Introduction

The past two years have seen corporate bonds emerge as a natural alternative to bank loans on the Swedish financial market. While traditional bank loans remain the first-choice financial solution for most corporations, demand for bonds has grown significantly over the past decade.

The Swedish corporate bond market and the bonds themselves are subject to an ever-changing landscape of national and European regulations. Recent changes include the introduction of the EU Benchmarking Regulation (2016/1011) and the Markets in Financial Instruments Directive and Regulation (MiFID II and MiFIR). These regulations set out new requirements for existing and new bond prospectuses.

Defining 'benchmark'

According to the Benchmarking Regulation, indexes which are used as benchmarks (eg, the price or value of a bond or other financial instruments) should be considered benchmarks.

On the Swedish bond market, benchmarks are frequently used for establishing the interest rates of bonds with floating interest. With that in mind, the benchmark's integrity is important for investors as it forms the basis for determining how much interest they are entitled to. The benchmarks for interest rates used on the Swedish bond market are normally the Stockholm Inter-Bank Offered Rate (STIBOR) and the Euro Interbank Offered Rate.

Benchmarking Regulation

To strengthen the reliability of EU benchmarks in the aftermath of the London Interbank Offered Rate scandal, the European Union introduced regulations relating to how indexes should be used as benchmarks. This led, among other things, to new regulatory requirements for existing and new bond prospectuses. Information regarding bonds and other financial instruments must now be provided and made available to investors.

According to Article 29(2) of the Benchmarking Regulation, a corporate bond or any other financial instrument which refers to a benchmark (eg, STIBOR) must include information in the prospectus regarding the benchmark's administrator. This information should determine whether the administrator is included in the European Securities and Market Authority's (ESMA) benchmarks register.

According to Article 51 of the Benchmarking Regulation, administrators (eg, the Swedish Banking Association) that handle STIBOR need not apply to be registered until January 1 2020. Under Article 52 of the regulation, existing prospectuses approved before January 1 2018 must be updated with this information within 12 months from this date.

As the Benchmarking Regulation is relatively new and its impact on the bond market remains to be seen, the Financial Supervisory Authority requires prospectuses to explicitly state the inherent risks of investment.

MiFID II and MiFIR

The introduction of MiFID II and MiFIR prompted additional transparency and reporting requirements.

As with the Benchmarking Regulation, MiFID II and MiFIR are fundamentally changing the financial markets. While the extent of these changes remains to be seen, the regulatory burden on financial institutions – especially those providing intermediary financial services that the Swedish bond market relies on – has markedly increased.

Comment

The Benchmarking Regulation, MiFID II and MiFIR have had a significant effect on the bond market, particularly in regard to information requirements for existing and new bond prospectuses. While the extent of information required by the Financial Supervisory Authority varies between corporations, prospectuses must acknowledge the prevailing market uncertainty and explicitly state the inherent risks of investment.

In addition to these new requirements, a prospectus which refers to a benchmark must include information determining whether the benchmark's administrator is included in ESMA's benchmarks register. While administrators need not apply to be registered until January 1 2020, the information requirements still apply.

For further information on this topic please contact Marcus Kern Fahlander at Advokatfirman Törngren Magnell by telephone (+46 8 400 283 00) or email (marcus.fahlander@torngrenmagnell.com). The Advokatfirman Törngren Magnell website can be accessed at www.torngrenmagnell.com.

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