Cayman Islands: Cayman Islands Stock Exchange: The Impact Of The European Market Abuse

The Cayman Islands Stock Exchange (the "CSX"), which has listed more than 4,000 securities with a combined market capitalisation in excess of US$190 billion, has firmly established itself as one of the leading international specialist exchanges.

An affiliate member of the International Organisation of Securities Commissions, the CSX is also an affiliate member of the World Federation of Exchanges and the only offshore exchange that is a member of the Inter-market Surveillance Group.

However, key to the success of the CSX was the grant by the UK HM Revenue & Customs in 2004 of its status as a 'recognised stock exchange'. This recognition permits debt securities listed on the CSX to satisfy the 'quoted eurobond exemption', that allows interest payments to be made gross without deduction of UK withholding tax. The CSX is not resting on its laurels, however, and continues to develop the range of products for which it provides listing services.

As part of the revision of its listing rules in April 2017, the CSX published a new Chapter 14 in connection with listing debt or equity securities issued by 'specialist companies', which is intended to attract listings of securities offered to qualified investors by companies that may be newly incorporated or pass-through SPVs with no specific revenue earning business or companies raising funding for a new project or line of business.

This new regime compliments what is already a strong line-up of products that can be listed on the CSX. These now include: (i) Chapter 6 (Equity Securities); (ii) Chapter 8 (Specialist Debt Securities); (iii) Chapter 9 (Investment Funds); (iv) Chapter 12 (Corporate and Sovereign Debt Securities); and (v) Chapter 14 (Specialist Companies).

THE CLO OPPORTUNITY

The CSX has not historically been the exchange of choice for the significant number of Collateralised Loan Obligation ("CLO") notes issued by Cayman Islands issuers each year, which could be listed on the CSX under the Specialist Debt rules.

The vast majority of such CLOs, which predominantly invest in US corporate leveraged loans and are managed by US collateral managers, have listed on either the Main Securities Market or the Global Exchange Market ("GEM") of the Irish Stock Exchange ("ISE"). We estimate that in excess of 700 CLO issuers are currently listed on the ISE. CLO notes were originally listed on the ISE to satisfy the internal investment requirements of various institutional EU investors and, more latterly, Asian investors who require a listing on an EU regulated exchange. Initially, at least, the ISE listing provided liquidity in both the primary and secondary markets with regards to such investors. For this reason, and as a preferred stock exchange for certain Japanese investors, it subsequently became market convention to list CLOs on the ISE. However, the introduction of the European Market Abuse Regulation ("MAR") in July 2016 is causing many market participants to question that convention and to actively consider a listing on the CSX as a viable alternative. As the CSX is a non-EU exchange, any CLO issuer listed on the CSX is not subject to the obligations of MAR.

THE IMPACT OF MAR

MAR replaced and extended the existing EU market abuse regime, which prohibits insider dealing, market manipulation and unlawful disclosure of 'inside information' in respect of securities listed on an EU stock exchange. MAR still carries significant penalties for non-compliance, including criminal sanctions in the form of fines and/or imprisonment. Importantly, MAR extended the application of the regime beyond the Main Securities Market of the ISE and now includes the GEM, the predominant exchange for listing CLOs. As a result, each CLO issuer listed on the ISE is required to take the following MAR compliance steps:

  • Adopt policies and procedures relating to the treatment of inside information, including to ensure the immediate publication of inside information, and to ensure that any delay in the publication of inside information is in accordance with MAR;
  • Draw up and maintain a list of persons within the issuer and Co-issuer discharging managerial responsibilities and of persons closely associated with them ("PDMRs");
  • Ensure PDMRs are aware of, and acknowledge in writing, their obligations relating to dealing in the issuers' financial instruments;
  • Draw up and maintain, in the prescribed form, a permanent insider list (the "Insider List") of persons with access to inside information relating to the issuer or its financial instruments; and
  • Ensure persons on Insider Lists are aware of, and have acknowledged in writing, their obligations under MAR and the sanctions for insider dealing and unlawful disclosure of inside information.

'Inside information' is defined as information that: (i) is precise; (ii) has not been made public; (iii) relates directly or indirectly to the CLO issuer or its notes; and (iv) if made public, would be likely to have a significant effect on the price of those notes or on the price of related derivative financial instruments.

In the context of a CLO, we expect the occurrence of events leading to the existence of inside information to be relatively rare. To the best of our knowledge, no CLO issuer has yet published an announcement on the ISE (or other publicly available source) for the purposes of disclosing inside information. The adoption of MAR policies and procedures, and the maintenance PDMR lists are steps that can be undertaken by the Cayman Islands administrator providing services to the relevant CLO issuer.

In addition, the MAR compliance obligations apply directly to the CLO issuer and there is no obligation on the CLO collateral manager to adopt specific MAR policies and procedures. Despite all of this, many CLO managers are concerned about the implications of MAR. Like all compliance obligations, MAR requires an investment of time in raising awareness and continual monitoring to be in a position to identify an event that may lead to the existence of inside information. The listing of a CLO issuer makes no difference to the investment strategy or performance of a CLO manager, who would much prefer to focus on management of the CLO portfolio without the distraction of additional compliance issues. The form of the Insider List is also a significant concern.

INSIDER LISTS

While we are of the view that an Insider List is only required upon the occurrence of inside information, which (as previously noted) is expected to be a rare event for a CLO issuer, the form of permanent Insider List requires a significant amount of personal information about each insider, including: (i) date of birth; (ii) national identification number (in the US, this would be a social security number); (iii) home telephone number; and (iv) home address. Most CLO managers are understandably reticent to provide such personal information in respect of their personnel. Even if you take a pragmatic view to limit the scope of potential 'insiders' to those personnel with day-to-day responsibility for the CLO, you still catch a number of portfolio managers (who tend to be senior employees or even the owners of the business) and senior staff at the collateral manager.

LEI REGISTRATION

The ISE recently advised that, with effect from 6 November 2017, every entity seeking a listing on the ISE must provide the ISE with a Legal Entity Identifier ("LEI") as part of its application.

The LEI is a 20-digit alphanumeric code, which uniquely identifies each legal entity that engages in a financial transaction, regardless of their jurisdiction. LEIs are valid for one year and must be updated by way of annual reapplication to the relevant LEI issuance agency, of which only a few are authorised to issue LEIs to Cayman Islands entities (including the ISE, the London Stock Exchange and Bloomberg). The CSX does not require an LEI from listing applicants.

CLO LISTING – THE CURRENT POSITION

Despite some initial concerns regarding the compliance obligations of MAR, a majority of CLO issuers that do list are continuing to list on the ISE GEM. Many investors continue to require, or at least prefer, that the CLO notes are listed. While we have seen several draft offering documents circulated without ISE listing disclosures, such disclosures are generally re-inserted following investor review. However, it is unclear whether the listing is a real investor stipulation or simply that a comparison against a prior offering document highlights the removal of the ISE listing and it is this alone that triggers the request to reinstate the ISE listing. Encouragingly for the CSX, ten CLO issuers have listed on the CSX over the past few months and we are aware of at least another 18 CLO issuers having made initial submissions to the CSX. We continue to field enquiries about listing CLO issuers on the CSX and this trend looks set to continue.

With a generally positive outlook for the CLO market, the CSX looks well positioned to benefit from the introduction of MAR in Europe.

ABOUT THE AUTHOR

Scott Macdonald is a Partner at Maples and Calder in the Cayman Islands. Scott has extensive experience in structured finance transactions, including CLOs, repackagings, structured funds and fund derivative products, and segregated portfolio companies. He also advises on fund financing, and is head of the CSX listing group in Cayman. Scott is a lead partner on the FATCA/Tax Information Exchange team focusing specifically on the structured finance sector.

He advises clients on legal issues under US FATCA, UK FATCA and the OECD Common Reporting Standard ranging from entity classification, availability of exemptions, reportable accounts, application of the account due diligence rules, and notification and reporting obligations. Scott acts for a significant number of CDO/CLO issuers and structured finance entities on the delegation of FATCA due diligence and reporting services to leading institutional paying agents.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Walkers
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Walkers
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions