UK: Derivatives - Issues Arising Out of the Prospectus Directive for SPVs or Investment Banks Issuing Listed Derivatives Under a Programme

Last Updated: 2 September 2004
Article by Pauline Ashall

Originally published in 2003

This article focuses on the key issues arising out of the Prospectus Directive for SPVs or investment banks issuing listed derivatives under a programme.

How are derivatives treated under the Directive?

The Directive distinguishes between equity and non-equity securities. Derivatives, even if relating to underlying equities, would be non-equity securities for this purpose (unless the securities and underlying equities are both issued by the same entity, or entities in the same group). As in the case of all non-equity securities:

  • as long as the derivatives can only be acquired on issue in amounts of €1,000 or more, the issuer can elect to have the prospectus approved either by the competent authorities in the EU state in which it has its registered office or the state where the securities are to be listed or offered to the public, if different; and
  • if the securities can only be acquired on issue for €50,000 or more ("non-retail securities"), the requirements for a summary to be included in the prospectus, and for annual information on the issuer to be published, are disapplied.

Under the Level 2 measures set out in CESR’s advice to the European Commission, all securities which are not equity securities or debt securities and which do not fall into any other "building block" (such as that for asset backed securities) are, by default, categorised as derivatives. For this purpose, CESR proposes that "debt securities" should be defined as "any security where the issuer has an obligation arising on issue to repay the investor 100% of the nominal value, in addition to which there may also be interest payments". Categorisation of a product as a derivative or a debt security may not always be straightforward. Notes issued on a limited recourse basis by an SPV on a repackaging would seem to be derivatives. On the other hand, many bonds with derivative features will be categorised as debt securities rather than derivatives. CESR proposes to deal with this by requiring disclosures in the prospectus that are similar to the disclosures required in the case of derivatives.

What information is required in the prospectus?

Under CESR’s proposals, the "building blocks" of information that would need to be included in a prospectus relating to derivatives are:

  • Information on the issuer. A somewhat lighter disclosure regime applies to an issuer of non-equity securities where the issuer is a bank or investment firm with experience of issuing such securities. This lighter regime is NOT available for issues by SPVs, which would have to comply with the general disclosure rules applicable to issuers of retail or non-retail securities, as applicable.

In all cases, however, the issuer disclosures seem onerous in the context of derivative issues, where the business activities of the issuer and its group may be of little or no relevance to purchasers of the derivatives. Also, except for issuers of non-retail securities, the proposal to require audited financial information on the issuer in accordance with IAS or equivalent (and including two years’ historical financial information if the issuer has been in existence for this period of time) is controversial. Issuers of non-retail securities whose financial statements are not in IAS form will have to describe the differences between IAS and local GAAP.

More detailed information (equivalent to that required for issuers of equities) is needed in respect of any derivative securities that, while being non-equity securities, give the holder the possibility (on election by the holder or the issuer) of acquiring underlying equities that would be newly issued and are not already admitted to trading on a regulated market.

  • Information on the derivatives. CESR has produced a specific schedule of information to be included in all prospectuses relating to derivatives, whether retail or non-retail.

It is important to note that the "derivatives" schedule applies in respect of all non-equity securities other than "debt securities" and "asset backed securities" as defined by CESR. The only difference between retail and non-retail offerings (so far as the securities note is concerned) is that prospectuses for retail derivatives must include "a clear and comprehensive explanation to help investors understand how the value of their investment is affected by the value of the underlying instrument(s)". This is not required in the case of non-retail derivatives. In view of potential civil liability for misrepresentation, producing both the "explanation" and the "summary" needed in a prospectus for retail derivatives will be fraught with difficulty.

CESR proposes that a prospectus for derivatives (as well as a prospectus for debt securities) should include a description of any interests, including conflicting interests, of persons involved in the issue. This is potentially something of a minefield.

  • Other information. Other "building blocks" of disclosure information may also be relevant, in particular the information required in respect of any guarantee of the securities.

Use of base prospectus?

Currently, it is common to have wide-ranging programmes under which a range of different types of derivative securities (unlisted or listed on one or more exchanges in Europe) can be issued, sometimes by a number of different issuers. The base offering document is approved by the relevant listing authority or authorities, and then securities can be issued through a pricing supplement.

The Prospectus Directive allows an issuer to use a base prospectus (which must be re-issued annually) for issues of "similar" non-equity securities "in a continuous or repeated manner". CESR has interpreted this as permitting a single base prospectus to be used in respect of a programme covering multiple issuers and/or guarantors, and different products. However, a single base prospectus cannot be used to cover issues of (i) asset-backed securities and/or mortgaged backed securities and/or warrants in respect of underlying equities and (ii) other forms of non-equity securities.

A base prospectus needs to include all the detailed information about the issuer and the securities that is set out in the relevant "building blocks" for disclosure produced by CESR, except for the "final terms" of each issue to be effected off the programme. It must also include a general description of the programme, an indication of the type of information to be provided as "final terms" and the way in which the final terms of issues will be published. CESR takes the view that the final terms must be published in all cases (for example on the issuer’s website) even in the case of a purely private placement.

In the case of a multi-product programme, the amount of information to be included in the base prospectus presents a real challenge, particularly as the prospectus must be "easily analysable and comprehensible" and, if the securities may be issued for less than €50,000, must include a non-technical summary. CESR has indicated that if a base prospectus relates to multiple products:

"…the information on different products contained in the base prospectus and likewise in the summary must not be mixed up but has to be clearly segregated."

As regards the "final terms" of each issue off the programme, CESR proposes that issuers should have the choice to issue a document containing simply the "final terms" or a document that also repeats some of the more detailed information in the base prospectus. This document must be filed with the relevant listing authority (and, as noted above, published) but does not require pre-approval by the authority.

Shelf registration document?

An alternative to producing a base prospectus is for an issuer to produce a registration document containing information about the issuer, and then to issue (and obtain approval for) a securities note, and if applicable a summary, each time securities are issued. Effectively, the registration document is a shelf registration document that can be incorporated by reference into the documents produced at the time of each securities offering.

In view of the practical difficulties in producing a base prospectus in accordance with the Directive for a multi-product/multi-issuer programme, it seems likely that issuers of derivative securities will either:

  • have a narrower programme (or even a number of separate programmes) set up for issuing listed securities, with the base prospectus only covering those securities; or
  • simply have a registration document pre-approved, and issue a new securities note and summary (if required) for each listed securities issue. Under the Directive, the competent authority has up to 10 working days (which can be extended if the information supplied is incomplete) to approve the prospectus.

Likely implications?

Since derivatives are unlikely to be admitted to trading on more than one market in Europe or offered to the public, the new Directive would not seem to be of benefit (except insofar as it clarifies and harmonises the circumstances in which unlisted derivatives can be sold without involving a public offer).

In the case of listed derivatives, the detailed contents requirements for prospectuses, the need in many cases for financial information in accordance with IAS and the potential liabilities (for example, where the "explanation" required in the case of retail derivatives is regarded with hindsight as misleading) are likely to increase the costs, the risks and the timescale for issues of listed derivatives. In particular, the use of a single multi-purpose programme is likely to become problematic for issues of listed derivatives.

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
 
In association with
Related Topics
 
Related Articles
 
Related Video
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