The year in review: capital markets in Germany – Lexology
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The year in review
Legislative and regulatory activity and activism in the area of the capital markets occurred both at the EU level and at the national level, with the national level being influenced primarily by European legislative measures. Thus, there were further developments concerning the withdrawal of the United Kingdom from the European Union (Brexit), and the covid-19 pandemic has an ongoing effect on legislation and market trends in Europe and Germany.
As the global economy is dealing with the aftermath of the covid-19 pandemic, the war in Ukraine, inflation and a looming global recession, regulators are attempting to stabilise the markets.
Notwithstanding the impact of the pandemic, which has been seen to dominate trends in the capital market, 2020 to 2022 also saw developments in distinct areas concerning debt and equity markets. The European Securities and Markets Authority (ESMA) published its final ‘MiFID II review report on the functioning of the regime for SME Growth Markets’.
In July 2020, the European Commission published the capital markets recovery package (CMRP), which contains targeted amendments to the Prospectus Regulation, MiFID II and securitisation rules. Subsequently, in February 2021, the EU legislature amended the Prospectus Regulation and MiFID II. As part of the amendment to the Prospectus Regulation, an EU recovery prospectus was introduced, which aims to facilitate equity funding and thereby allow companies to rapidly recapitalise. In this regard, the EU recovery prospectus should only focus on essential information that enables investors to make informed investment decisions. Furthermore, the exemption from the obligation to publish a prospectus for certain non-equity securities is temporary broadened as the relevant amount is increased from €75 million to €150 million. The amendments to MiFID II provide, inter alia, for a facilitation of information requirements.
In November 2021, the European Commission proposed new measures towards a capital markets union in a plan to boost Europe’s capital markets. This includes a ‘European Single Access Point’ (ESAP) which shall offer a single access point for public financial and sustainability-related information on both exchange listed stock corporations and also smaller companies. As a part of the 2021 capital markets union package, the review of MiFIR will introduce a ‘European consolidated tape’, which will give investors access to near real-time trading data for stocks, bonds and derivatives across all trading venues in the EU. So far, this access has been limited to a handful of professional investors. The package also includes reviews of AIFMD and ELTIFs to make it easier for retail investors to invest in ELTIFs, in particular by removing the minimum €10,000 investment threshold, and making small changes to AIFMD.
In November 2021, European Regulation (EU) 2020/1503 on crowdfunding service providers for business and the accompanying German Act came into force. This Regulation aims at making it easier for crowdfunding platforms to offer their services across the EU and improve access to this form of finance for businesses in need of funding. The initiative allows platforms to apply for an EU label, based on a single set of rules. These rules include information disclosures (e.g., prospectus obligations), rules on governance and risk management, and supervision.
Against the backdrop of the Wirecard scandal, in May 2021, the German legislator passed the Financial Market Integrity Strengthening Act (FISG), which primarily aims to strengthen integrity and stability of the German capital market, resulting in investor confidence in the German capital market. In this regard, the FISG brings changes to balance sheet control, further regulation to auditing and improvement to the supervisory structures and the powers of the BaFin in auditing the outsourcing on the part of financial services companies. Furthermore, in March 2021, ESMA proposed to the European Commission improvements to the transparency directive in light of the Wirecard case.11
In May 2021, the German legislature adopted the Electronic Securities Act (eWpG), which entered into force in June 2021. The introduction of electronic securities is intended to make the German financial market more viable in the future and, at the same time, to protect the integrity, transparency and functioning of the markets. In line with other European countries, Germany also makes it possible to issue electronic securities, including crypto securities based on blockchain technology. The central point of the new provisions is the abandonment of the requirement of the documentary securitisation of securities, which can be replaced henceforth by an entry in an electronic securities register. To preserve the legal certainty of the acquisition and transfer of securities that has grown in practice and theory over the decades, electronic securities will be legally equated with securities securitised in documentary form. As a first step, the eWpG allows the issuance of electronic bearer bonds as well as, in a limited form, unit certificates for special assets; it currently allows for a future extension to cover other bearer instruments, such as stocks. At the same time, it will remain possible to issue securities securitised in a documentary form. Issuers will thus have the choice to either securitise newly issued securities in a documentary form or to issue electronic securities. The first electronic security was issued using eWpG rules on 8 December 2021. As of 26 June 2022, the BaFin list of electronic securities only contains 11 securities issued under eWpG rules.
After ESMA, EBA and EIOPA published their joint ‘Final Report: EMIR RTS on various amendments to the bilateral margin requirements in view of the international framework’, the amendments on the RTS entered into force in February 2021.12
In March 2021, the amendments to the EU Securitisation Regulation and the CRR were adopted as part of the CMRP (‘quick fixes’). With regard to the EU Securitisation Regulation, the securitisation of non-performing exposures was implemented and a simple, transparent and standardised (STS) framework was introduced for on-balance sheet synthetic securitisations. With regard to the CRR, inter alia, the beneficial STS risk weighting, previously available only for SME synthetic securitisations that met traditional STS requirements (excluding true sale requirements), was extended to senior securitisation exposures in STS balance sheet securitisations of all asset classes.
In June 2021, the German legislator transposed the Investment Firm Directive (IFD)13 into the new Securities Institutions Act (WpIG). At the same time, the new Investment Firm Regulation (IFR)14 came into force. Before those regulations, investment firms had been subject to the prudential regulations of the KWG and CRR. Therefore, the same provisions applied, in principle, to investment firms in the same way as to banks, where there were numerous exceptions, through which the legislator attempted to take account of the principle of proportionality. With the new regulations the legislator decided to create a separate prudential regime for investment firms to address the different risk profiles of securities institutions and to bring about risk-adequate supervision, especially with regard to small and medium-sized investment firms.15 In the future, only large investment firms will still be subject to the regulations of the KWG and CRR.
In August 2021, most parts of the New Funds Location Act (FOSTOG), which aims to strengthen Germany as a location for investment funds, came into effect. Through this the legislator brought, inter alia, a new range of fund products and new tax regulations came into force. FOSTOG also serves to adapt the KAGB to some of the SFDR and Taxonomy Regulation rules, as well as to implement the new EU uniform rules on pre-marketing.
In November 2021, a settlement was reached in the famous Telekom KapMuG case on the third public offering by Deutsche Telekom in 2000 after more than 20 years of trials.
In May 2021, media reports stated that Wirecard’s insolvency administrator wanted to reclaim dividends paid to its shareholders in the amount of €40 million. In addition, it cannot be ruled out that share buybacks of over €140 million may also be reclaimed by the insolvency administrator.16 In this context, the district court of Munich has ruled that the 2017 and 2018 annual reports are void;17 if this ruling becomes legally binding, that opens the door to clawbacks.
As part of a preliminary ruling under Article 267 TFEU from the Supreme Court of Spain, in June 2021, the European Court of Justice ruled that, inter alia, Article 6 of the Prospectus Directive must be interpreted as meaning that, in the event of an offer of shares to the public for subscription that is addressed to both retail investors and qualified investors, an action for damages on the grounds of the information given in the prospectus may be brought not only by retail investors but also by qualified investors.18
FOSTOG also extends the VAT exemption granted to investment funds to venture capital funds and increases the tax free maximum amount for employee equity participation.
In March 2020, the German legislature introduced amendments to the Act on the Recovery and Resolution of Credit Institutions, setting out special regulations for CCPs (e.g., the requirement for default funds). In its role as supervisory authority to CCPs BaFin has implemented the German version of the ESMA Guidelines as of June 2022.19
In January 2021, the European Union postponed phase 3 of the Central Securities Depositories Regulation (CSDR), which was originally scheduled for September 2020 to February 2022.20 The CSDR lays down uniform requirements for the settlement of financial instruments in the European Union and rules on the organisation and conduct of central securities depositories (CSDs) to promote safe, efficient and smooth settlement. Phase 3 of the CSDR deals with measures to prevent and address settlement fails and to encourage settlement discipline, by monitoring settlement fails, collecting and distributing cash penalties for settlement fails, and implementing buy-in processes.21
Additionally, as already seen in previous years, increased offerings of crypto tokens and the underlying distributed ledger technology (DLT) have been points of regulatory and governmental attention. Transposing the Fifth Anti-Money-Laundering Directive,22 the German legislature, inter alia, incorporated the crypto custody business into the KWG as a new financial service, setting out an extensive definition of cryptoassets and requiring licencing by BaFin for companies offering this service. However, the law includes transitional provisions for those companies that conducted this type of business before these activities became subject to authorisation requirements.
The European legislation on DLT market infrastructure was formally signed by the legislators in May 2022, laying down requirements in respect of: granting and withdrawing specific permissions to operate DLT market infrastructure in accordance with this Regulation; granting, modifying and withdrawing exemptions related to specific permissions; mandating, modifying and withdrawing the conditions attached to exemptions and in respect of mandating, modifying and withdrawing compensatory or corrective measures; operating and supervising DLT market infrastructure; and cooperation between operators of DLT market infrastructure, competent authorities and ESMA.
2020 and 2021 also saw increasingly more developments with regard to sustainable investments, such as a Commission proposal for a European green bond standard as part of the European Green Deal Investment Plan. The Taxonomy Regulation, the fundamental framework providing an EU-wide classification system for environmentally sustainable activities, entered into force in July 2020 and will become fully applicable within 2022.
On 2 June 2022, the European supervisory authorities (the EBA, EIOPA and ESMA) published a statement providing clarifications on the draft RTS (regulatory technical standards) issued under the Sustainable Finance Disclosure Regulation (SFDR), which include the financial product disclosures under the Taxonomy Regulation. It provides clarification on key areas of the SFDR disclosures, including the use of sustainability indicators; principal adverse impact (PAI) disclosures; financial product disclosures; direct and indirect investments; taxonomy-related financial product disclosures; DNSH (i.e., ‘do not significantly harm’) disclosures; and disclosures for products with investment options.
Finally, the European Union has enacted a new Regulation on the designation of a replacement for the benchmark European overnight index Average (EONIA) in contracts and financial instruments The EONIA has been replaced by the euro short-term rate (€STR) plus a fixed spread adjustment of 8.5 basis points.
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