Prospectus Regulation

The Prospectus Regulation, which repealed and replaced the Prospectus Directive, became fully and directly applicable in all Member States on 21 July 2019. In the following months, we have seen a number of prospectus approvals in the repackagings market, with some clear trends emerging in terms of how national competent authorities are interpreting and applying the new rules.

These trends will be of interest to issuers of balance sheet structured products, many of whom took advantage of the Regulation’s grandfathering provisions and so will only be encountering the new regime for the first time on their 2020 programme updates. Whilst the good news is that in most cases the impact will be one of evolution rather than revolution, there will be certain aspects that need to be considered in advance in order to ensure a smooth approval process.

The content and presentation of risk factors is one such area. The Regulation and accompanying ESMA Guidelines require risk factors to be specific to the issuer and/or the securities, material to investors and corroborated by the prospectus. Risk factors should be as concise as possible and presented across a limited number of categories, with the most material factors in each category presented first. In the repackagings context, this has led to the amendment, re-ordering and, in some cases, deletion of risk factors. Balance sheet structured products issuers should expect to have to make similar changes.

For issuers of retail structured products, there are also significant changes to the prospectus summary. A pro-forma summary is no longer required to be included in the base prospectus (and ESMA recently confirmed in its updated Q&As that it is not permissible to do so, even on an optional basis). The issue-specific summary has been overhauled, with issuers required to follow a rigid Q&A-style format including a section containing up to 15 of the most material risk factors. Complying with these requirements within the new 7-page length limit will be challenging and issuers might want to consider preparing template summaries for various payouts ahead of any drawdown.

Finally, the Regulation has introduced changes to the disclosure requirements in respect of certain underlying obligors. This has already had a significant impact on the repackagings market and is expected to present similar issues in the context of reference entity disclosure under certain balance sheet credit-linked notes. For single name or small basket CLNs, basic disclosure on the reference entity is now only permitted where it has securities admitted to trading on an EEA regulated market, an “equivalent third country market” or an SME growth market (of which only EEA regulated market is of any practical use at this stage). Otherwise, full, issuer-level disclosure on the reference entity is required. Whilst there have been calls for some form of relief in this area, we have yet to see anything formal from ESMA or the Commission.

For more detail, visit our EU Prospectus Regulation page and in particular our one-page summary: At a glance: the new EU Prospectus Regulation – key changes for repackagings and other structured finance transactions.