The stock exchanges in London and Luxembourg have struck back in their battle with non-EU exchanges for domination of Eurobond listings once the EU’s Prospectus Directive takes effect on July 1.
They have both unveiled a strategy for dealing with competition from rivals, several of which aim to attract non-EU issuers by offering a chance to avoid new EU regulation.
Both London and Luxembourg propose to sidestep the parts of the Prospectus Directive that are unappealing to issuers.
The stakes are high, with many issuers intent on avoiding the Prospectus Directive and its requirement for an expensive retail-style prospectus for all bond deals with denominations of less than €1,000. At the same time, the EU’s Transparency Directive will, from 2006, require even foreign issuers to report under International Accounting Standards (IAS) if they list on EU exchanges.
Swiss rules
The Swiss Exchange (SWX) staked its claim for a bigger market share with a new set of rules that took effect on February 1 and listed its first Eurobond, a $125 million deal for Banco Itaú, at the end of March. SWX’s rules mimic the pre-Prospectus-Directive Eurobond listing regime in Luxembourg and London.
Norway’s exchange announced in March the creation of an alternative market to try to tempt issuers away from EU exchanges by overhauling its debt securities listing regime, again to mirror pre-Prospectus regimes.
In response, the Luxembourg exchange has sought to reassure issuers that little will change after July 1. Luxembourg has already prepared a Prospectus Directive implementation plan. This will launch an alternative market that will operate independently of the EU regulated market. Its rules will be defined in the exchange’s rules and regulations and will be almost identical to the present Eurobond listing regime.
The new market segment will be open to all types of securities, including equity, but will specialize in Eurobonds. It will be overseen by Luxembourg’s regulator, but will fall outside the EC definition of a regulated market. Neither the Prospectus Directive nor the Transparency Directive will apply to its listings.
Listing on what is effectively an unregulated market raises concerns about investor protection as well as practical problems centring on how much paper institutional investors can buy on unlisted markets. The exchange points out that its internal rules require a ministerial order to take effect, and so are more than simply the exchange’s own rules.
“We do not think we are reducing investor protection,” says a Luxembourg Stock Exchange source. “We are keeping the same level as today, although it is true that the disclosure requirements will be less than will be required under the Prospectus and Transparency Directives.”
Whether investors will be able to buy alternative market paper is a more pressing concern. For example, the European laws on Ucits funds, which are cross-border EU unit trust funds, limit them to investment in transferable securities listed on a regulated market. And many institutional investors have self-imposed restrictions on what they can buy.
Luxembourg is keeping the official listing criteria the same for main and exchange-regulated markets in the hope that this will enable institutional investors to use both. It is also petitioning the European Central Bank to add notes listed on the exchange-regulated market to its list of accepted collateral that financial institutions can put up for the ECB’s marginal lending facility and refinancing operations.
Luxembourg admits that it faces a fight to hold on to existing business. “We are not looking to increase market share but to preserve it,” says the exchange representative. “Other markets see this as a commercial opportunity.”
Among those other markets, the London Stock Exchange sees the shifting regulatory environment as an opportunity to increase its market share. After July 1, the LSE will offer three options: a retail listing market, a regulated wholesale market or a new exchange-regulated market. The LSE is preparing a memorandum setting out details of the exchange-regulated market segment, which will be called a Professional Investor Market.
Investor impact
The LSE will sweep all existing London-listed Eurobonds into the exchange-regulated market, meeting the possibility that the Prospectus Directive is applied retroactively. But the main selling point is the expectation that most professional investors will be free to buy paper listed on the Professional Investor Market without restrictions. “Our key point is that we’ve considered the impact on investors as well as issuers,” says Paul Haddock of the LSE’s issuer services department.
The London exchange has carried out a legal assessment of whether institutional investors and insurance companies will be able to buy the notes on its exchange-regulated market and are confident they will. London’s approach is to require prospectuses that look much like Prospectus Directive-compliant documents but without the requirement to comply with IAS. In all other respects the Transparency Directive and Market Abuse Directive will apply.
The success or failure of the new rivals will depend on how quickly, effectively and flexibly they can read and comment on prospectuses and then list bonds. If on top of fast turnround non-EU institutions are cheaper than EU exchanges while maintaining liquidity and investor protection, issuers will be drawn away from the EU. But if London and Luxembourg improve customer focus and deliver better services with little change in cost or regulatory burden, they will maintain a grip.
