The Swiss Exchange (SWX) is planning to change its listing rules to attract issuers that are unhappy with the increased compliance costs associated with the EU’s recently passed prospectus and transparency directives.
SWX will introduce changes over the next four months, removing a requirement that debt securities listed in Switzerland be governed by Swiss law and clearing the way for issuers to publish statements under most local accounting standards, including Japanese and US rules.
SWX plans to create a fast-track system for transferring EU-listed securities to Switzerland without new prospectuses having to be issued. The exchange will also allow issuers to list MTN programmes in Switzerland and will remove a requirement to use a Swiss paying agent on deals.
SWX is already circulating the draft listing rules to Swiss market participants. It hopes to attract issuers that are keen to avoid the more cumbersome requirements contained in the new EU directives, which are set to come into effect in 2005.
The 40-year-old Eurobond market enjoys exemptions from many disclosure requirements on the grounds that the bonds are sold only to professional and institutional investors. But the new prospectus directive, which is aimed at creating a pan-EU securities market by allowing issuers to sell securities into any EU country once the regulator of one member state has approved the prospectus, will change that.
Critics say the new EU regime will force issuers of wholesale securities to issue in denominations of ¤50,000 ($60,000), or more, to be exempt from costly prospectus requirements designed to protect retail investors. Under the Swiss rules the disclosure regime for any issue will match that of the present wholesale market.
“The EU has given SWX an open goal,” says Nick Eastwell, head of capital markets at Linklaters, which, along with Swiss firm Homburger, has advised SWX on its proposed listing regime. “The market rightly accepts that if you are going to sell securities to retail investors you have to comply with comprehensive transparency and disclosure rules but the EU’s new retail regime will catch a host of wholesale products aimed at professional investors.”
Eastwell says the flaw in the European Commission’s approach has been to regulate by looking at types of securities rather than the types of investor the securities are designed for. This means firms will have to structure products that non-professional investors rarely buy as if the securities are aimed at the retail market.
Cost burden
“The cost of compliance with the new EU retail regime will be difficult to accurately quantify,” says Eastwell. “But it will come in upfront prospectus costs, IFRS restatement costs and extra reporting costs, which will certainly run into the hundreds of thousands of euros. Prospective issuers of classic EU exchange-listed Eurobonds will not be prepared to shoulder this extra expense burden, which will likely make the cost of raising capital through this medium prohibitive. Electing to list on a recognized exchange outside the EU provides a viable alternative.”
Stock exchanges in Singapore and Hong Kong have also moved to take advantage of issuer dissatisfaction, pitching themselves as more issuer-friendly than the EU.
They are particularly attractive to issuers of convertibles, which will be treated as equity by the new EU rules and so will be subject to extensive disclosure rules with no exceptions.
But the EU’s key exchanges are not going to concede market share easily. “London is the home of the Eurobond market and we are confident that this will continue,” says Martin Graham, director of market services at the London Stock Exchange. “We are aware of the difficulties presented by the prospectus directive and are in discussions with the regulators regarding the preservation of the existing flexible wholesale debt regime that has proved so successful over the last 40 years. We will be presenting our plans to the market in due course.”
London’s junior growth market, AIM (Alternative Investment Market), has already opted out of the EU’s list of regulated markets, allowing it to sidestep EU legislation such as the prospectus directive. It now seems the regulatory threat is such that larger markets could be planning similar moves, which, if successful, could nullify SWX’s strategy.
However, some large investors cannot invest in unregulated securities, so the appeal of an unregulated exchange might be limited.
London-based firms arrange about 60% of Eurobonds. The market was created when restrictive legal changes in the US in the 1960s compelled bankers to look for more flexible ways to issue bonds, so there is an element of déjà vu here.
Because it is often more convenient for EU-incorporated issuers to issue their debt on the same exchange as their equity is listed, these issuers have at least one interest in sticking with London or other EU exchanges. But non-EU issuers could be attracted to SWX’s new regime.
And it is non-EU issuers who are more likely to have to restate in accordance with IFRS, since EU-incorporated issuers will have to produce IFRS financial statements from 2005 anyway.
The new rules should go to the SWX Admission Board at the end of September this year, and could be in place from December if the Swiss Federal Banking Commission approves them.