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The mission of ICMA is to promote resilient and well-functioning international and globally integrated cross-border debt securities markets, which are essential to fund sustainable economic growth and development.
ICMA is a membership association, headquartered in Switzerland, committed to serving the needs of its wide range of members. These include public and private sector issuers, financial intermediaries, asset managers and other investors, capital market infrastructure providers, central banks, law firms and others worldwide.
ICMA currently has over members located in 62 countries. ICMA brings together members from all segments of the wholesale and retail debt securities markets, through regional and sectoral member committees, and focuses on a comprehensive range of market practice and regulatory issues which impact all aspects of international market functioning. The articles and comment provided through the newsletter are intended for general and informational purposes only.
ICMA believes that the information contained in the newsletter is accurate and reliable but makes no representations or warranties, express or implied, as to its accuracy and completeness. Please e-mail: regulatorypolicynews icmagroup. All rights reserved.
No part of this publication may be reproduced or transmitted in any form or by any means without permission from ICMA. Let me start by thanking all of you for your support last year, through your membership, active participation on our committees and councils, and support of our many events. I would also like to thank specifically the ICMA Board for their time, support and guidance over the year, and our dedicated and experienced staff for all their efforts and continual sheer hard work.
In each area, we focus on the market as a whole, involving the sell side and the buy side together. We also focus on the impact of new financial technology across these areas and on helping avoid unnecessary market fragmentation.
Last year there were four overriding themes — sustainability, the transition from IBORs to risk-free rates, Brexit and continuing market access, and FinTech. All will affect the way our members do business in the capital market, and so our engagement on their behalf is necessarily extensive.
Sustainability emerged at or near the top of the agenda for the public and politicians in most countries last year, with increasing demand for private sector financing for the changes we need to make. ESG disclosure is an increasingly important topic for our buy-side members and also for our issuer community. We are committed to playing a full role in the globally coordinated development of green and social finance, working on definitions and market practice in many different jurisdictions with members and the authorities China, ASEAN, Japan, Russia, India, and the US as well as Europe, promoting the sector at events across the world and offering education courses.
As far as the transition to risk-free rates is concerned, we are directly involved in the risk-free rate working groups of the UK, the euro area and Switzerland and have regular calls with the ARRC in the US.
Our focus is on the bond markets, where we continue to chair the sterling bond market transition group, working with the FCA and the Bank of England. The transition from the IBORs to risk-free rates is complex and far-reaching and, whilst adoption of the new risk-free rates in the bond market is going well in many jurisdictions and extremely well in the GBP market , the legacy problem is not yet solved.
We have commented on the transition widely in the Quarterly Report, through a series of member calls in Europe and Asia and in many committee meetings and individual member discussions.
This will continue to be a dominant theme for at least the next two years. ICMA is not of course involved in politics. Our focus has been on the potential market impact of Brexit, where we have updated our members regularly on the situation as it emerges, both as regards the market impact of so-called cliff-edge risks when passporting rights between the EU27 and the UK cease, and the scope for regulatory equivalence after Brexit. It would appear that most of our major buy and sell-side members are now set up and authorised so as to be able to serve clients in both the EU27 and the UK, but nevertheless smaller members may not yet be ready.
We will continue our work on Brexit as long as necessary. In the fast-changing domain of FinTech, which is rapidly reshaping our market, we have chosen initially to help our members by providing information on what solutions are commercially available to them - through our mapping directories in the primary and secondary markets and in repo operations and by promoting information exchange between FinTech providers and members at meetings and conferences.
We have also built relationships with a broader set of relevant regulators and are keenly monitoring international developments in this area. Aside from these major themes, the important day-today work with our members continues.
For example, the advocacy and education around the impact of the mandatory buy-in regime under CSDR has been augmented with a new impact study. The study predicted a rather negative effect on liquidity, in particular for lower credit quality bonds. This is a complex topic and we are working with ESMA and the Commission to explain our perspective and look for ways to mitigate the harmful impact of mandatory buy-ins.
The repo market has always been a vital — though not always fully appreciated — part of the financial markets. It has reached greater prominence this year. The forthcoming SFT Regulation due to be implemented in early is a major challenge for market participants, given the scale and complexity of the reporting requirements embodied in the Regulation, whose impact will be felt in markets far beyond the borders of Europe. ICMA has been leading the industry response to standardising and clarifying the reporting requirements - the volume of information for each trade is immense and most fields need to match exactly in order to settle — and hence the industry effort to harmonise the reporting is essential.
Our expertise on repo is in demand from many areas outside Europe, and we have been happy to share this with members and regulators, holding repo seminars and courses all over the world. As an example, we work with FrontClear in sub-Saharan Africa to promote capacity building and also with the authorities in the Philippines and in Indonesia.
Repo market developments are also under way in China and ICMA has been happy to share its expertise and experience in creating international standards and documentation.
In addition, we are proponents of an EU consolidated tape for non-equities and have been asked by the European Commission to present our views on the rationale, structure and governance of such a data source. Working with a cross-industry group of our members we submitted an interim report in mid-December and are looking forward to continuing our discussions in Both have extended their membership again this year, with an extensive schedule of meetings across European finance centres.
Our mentoring platform, which. In Asia-Pacific, the fastest growing of our regions, we welcomed to ICMA a number of significant new members at different levels of membership ranging from Tier 1 to Tier 3.
Our market-leading work on primary markets and sustainability, and the efforts of our team in the Hong Kong office, has resulted in a high profile for ICMA with members and regulators in the region. Last year through outreach in various forms we were able to assist members in better understanding the extra-territorial impact of forthcoming EU regulation.
Executive education remains important to ICMA and our members. The offering is already extensive and in we will be revamping the online self-study versions of our introductory courses.
Full details of all courses are on our website. Lastly, a quick word on major forthcoming events. Operationally ICMA is in a good position, financially viable, engaged and with expert staff with a high level of continuity, and with a growing membership - now at a twodecade high.
In this brief summary I have just set out some of the highlights of , but I hope this gives you a good feel for the breadth and depth of our activities. As ever huge challenges lie ahead, but there is much that can be achieved by working together.
Again, many thanks for your support - I wish you all a good new year and look forward to working with you all in The biggest challenge in the bond market is how to transition legacy bonds referencing LIBOR to risk-free rates. For example, could legislators redefine LIBOR as risk-free rates plus fixed spreads for those tough legacy contracts? Or could they create safe harbours for those. These measures are not in the gift of regulators, but it is sensible to consider their pros and cons.
But I want to be very clear — none of the options except that of cessation can be relied upon to be deliverable. Those who can transition should do so. Andrew Bailey has been appointed as the next Governor of the Bank of England with effect from 16 March A common objective is to make risk-free rates as robust as possible, with robustness measured primarily by the volume of underlying observable transactions.
Source: FSB, 18 December When LIBOR is permanently discontinued, such fallbacks will result in the rate being fixed for the remaining life of the bond. Some legacy bonds may have fallback language which is unclear or have no fallback provisions at all. This is an existing market practice for individual bonds. Issuers can propose to undertake consent solicitations if and when they wish. Successful completion is dependent on consent thresholds being met by a sufficient proportion of investors.
Where derivatives are used to hedge legacy bond contracts which fall back to a fixed rate when LIBOR is permanently discontinued, there may be a hedging mismatch, as derivatives may fall back to an alternative rate in accordance with their own terms.
However, it is relevant to note that the average life of some securitisations is significantly shorter than their final maturity, and some have call options. Market sources.
The provisions of each relevant legacy bond transaction need to be checked to ensure that any consent solicitation is conducted in accordance with its terms and conditions, including as to quorum and consent thresholds. Issuers of floating rate notes may undertake a consent solicitation exercise to amend the interest rate provisions in the terms and conditions of legacy bond transactions eg Type 1 legacy LIBOR bond contracts so that they reference another rate in future eg SONIA plus an adjustment spread.
As an alternative, issuers may undertake a consent solicitation exercise to amend the Type 1 fallback provisions in their legacy bond transactions so that the fallbacks to the risk-free rate are triggered on the occurrence of a specific event,. In the case of securitisations, consent solicitations need to be analysed on a tranche-by-tranche basis. It may be possible to group together series of securitisations when voting but, given the significance of a change to the interest rate, it is expected that the changes would need to be voted on tranche-by-tranche.
As a matter of market practice, irrespective of whether the underlying contracts formally require it, any consent solicitation proposal for securitisations would need to include a confirmation that the ratings on the relevant securitisation are unaffected. A consent solicitation of a securitisation requires the involvement of the issuer, the trustee and other transaction parties, including the originator. While the directors of SPVs special purpose vehicles, the issuers of the securitisations may be prepared to engage with the trustee and put a proposal to a vote of holders of the securitisation, there may be concerns about whether the structure can bear the cost where the originator or sponsor is not willing to fund such costs itself.
This negative consent mechanism has not been adopted elsewhere in the bond market. These considerations will be kept under review as the market continues to develop. Transitioning the legacy bond market as a whole 9 Transitioning the legacy bond market as a whole — involving FRNs, covered bonds, capital securities and securitisations — through consent solicitations and other liability management exercises would be a long, complex and costly process.
But individual bond contracts will still need to be amended, bond by bond. A protocol cannot be used to change legacy bond market contracts, unlike the protocols used by ISDA in the derivatives market. Given that the identity of bondholders is not always known, consent solicitation in the US may not be practicable.
So this approach is unlikely to work for very long, particularly if banks decide subsequently to withdraw. These figures should be regarded as broad orders of magnitude, not precise estimates. It will not be comfortable for the administrator of the rate. As an alternative, changing the method of calculating LIBOR would be likely either to depend on an initiative by the administrator or require the intervention of the authorities. The FCA has stated that it is sensible to consider the pros and cons of legislation, and to see if and where a consensus exists.
Pros and cons of official intervention, if feasible 15 The first question to consider from a bond market perspective is whether there is a significant risk of market disruption that would justify intervention by the authorities, if intervention is feasible.
Where these contracts are outstanding at permanent discontinuation, they will fall back to a fixed rate ie the last LIBOR fix. This was not the original intention of the parties, even though the terms of the contract are quite clear. If the contracts fall. But in some cases, this is not likely to be feasible, as the contracts cannot be changed: eg because consent thresholds cannot be reached. In others, there is not likely to be time to change them all by the end of , because there are large numbers of outstanding bonds and each bond needs to be transitioned separately, bond by bond, which is a time-consuming process.
They may be able to sell their bonds in the market, but this could have a significant effect on the market price.
ICMA Primary Market Handbook (formerly IPMA Handbook) | Practical Law
ICMA Primary Market Handbook (IPMA Handbook)
ICMA Primary Market Handbook (formerly IPMA Handbook)