The EU Prospectus Directive (PD), which came into effect on July 1, has been a major talking point for issuers, bankers and lawyers through the quiet summer months. The general feeling has been one of frustration at the implementation process.
The directive is intended to provide standard listing requirements across the EU member states, a move that will ultimately allow issuers to sell securities across jurisdictions in a more efficient manner. Although the final result should be a positive step towards a unified market, the procedure has had its teething troubles.
"It is true that the implementation of the Prospectus Directive could have been smoother. Issuers are currently facing zealous regulatory bodies and some market participants are not yet up to speed on the new listing procedures. An assessment of the first few months under the new regime, with regards to debt capital markets and derivatives products, has proven difficult, but the market is now becoming more organised," said Benjamin Lamberg, head of EMTN origination at Dresdner KW.
Luxembourg and London have held a duopoly over Eurobond listings for many years, primarily because of their Eurobond-friendly listing regimes. The two exchanges have historically recognised the fact that the Eurobond market is aimed at professional investors and therefore the disclosure requirements are not as stringent as would be expected for a retail-targeted market.
But whereas the old regime was based on the status of the targeted end investor, the new regime is concerned with the product type and requires all bonds with a face value of less than €50k to adhere to strict retail-based regulatory requirements.
In effect, the PD dilutes the competitive edge that London and Luxembourg hold over their rivals and competition for Eurobond listings is at an all-time high. The directive has almost certainly opened the door for new players, but it is the immense frustration at the implementation process that could actually drive issuers elsewhere.
Luxembourg under attack
Luxembourg has taken the brunt of the criticism due to a lack of clarity about its procedure, and substantial delays in documentation approval. Many point the finger at the listing authority, the Commission de surveillance du secteur financier (CSSF). The main problem appears to be a lack of communication between the CSSF and the exchange.
The Luxembourg exchange is certainly quick to distance itself from any criticism, and points any enquiries regarding the authorisation of documentation directly to the supervisory commission.
"Under the new EU rules, provisions for authorising documentation now lie with the CSSF rather than the exchange, and all enquiries must be taken to the CSSF," said an exchange official.
But contrary to the exchange's view that it has no role in the approval process, bankers and lawyers report dealings with both the regulator and the exchange regarding documentation matters. And according to Arthur Philippe, director of the CSSF, the exchange has been intensely involved in the approval process.
"The CSSF entrusted the Luxembourg Stock Exchange with the preliminary analysis of the documents filed for approval and with submitting its opinion to the CSSF in the form of a report. Based on the information and documents received, the CSSF undertakes a control before it decides on the approval of the prospectus," he said.
Harmonisation is the key behind the PD, although issuers and lawyers have found anything but harmony between the exchanges and listing authorities. According to Matthew Hartley, a partner at Allen & Overy, the consistency of initial feedback on documentation has often been less than satisfactory.
"Even though we are supposed to be in a harmonised regime, issuers are receiving different feedback on their documentation from different exchanges. In Luxembourg, some issuers have found that the CSSF has come back with contrary views to the stock exchange on some points," he said.
And the problems do not stop there. Issuers, bankers and lawyers have been less than impressed with the slow pace of the process, particularly in Luxembourg.
"The UKLA has remained closer on track than Luxembourg. It had an initial setback in its plans to implement the directive in April or May due to the elections, but since then has stuck to a realistic deadline rather than pushing back the timetable at the last minute. The UKLA has remained consistent in coming back with initial comments after five days, whereas in Luxembourg one issuer did not receive initial comments for five weeks," said Hartley.
Officials at the CSSF recognise that the current procedure is not yet up to speed, but according to Philippe, ongoing improvements should result in a smoother process going forwards.
"We are aware of the fact that the first comments have been rather slow in being issued. This is mainly due to the fact that the Luxembourg Stock Exchange had to review in parallel draft prospectuses newly submitted as well as a large number of prospectuses which had been filed before July 1 under the old regime and had to be adapted to the new regulation . . . The CSSF is currently working with the Luxembourg Stock Exchange to find a way to alleviate the two-phase review problem. A possible solution will be for the Luxembourg Stock Exchange to give the issuer its preliminary comments as quickly as possible, and for final comments to be given together by both the CSSF and Luxembourg exchange," he said.
Most believe that the situation is improving and that the damage may have been mitigated due to the fact that the biggest hurdles and delays have come during the quiet summer months, and amid all of the concerns, there is also some solid support for the future of the directive.
"If we focus on a one to two-year horizon, I consider the EU Prospectus Directive to be a giant step towards truly integrated capital markets in the EU. With the arrival of the euro, various domestic investor bases started to converge and with the Prospectus Directive and the upcoming Transparency Directive, the underlying legal framework is also becoming more unified," said DrKW's Lamberg.
While many have been surprised at the level of confusion that has reigned, others were expecting little else due to the shear magnitude of implementation. But some warn that there are bigger challenges on the horizon, which could have a more profound impact on Eurobond listings. "The new EU listing regime represents the biggest regulatory change seen in a generation in the euro markets, with the Transparency Directive, which comes into effect in January 2007 likely to have an even greater impact than the Prospectus Directive in determining where issuers will choose to list," said Nick Eastwell, global head of capital markets at Linklaters. "The Transparency Directive represents the EU's answer to Sarbanes Oxley and in its wake we are likely to see fewer non-EU companies coming to EU-regulated markets," he added.
Some see the prospectus directive as the first test for the larger Transparency Directive and while Eurobond listing figures remain very low in Zurich compared with those in London and Luxembourg, SWX officials hope that will change en route to the January 2007 implementation date.
"The Prospectus Directive has certainly been the trigger for some issuers to look at SWX, but the big issue will be the Transparency Directive. Many issuers, particularly in Japan, are already asking about our disclosure requirements ahead of the new directive and many are looking to try out new exchanges like the SWX before 2007," said SWX's Morard.
With the EU's regulatory environment set for further changes in the coming years, bankers are hoping that if nothing else, the recent debacle will at least have provided a lesson for the future.
"The bond industry and its regulators should have an open dialogue and closely examine the practical consequences of the implementation of new policies, and let's hope that bankers have learnt their lesson and are now getting ready for the upcoming transparency, market abuse and mifid directives," said DrKW's Lamberg.