Luxembourg Newsletter - June 2014

CAPITAL MARKETS

Consultation on FX Financial Instruments

We reported in our Newsletter of March 2014 that on February 14th 2014, ESMA, in the context of the European Market Infrastructure Regulation (EMIR), sent a letter to the European Commission (Commission) asking for clarifications on the classification of foreign currency (FX) financial instruments.

Under Directive 2004/39/EC on Markets in Financial Instruments (MiFID) a contract considered as a financial instrument may give rise to authorisations and other obligations. Whether or not an FX contract can be defined as a financial instrument has therefore important implications as regards authorisation requirements under MiFID, but also as regards the scope of application of other EU financial regulations including EMIR, the Capital Requirement Directive and Regulation (CRD4) and the Market Abuse Regulation since they all cross-refer to the definition of financial instruments under MiFID.

Recognising a lack of harmonisation between the EU Member States, the Commission, on April 11th 2014, published a consultation paper (Consultation) with the narrow scope to define FX financial instruments and determine the boundaries between an FX financial instrument and a spot FX contract.

The purpose of the Consultation is to assist the Commission in preparing a formal proposal to ensure clear, adequate and consistent application of the relevant financial regulation across the EU.

The Consultation included 10 questions ranging from the use of FX, settlement periods, developments in the FX market, risks, transitional periods and interaction with regimes outside of the EU.

The Consultation closed on May 9th 2014. The Commission explained that the Consultation took less than 12 weeks because this topic is a technical issue which, for reasons of legal certainty and need for consistent application of financial regulation across the EU, requires a swift regulatory response.

Although no timeline has been indicated it is expected that the proposal on this topic will soon be made available as the demand for a regulatory response is high.

For the full text of the Consultation, please see the following link: http://ec.europa.eu/internal_market/consultations/2014/foreign-exchange/index_en.htm

Prospectus Directive – Delegated Regulation

On April 15th 2014 Commission Delegated Regulation (EU) No. 382/2014 supplementing Directive 2003/71/EC with regard to regulatory technical standards for publication of supplements to prospectuses (the "Delegated Regulation") was published in the Official Journal of the European Union.

This Delegated Regulation specifies the minimum situations where the publication of a supplement is mandatory.

Some of the specified situations relate only to issuers of equity securities or issuers of underlying shares in case of depositary receipts, in particular:

1. where new annual audited financial statements are published;
2. where an amendment to a profit forecast or a profit estimate already included in the prospectus is published;
3. where there is a change in control;
4. where there is any new public takeover bid by third parties and the outcome of any public takeover bid.

In addition, the following situations (which are not restricted to issuers of equity securities or issuers of underlying shares in case of depositary receipts) require the publication of a supplement:

1. where there is a change in the working capital statement included in a prospectus when the working capital becomes sufficient or insufficient for the issuer's present requirements;
2. where an issuer is seeking admission to trading on an additional regulated market in an additional Member State or is intending to make an offer to the public in an additional Member State other than the one(s) provided for in the prospectus;
3. where a significant financial commitment is undertaken which is likely to give rise to a "significant gross change";
4. where the aggregate nominal amount of the offering programme is increased.

The Delegated Regulation entered into force on May 5th 2014.

Market Abuse – Recent Developments

On June 12th 2014 Regulation No 596/2014 on market abuse (MAR) and Directive 2014/57/EU on criminal sanctions for market abuse (CSMAD) were published in the Official Journal of the European Union. MAR shall be applicable from July 2016. Member States have two years to transpose the CSMAD into their national law.

MAR and CSMAD aim to update and strengthen the existing market abuse framework to ensure market integrity and investor protection, in particular by:

• extending the scope of the current market abuse regime to new markets and trading strategies;
• explicitly banning the manipulation of benchmarks (such as LIBOR);
• introducing offences of attempted insider dealing and market manipulation;
• reinforcing the investigative and administrative sanctioning powers of national competent authorities; and
• establishing a harmonised regime of minimum criminal and administrative sanctions across the EU Member States for market abuse offences.

The texts of MAR and CSMAD are available at http://ec.europa.eu/internal_market/securities/abuse/index_en.htm

ECJ Judgment On Access To Prospectuses In Electronic Form

It is rare that a ruling of the ECJ deals with the interpretation of the Prospectus Directive regime (composed of inter alia Directive 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading (the Prospectus Directive) and the related Commission Regulation (EC) No 809/2004 (the Prospectus Regulation). On May 15th 2014 the ECJ gave a ruling in the Michael Timel v Aviso Zeta AG case (C-359/12).

A number of questions were raised by the referring court on prospectus content and publication. In the ECJ's responses to these queries they have clarified the following points:

1. Art. 22(2) of the Prospectus Regulation is to be interpreted as meaning that information required under Art. 22(1) which, although not known at the time of publication of the base prospectus, nevertheless was known at the time of publication of a supplement to that prospectus must be published in that supplement if the information involves a significant new factor, material mistake or inaccuracy capable of affecting the assessment of the securities, within the meaning of Art. 16(1) of the Prospectus Directive.
2. The requirements of Art. 22 of the Prospectus Regulation are not satisfied by the publication of a base prospectus which omits the information required under Art. 22(1), in particular the information referred to in Annex V to the Prospectus Regulation, if no final terms are published.
3. Art. 29(1)(1) of the Prospectus Regulation is to be interpreted as meaning that the requirement that a prospectus must be easily accessible on the website on which it is made available to the public is not fulfilled where there is an obligation to register on that website, entailing acceptance of a disclaimer and the obligation to provide an email address, where a charge is made for that electronic access or where consultation of parts of the prospectus free of charge is restricted to two documents per month. (Some such restrictions previously applied where a prospectus was published on the Luxembourg Stock Exchange, which was where the documents were made available in the present case; since June 13th 2014, all published prospectuses on the website of the Luxembourg Stock Exchange are available without restriction).
4. Finally, Art. 14(2)(b) of the Prospectus Directive is to be interpreted as requiring the base prospectus to be made available to the public both at the registered office of the issuer and at the offices of the financial intermediaries. The question arose due to a

translation discrepancy in different versions of the directive. The clarification of the ECJ affirmed the wording of the English language version (amongst others).

The judgment of the ECJ is available at the following link: http://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1403732229838&uri=CELEX:62012CJ0359

MIFID II

On June 12th 2014 the Directive 2014/65/EU on Markets in Financial Instruments repealing Directive 2004/39/EC and the Regulation No 600/2014 on Markets in Financial Instruments (together "MiFID II") have been published in the Official Journal of the European Union. Member States have two years to transpose the new rules which will be applicable from January 2017.

In respect of the "level 2" legislation, on May 22nd 2014, ESMA published two consultation papers: (i) a consultation paper relating to technical advice to be provided by ESMA in respect of investor protection, transparency, data publication, trading venue requirements, commodity derivatives and portfolio compression, and (ii) a discussion paper dealing with technical standards to be developed by ESMA relating to investor protection, transparency, data publication, trading venue requirements, commodity derivatives, organisational requirements for investment firms and trading venues, market data reporting and post-trading requirements. The "level II" texts are due to be adopted by June 2015.

The new framework aims to make financial markets more efficient, resilient and transparent and to address the loopholes of the initial directive (MiFID I) which were revealed during the financial crisis.

Some of the interesting developments under MiFID II include:

• A greater range of products and activities are within the scope of MiFID II;
• A prohibition on inducements for firms providing "independent" advice or portfolio management has been introduced;
• Firms will be required to comply with new obligations to enhance investor protection (e.g. suitability test, greater oversight of senior management, segregation of duties to prevent conflicts of interest);
• In order to capture inter-broker dealing systems which are not regulated markets or multilateral trading systems (MTFs), a new trading venue, an Organised Trading Facility (OTF) has been introduced (limited to non-equity instruments);
• A new harmonised regime for the provision of services by third country firms has been created;
• Equity market transparency has been increased and a principle of transparency for non-equity instruments such as bonds and derivatives has been introduced; and
• Supervisory powers of competent authorities have been strengthened.

The texts of MiFID II are available at: http://ec.europa.eu/internal_market/securities/isd/mifid2/index_en.htm.

CORPORATE

European Cooperative Society (SCE)

In March 2014, the Luxembourg parliament adopted a new law introducing a new corporate form, the European Cooperative Society (the "SCE") and amending the Luxembourg law of August 10th 1915 on commercial companies (the "Law").

The law of March 10th 2014 regarding the SCE took effect on March 24th 2014 (the "New Law") and transposes into Luxembourg law the Council Regulation (EC) N° 1435/2003 of 22 July 2003 relating to the Statute for a European Cooperative Society (the "Regulation").

The main characteristics of an SCE are the following:

• It has legal personality and is formed by at least five (5) natural or legal persons resident in at least two (2) Member States;
• It has a variable capital and the members' shares are not transferable;
• The subscribed capital requirement must not be less than thirty million EUROS (EUR 30,000,000.-);
• The subscribed capital is divided into shares and each member is liable only up to the amount of its contribution;
• The activities of the SCE should serve the mutual benefit of the members and allow them to develop their economic and social activities in accordance with their participation in the cooperative;
• All members of the SCE are involved in the activities of the cooperative, as customers, employees or suppliers or by any other means;
• During liquidation, the net assets and reserves are distributed according to the
• principle of disinterested distribution, meaning to another cooperative pursuing similar aims or general interest purposes unless otherwise provided for in the articles of incorporation of the SCE;
• It is a fully taxable entity.

Why choose an SCE?

• The establishment of an SCE creates equal opportunities among cooperatives and other corporate forms and fosters the development of cooperative activities on a transnational scale;
• An SCE can be operated by physical persons or legal persons residing or established in different Member States with a reduction of existing cross-border obstacles;
• An SCE can be created by merger of existing cooperatives or an existing cooperative can be converted into a SCE without being liquidated beforehand, where that cooperative has its registered office and head office in one Member State and an establishment or subsidiary in another Member State;
• An SCE provides the flexibility to be managed by either a supervisory body and a management body (two-tier system) or a single administrative body (one-tier system), depending on the form chosen in the articles of incorporation.

To sum up, the SCE is a corporate form combining different characteristics of capital companies and personal companies and shall in each Member State be treated as if it were a national cooperative.

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