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.
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.
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.
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