering into an OTC equity derivatives transaction on the issuer’s shares?

In addition to the reporting obligations detailed in questions 2 and 3, shareholders may have reporting obligations under the Securities Market Law and under Royal Decree 1362/2007 of 19 October 2007, on transparency requirements of issuers, as amended. Under Royal Decree 1362/2007, the shareholder that acquires or sells shares or voting rights with respect to listed shares shall be obliged to report to the issuer and to the CNMV if the thresholds are over 3 per cent, 5 per cent, 10 per cent, 15 per cent, 20 per cent, 25 per cent, 30 per cent, 35 per cent, 40 per cent, 45 per cent, 50 per cent, 60 per cent, 70 per cent, 75 per cent, 80 per cent and 90 per cent. OTC equity derivatives may be considered for the purpose of such thresholds. This affects not only OTC equity derivatives that can be delivered by physical delivery but also those that are settled in cash and could have a similar economic effect as physical delivery. Article 28 also establishes certain rules for calculating the voting rights of such OTC equity derivatives.

Directors of the issuer must disclose, under Royal Decree 1362/2007, any shares and OTC equity derivatives they may have, including options. Further, the issuer must notify the CNMV of any acquisition or sale of its own shares over 1 per cent, and of each additional 1 per cent (up to the maximum of 10 per cent permitted).

All these communications must be made within four business days after the acquisition or the closing of the agreement and the CNMV will publish those holdings on its website.

Restricted periods

Are counterparties restricted from entering into OTC equity derivatives transactions during certain periods? What other rules apply to OTC equity derivatives transactions that address insider trading?

The Market Abuse Regulation sets forth certain restrictions and prohibitions to enter into any kind of transaction, including OTC equity derivatives transactions, when the counterparty may have material, non-public information about the issuer of the underlying shares, as such information would be considered insider dealing. A person shall not:

  • engage or attempt to engage in insider dealing;
  • recommend that another person engage in insider dealing or induce another person to engage in insider dealing; and
  • unlawfully disclose inside information.

The Market Abuse Regulation and Spanish laws implementing it (including, among others, the Securities Market Law and Royal Decree 1333/2005 of 11 November 2005 on market abuse) provide certain acceptable practices, but this legislation should be considered before entering into any OTC equity derivatives transactions.

Legal issues

What additional legal issues arise if a counterparty to an OTC equity derivatives transaction is the issuer of the underlying shares or an affiliate of the issuer?

In addition to the foregoing, the internal code of conduct of each issuer of listed shares must be considered when contracting an OTC with that issuer, as it may include certain restrictions on closing or announcing transactions before or after publishing its financial reporting (blackout periods).

Tax issues

What types of taxation issues arise in issuer OTC equity derivatives transactions and third-party OTC equity derivatives transactions?

Owing to the complexity and broad range of transactions that could be carried out involving an OTC equity derivative, a lot of issues may arise from a tax perspective. There are complex rules for determining the nature of the payment in an OTC transaction, which could have different tax consequences. Moreover, tax residence of the counterparties must be considered in order to avoid or minimise any potential withholding tax or similar.

Liability regime

Describe the liability regime related to OTC equity derivatives transactions. What transaction participants are subject to liability?

Although OTC equity derivatives contracts are not defined in Spanish law (see question 3), the liability regime of the Spanish Civil Code and Commercial Code with respect to any contractual breach and its consequences will apply.

Additionally, there could also be liabilities pursuant to the Spanish Capital Markets Law and regulations, which establish liabilities for the failure to report the transaction to the CNMV or to publish it within the established period, or if the shareholder’s stake concerning the OTC equity derivative is not disclosed, as detailed in question 9. Also, additional liabilities may arise under the Market Abuse Regulation, such as the use of non-public information or any other market abuse. Finally, there are higher reporting obligations applicable to credit institutions and financial services providers, and also for directors of issuers, that could result in additional liabilities.

Stock exchange filings

What stock exchange filings must be made in connection with OTC equity derivatives transactions?

As detailed in questions 2 and 9, there are different stock exchange filings to be made with the CNMV in connection with OTC equity derivatives in relation to:

  • fee quotes from investment firms;
  • short positions in shares;
  • notification of the closing of OTC transactions;
  • volume and price of the transaction; and
  • the shareholder’s stake.

Such notifications shall be made to the public according to the thresholds detailed in question 9. Counterparties of OTC equity derivatives transactions must also comply with the filing requirements established in the European Market Infrastructure Regulation (EMIR), explained in detail in questions 19, 20 and 21.

Typical document types

What types of documents are typical in an OTC equity derivatives transaction?

As in other jurisdictions, such as the United Kingdom or the United States, for example, for OTC equity derivatives, it is common practice in Spain to use the architecture of the International Swaps and Derivatives Association (ISDA) standard forms, pursuant to the law of England and Wales or New York, including an ISDA Master Agreement (with or without a schedule thereto) and one or more trade confirmations subject to that ISDA Master Agreement. The ISDA Master Agreement governs the basic relationship between the counterparties. In each instance, the specific transaction is confirmed. Sometimes the confirmation may take the form of a master confirmation that governs the general framework for the type of transaction, with supplemental confirmations.

In addition to the above-mentioned, the Spanish Banking Association (AEB) has published a standard derivatives framework agreement to be used under Spanish law and drafted in Spanish. This framework agreement for financial operations (CMOF) is used quite often by Spanish banks, other credit institutions, other financial entities and Spanish corporates. The structure of a CMOF is similar to the ISDA architecture but considers a Spanish legal framework and therefore satisfies the requirements of RDL 5/2005 to be considered a financial agreement and receive the special protections in the event of a bankruptcy. When using ISDA, such protection shall be determined by UK or US legislation, in which case it will be recognised by Spanish judges, but this process is not as simple as it is when using a CMOF directly. A CMOF also has an annex 1 (which is similar to the schedule under ISDA), and provides an annex 3 (which is similar to the collateral annexes under ISDA but complies with the requirements to be deemed a security interest under Spanish law).

Legal opinions

For what types of OTC equity derivatives transactions are legal opinions typically given?

Legal opinions regarding capacity and validity are typically required when one of the counterparties is not a financial institution, or has securities or collateral related to the transaction. It is also typical to ask for opinions when the ISDA framework is used, to confirm the validity and enforceability of a foreign law and the potential withholding tax when the dealer is a foreign entity.

Hedging activities

May an issuer lend its shares or enter into a repurchase transaction with respect to its shares to support hedging activities by third parties in the issuer’s shares?

Yes, but it must observe the Corporations Law limitations described in question 7. In addition, the Corporations Law totally prohibits the initial subscription of shares by the issuer.

As in other jurisdictions, repurchase transactions and share loans can raise quite sensitive market manipulation issues and therefore the Market Abuse Regulation must be observed. In this regard, article 5 of the Market Abuse Regulation sets forth safe harbour conditions so that transactions are not considered market abuse trading in own shares in buy-back programmes where the full details of the programme are disclosed prior to the start of trading; and trades are reported to the CNMV as being part of the buy-back programme and subsequently disclosed to the public - adequate limits with regard to price and volume are complied with.

To benefit from this exemption, a buy-back programme shall have the following as its main purposes:

  • to reduce the capital of an issuer;
  • to meet obligations arising from debt financial instruments that are exchangeable into equity instruments; or
  • to meet obligations arising from share option programmes, or other allocations of shares, to employees or to members of the administrative, management or supervisory bodies of the issuer or of an associate company.

To benefit from this exemption, the issuer shall report to the CNMV every transaction relating to the buy-back programme.

Securities registration

What securities registration or other issues arise if a borrower pledges restricted or controlling shareholdings to secure a margin loan or a collar loan?

There is no particular registration or issue when a borrower pledges restricted or controlling shareholdings, other than those that arise when pledging other shares of the listed entity. Notwithstanding, rules regarding notification of shareholdings and insider information should be observed, as detailed above.

Borrower bankruptcy

If a borrower in a margin loan files for bankruptcy protection, can the lender seize and sell the pledged shares without interference from the bankruptcy court or any other creditors of the borrower? If not, what techniques are used to reduce the lender’s risk that the borrower will file for bankruptcy or to prevent the bankruptcy court from staying enforcement of the lender’s remedies?

RDL 5/2005 includes certain special bankruptcy protections for compensation agreements and for financial guarantees in which the pledged shares of a listed company shall be included. Article 15.4 of RDL 5/2005 establishes that these financial guarantees shall not be limited or affected in any way because the start of a bankruptcy proceeding and can, therefore, be executed immediately and separately.

Market structure

What is the structure of the market for listed equity options?

Listed equity options are listed on the Spanish Stock Exchange and Markets (BME), including the stock exchange (the BME continuous market or the Stock Market Inerconnection System (SIBE), which is the electronic market that connects the Barcelona, Madrid and Valencia stock exchanges, which are regulated markets) or the Financial Futures Spanish Market (MEFF). MEFF is a Spanish regulated market and the shareholder. The Governing Company of the Derivatives Market (MEFF exchange) is the governing body that establishes the rules and conditions for becoming a member of such market. As regulated markets, the BME continuous market and MEFF exchange are therefore supervised by the Spanish financial authorities, the CNMV and the Ministry of Economy and Finance. The main regulation on the BME continuous market is the Securities Market Law. The MEFF exchange is subject to the Securities Market Law, but also to Royal Decree No. 1814/1991 of 20 December 1991, regulating official markets of futures and options, as amended.

Typically, the OTC equity derivatives listed on the BME continuous markets are those issued or offered by dealers active in these markets (warrants, calls, puts, caps, discounts, certificates, etc). On the other hand, MEFF offers a wide range of standardised equity options and futures over Spanish listed companies’ shares and indexes, including IBEX 35 futures and options, single stock futures and options, futures on a dividend index, futures on single stock dividends and 10-year notional bond futures. The MEFF also offers repo transactions on Spanish public debt.

In the context of the BME continuous market and the MEFF exchange, the obligations established by EMIR, with its principal Regulation (EU) No. 648/2012 but also with certain additional delegated regulations and technical regulations, includes the obligation to centrally clear certain classes of OTC derivatives contracts through central counterparty (CCP) clearing or apply risk mitigation techniques when they are not centrally cleared.

The clearing obligation applies to EU firms that are counterparties to an OTC derivative contract, including OTC equity derivatives. EMIR identifies two categories of counterparties to whom the clearing obligation applies: financial counterparties (FCs) such as banks, insurers, asset managers, etc; and non-financial counterparties (NFCs), which includes any EU firm whose positions in OTC derivatives contracts (unless for hedging purposes) exceed EMIR clearing thresholds.

ESMA develops the class of OTC derivatives that should be subject to:

  • the clearing obligation;
  • the date or dates from which the clearing obligation takes effect, including any phase-in;
  • the categories of counterparties to which the obligation applies; and
  • the minimum remaining maturity of the OTC derivatives contracts subject to frontloading.

The OTC derivatives that would be subject to the clearing obligation include certain OTC equity transactions, such as lookalike and flexible equity derivatives and a contract for difference.

It is important to point out that this clearing obligation affects not only listed equity options, such as those to be listed on the MEFF exchange, but also other OTC equity transactions as ESMA determines. With respect to the MEFF exchange and other OTC equity transactions between Spanish counterparties, BME Clearing is the Spanish CCP. Under certain conditions, this obligation can also affect non-EU counterparties, for example:

  • where EU counterparties trade with entities established outside the EU;
  • two entities established outside the EU trade together; and
  • there is an impact on EU markets (a direct, substantial and foreseeable effect in the EU).

In addition to the clearing through CCPs, EMIR requires notifications by certain NFCs and FCs to the CNMV, using a template, about the OTC equity transactions performed.

Governing rules

Describe the rules governing the trading of listed equity options.

The Securities Market Law governs trading on both the BME continuous market and the MEFF exchange. For listing on the BME continuous market, a prospectus prepared under Regulation (EC) No. 809/2004 must be prepared and filed with the CNMV. However, as the MEFF includes standardised contracts, it does not require these filings by dealers, in accordance with Royal Decree 1282/2010.

Although they are regulated markets, the BME continuous market and the MEFF exchange are private and therefore, despite the regulations and law authorising the creation of those markets and the application of the Securities Market Law, they have their own regulations.

The BME continuous market has established certain trading rules specifically for the trading of these securities, certificates and other OTC equity products, although the main terms do not differ from traditional stock markets (as this market is part of SIBE, as mentioned in question 19). There are several types of agents involved in this market, particularly when observing the different market stages, starting when a new security is issued until it is cross-traded. There are three main categories of agents in accordance with the functions of each market stage:

  • issuers;
  • broker-dealers, brokers and financial institutions; and
  • specialists.

All these agents are subject to supervision, inspection and control by the CNMV.

There are trading rules for orders to be included on open markets, in auction periods and volatility auctions.

In the open market, orders are entered, modified and cancelled, and traded when applicable. The open market situation in the securities, certificates and other products module is the most common (unless there is an extremely volatile situation where many volatility auctions take place on several securities or there is an auction on a determined security for exceptional reasons). During this period, several basic rules must be followed (as in the equity market) summarised in the following points:

  • price-time priority of orders: orders with the best price (highest bid and lowest ask) have priority in the book; and
  • best opposite side price: orders entered in the system are executed at the best opposite side price.

Auctions are periods when orders are entered, modified and cancelled but trades do not take place until the end of this auction. During this period, and in real time, an equilibrium price is calculated in accordance with the supply and demand leading to trades at the end of the auction at the last equilibrium price calculated (securities allocation).

The duration of volatility auctions is five minutes plus a random end of 30 seconds during which the auction ends at any time and without prior notice, and the securities allocation process takes place (cross-trading at the equilibrium price in the auction sale). If, on market closing, there is one or several securities in auction, the system will automatically allocate them at session closing time (17:30). Volatility auctions take place because of dynamic range rupture.

With respect to the MEFF exchange, it has approved its own rule book and general conditions that structure such a rule book. The rule book contemplates how to become a member of the market, the types of contracts to be traded (all of which will be book entries), the CCP register for clearance and the trading criteria.

Trading is governed by the principles of unity of price and publicity of trades. All buy or sell orders communicated to the exchange-trading system shall be binding from the moment of acceptance thereof by the MEFF exchange, unless they are cancelled. The MEFF exchange must expressly accept a buy or sell order and its execution or cancellation, in order for such a buy or sell order, execution or cancellation to be valid. Buy or sell orders are processed according to their order of arrival, and in accordance with the following criteria:

  • best price;
  • earliest time of arrival;
  • type or volume of the order; and
  • type of order.

The MEFF exchange will enforce any resolutions on suspension of trading adopted by the CNMV, and may also decide to suspend trading in cases of force majeure or where necessary to protect the MEFF exchange itself, the market or its participants, informing the CNMV accordingly. The MEFF exchange, as a result of lack of liquidity or of the general interest of the market, may decide to cancel trading on contracts.

The general conditions describe the specific characteristics of each contract that is implemented and form an integral part of the contract. The general conditions may set forth specific terms relating to the activity of members as relates to the contract to which they refer.

Types of transaction

Clearing transactions

What categories of equity derivatives transactions must be centrally cleared and what rules govern clearing?

See question 20 with respect to which categories of OTC equity derivatives must currently be centrally cleared. As noted in question 20, ESMA may, under EMIR, update the list of such OTC products from time to time. In any case, as noted in question 20, all listed equity derivatives in the MEFF exchange will be centrally cleared.

Exchange-trading

What categories of equity derivatives must be exchange-traded and what rules govern trading?

See questions 20, 21 and 22. Listed equity derivatives must be exchange-traded on an options exchange market, such as the MEFF exchange.

Collateral arrangements

Describe common collateral arrangements for listed, cleared and uncleared equity derivatives transactions.

In accordance with the Rule Book, the general conditions of any contracts traded on MEFF may establish specific conditions for the activity of any member in relation to such contracts.

There are no collateral arrangements applicable for listed OTC products on SIBE, although they will benefit from the general market guarantee as they will also be cleared through a CCP (Iberclear, in this case).

With respect to other unlisted OTC equity transactions, such as swaps and other security-based swaps, counterparties may typically document their collateral arrangement using a Credit Support Annex (CSA) such as that published by ISDA, under UK or US law, or Annex 3 of the CMOF model of assignment as security published by the AEB, under Spanish law. When using an ISDA CSA, counterparties should bear in mind that certain signing formalities and adjustments should be included to comply with RDL 5/2005 and therefore be valid and enforceable in Spain.

Exchanging collateral

Must counterparties exchange collateral for some categories of equity derivatives transactions?

With respect to listed equity derivatives, counterparties may exchange collateral through the MEFF exchange, as detailed in question 23.

With respect to other equity derivatives transactions, EMIR must be complied with. Although currently this legislation does not include the obligation to post collateral, where the OTC derivative contract has not been cleared through a CCP, there are certain risk management requirements that apply to all counterparties (including non-financial counterparties) in relation to:

  • timely confirmation of trade;
  • portfolio reconciliation;
  • dispute resolution procedures; and
  • portfolio compression.

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?

The regulations on short selling and reporting to the CNMV with respect to shareholders’ stakes and the Market Abuse Regulation described throughout this chapter apply to any counterparty of an OTC equity derivative transaction and therefore must be observed, even if one counterparty or neither counterparty is subject to Spanish jurisdiction. As stated, certain additional reporting obligations apply to credit institutions and financial services providers operating in the Spanish markets. EMIR reporting obligations may also affect counterparties from non-EU countries, so the clearance and reporting obligations would also apply.

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?

The entities mentioned in section 3 article 69 of the Securities Market Law that fulfil the requisites established in the Rule Book and the relevant circulars may become members of the MEFF Exchange.

An application to become an Exchange member must be accompanied by a certificate issued either by the CNMV or by the Bank of Spain, as appropriate to the type of entity involved. This certificate will confirm the entity’s compliance with the conditions laid out in the Securities Markets Law.

Membership applications shall be approved by the MEFF Exchange board of directors. To acquire such a condition, members must apply in writing to MEFF Exchange and execute the agreements with it.

Members must have, and maintain, the necessary technical and human resources that may be required to trade on the MEFF Exchange. Such requirements are established and reviewed by the MEFF Exchange by its own rules and circulars.

Exchange members shall be members of the CCP in which the contracts admitted to trading on the MEFF Exchange are settled, cleared and being the object of a CCP.

Reporting requirements

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

Trading information shall be disclosed by the MEFF Exchange as follows:

  • In real time:
    • through its proprietary information systems; and
    • through professional broadcasters of financial information.
  • Regularly, in the Daily Bulletin: the following information, at least, in connection with the trading of each contract series shall be disseminated in real time:
    • the best offered buy and sell price;
    • the number of contracts offered for such prices;
    • the price of the last transaction performed on the trading system;
    • the cumulative number of contracts traded during the session up to a particular time at any price; and
    • other information determined pursuant to the General Conditions of the Contracts as required to be broadcast in real time.
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?

For listing of securities in SIBE, as detailed in question 20, a prospectus must be produced by the issuer of the OTC product and registered at the CNMV, following the content of Regulation (EC) No. 809/2004. Owing to the existence of public information about the underlying issuer of the shares, the prospectus needs to provide limited information about the issuer and will refer to the public information available at the CNMV or on the issuer’s website. As in other European jurisdictions, the prospectus must provide a detailed description of the product and how the basket or index works. In addition, the information about the seller or issuer of the OTC must be detailed, including the potential conflict of interest and cost related to the transaction. The prospectus must also detail the general tax regime applicable to the products, although an additional tax analysis may be required depending on the jurisdiction of the subscriber of the product.

Liability regime

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

In addition to general contractual liability and the Market Abuse Regulation, issuers, offerers and others (and the directors of the aforementioned) involved in offerings of structured products face potential liability for the content, misstatements or omissions of a prospectus, as well as for failing to register the required prospectus at the CNMV, in accordance with the Securities Market Law and article 32 et seq of Royal Decree 1310/2005 of 4 November 2005, implementing that Law.

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?

Convertible securities of Spanish companies require the prior authorisation of the general shareholders’ meeting and the issuance of certain reports by the board of directors and an independent expert appointed by the applicable Spanish mercantile registry, in accordance with the Corporations Law. An additional report on the exclusion of the shareholders’ right to subscribe such securities may also be required. In addition, the same prospectus regulation that applies for offering and listing such securities will also apply to their sale and therefore the Securities Market Law, Regulation (EC) No. 809/2004 and Royal Decree 1310/2005 must be considered. In practice, many convertible securities of Spanish issuers are listed on non-regulated markets to avoid these disclosure obligations, which can delay the schedule of the transactions.

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 securities differ from convertible securities in that the issuer of the underlying security is not the issuer of the exchangeable security or, if it is the issuer, such underlying security was already issued before the issuance of the exchangeable security (and the issuer had repurchased them, for example). In these circumstances, the reports required by the Corporations Law for convertible securities are not necessary. Notwithstanding, the same prospectus regulation that applies for offering and listing such securities will also apply to their sale and therefore the Securities Market Law, Regulation (EC) No. 809/2004 and Royal Decree 1310/2005 must be considered. In practice, many exchangeable securities of Spanish issuers are listed on non-regulated markets to avoid these disclosure obligations, which can delay the schedule of the transactions.

Update and trends

Recent developments

Are there any current developments or emerging trends that should be noted?

No updates at this time.