FSR OUTLOOK 2022: Regulatory review of debt capital markets set to intensify


In a word:

  • As debt markets become less opaque, with the availability of more data and advanced analysis, regulatory scrutiny of their functioning intensifies
  • In a wide range of jurisdictions, regulators examine how companies manage potential conflicts of interest in the process of raising debt capital, and whether confidential or inside information is properly controlled.
  • Businesses should expect to see more monitoring and enforcement action in this area over the coming year.

Regulatory oversight of debt capital markets will increase

Regulators’ interest in previously opaque debt capital markets has intensified, albeit very gradually. The LIBOR rate-fixing scandal, as it unfolded from 2007 to 2013, was an early incentive, and the UK FCA took early enforcement action for misconduct in debt markets from of 2007. But the global pace is accelerating. In 2018, the Markets in Financial Instruments Directive and Regulation (MiFID II) introduced strengthened rules governing the provision of subscription and placement services, including specific requirements for the management of conflicts of interest and the allocation process, and pre- and post-trade transparency requirements which have given regulators much greater oversight of the functioning of debt markets in the European Union. And the recommendations of the 2020 final report of the International Organization of Securities Commissions (IOSCO) on Conflicts of interest and associated conduct risks during the fundraising process now call for action.

With this background in mind, we anticipate that the review of debt capital markets will be a key focus for regulators over the next year, with some slight variations in focus and approach across jurisdictions.

In the wake of the from the United Kingdom Leaving the EU, the FCA and the UK Treasury have consulted on a proposal to reform the UK regulatory landscape with the aim of ensuring that UK regulation remains fit for purpose and can support future growth. These reforms are expected to take shape in 2022. The UK government considers that the MiFID II scheme has offered little meaningful transparency and has had limited impact on price formation, but at a high cost to industry. Thus, the reforms proposed by the government would recalibrate (but not remove) the transparency regime of the markets for fixed income securities and derivatives, with a shift from regular liquidity calculations based on quantitative criteria only to qualitative criteria and quantitative. With regard to benchmark reform, the UK Financial Services Act 2021 gives the FCA new and strengthened powers to manage the phasing out of critical benchmarks such as LIBOR. Exercising these powers will be crucial in tackling the remaining stock of difficult legacy contracts, especially in the bond markets.

However, market conduct in debt capital markets, in particular with respect to the management of conflicts of interest and the control of inside information, remain key priorities for the FCA, following significant work. Early surveillance and competition on conflicts, allocation processes and the role of analysts in the stock and bond markets were undertaken between 2013 and 2015. Access to transaction reports and order books, combined with increased processing capacity and the use of advanced analytics, now provides FCA with near real-time algorithmic radar for all operations. Regardless of the post-Brexit adjustments to MiFID II, we expect to see more execution activity in UK debt markets in the coming year. In particular, the IOSCO final report refers to a small number of banks that acted opportunistically during the pandemic and using their lending relationship to pressure their corporate clients to secure roles on future mandates. of the primary market.

In Australia, we predict that debt transactions will be a key target for the Australian Securities and Investments Commission (ASIC) in 2022. As of September 2020, ASIC reported that debt transactions were on its radar: the ASIC 668 report was focuses on allocations in debt fundraising and some 2018-20 transactions. She revealed concerns about, among other things, the handling of conflicts of interest and inside information, and an unduly “light” approach within companies to the supervision and monitoring of debt transactions. ASIC has launched an insider trading case against a bank for its involvement in the largest single-tranche executed interest rate swap in Australian financial market history. The case, which will be heard in 2022 or 2023, is a clear sign of ASIC’s willingness to review past debt transactions and initiate legal proceedings. The outcome will be closely watched by market players and their advisers.

In Hong Kong, the Securities and Futures Commission (SFC) recently finalized new code requirements for intermediaries engaged in bookbuilding, pricing and investing in debt and equity market transactions. These new requirements will come into effect on August 5, 2022 and will cover a range of activities, including issuer and offering assessment, issuer advice, marketing, book building, pricing, allocation and placement; and record keeping. They were formulated with reference to the 2020 IOSCO report discussed above, as well as the results of the SFC thematic review following the publication of this report – addressing issues such as lack of transparency in orders placed, conflicts of interest when union members invest on behalf of clients and exclusively, and preferential treatment or discounts granted to investors.

In addition, we expect the Hong Kong Stock Exchange Limited to closely monitor the market to comply with the requirements of the Enhanced Professional Debt Scheme, which it implemented on November 1, 2020.

In United States, we expect transparency and competition in bond markets to be a priority for the United States Securities and Exchange Commission (SEC). The SEC has already told market participants that it is considering appropriate reforms with respect to post-trade transparency and trading platforms for corporate bonds, mortgage markets, asset-backed securities and municipal bonds. . In particular, the SEC has indicated that it is concerned about the accessibility of pre-trade price information made available to professional investors in the corporate bond market. We anticipate that the SEC will closely monitor the accessibility of pre-trade price information available to professional investors. We also expect regulations to follow in the coming year, focusing on expanding the dissemination of pre-trade information to make the corporate bond market more accessible, competitive and liquid.

In all of the jurisdictions covered in this article, there is evidence of regulatory concerns about how companies handle conflicts that may arise from the exclusive interest that an intermediary company may have in a transaction, and the multiple roles and range of services provided by intermediaries to their clients. The regulatory expectation that market participants should continue to provide fair treatment to corporate customers during times of disruption is very clear.


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