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Reverse Yankee Bonds and the New EU Market Abuse Regime

June 03, 2016 (14 min read)

By: Matthew Merkle, Kirkland & Ellis International LLP.

ON JULY 3, 2016, THE EUROPEAN UNION (EU) WILL EXTEND its new market abuse regime (MAD II)2 to the previously unregulated Global Exchange Market of the Irish Stock Exchange (GEM) and the EuroMTF of the Luxembourg Stock Exchange. MAD II will thereafter apply to U.S.-based issuers of euro-denominated bonds that are listed on the GEM and the EuroMTF. MAD II differs in significant ways from relevant U.S. law, and issuers of Listed Reverse Yankee Bonds will need to weigh the cost of complying with MAD II against the benefits of maintaining a listing of their Reverse Yankee Bonds on a European stock exchange.

This article specifies immediate actions issuers should take to comply with MAD II, describes Listed Reverse Yankee Bonds, analyzes the requirements for MAD II from the perspective of a bond issuer, and presents alternatives to the GEM and EuroMTF for Reverse Yankee Bond issuers.2

Immediate Actions

To comply with the requirements of MAD II, issuers of Listed Reverse Yankee Bonds should take the following actions no later than July 3, 2016:

  • Create and implement a plan for managing the disclosure and delay of disclosure of inside information and for recording instances of non-disclosure.
  • Identify and maintain a list of persons discharging managerial responsibilities (Managers) and persons closely associated with them and create procedures for tracking and recording transactions undertaken by such persons in the Listed Reverse Yankee Bonds.
  • Create and maintain a list of persons working for the relevant issuer (including service providers) who may have access to inside information (Insiders).
  • Amend existing insider trading policies to comply with MAD II (including its 30-day “blackout” close period for Managers and persons closely associated with them).
  • Communicate the new requirements to employees, shareholders, advisers, and other stakeholders.

Significant uncertainty remains around how European securities regulators and other officials (including local prosecutors) will interpret and enforce MAD II. Further guidance is expected on MAD II’s implementation from the European Securities and Markets Authority.

Listing Reverse Yankee Bonds

In 2015 and 2016, U.S.-based issuers issued record volumes of euro-denominated bonds (so-called Reverse Yankee Bonds) to take advantage of low yields in Europe and the weakness of the euro, hedge their operational exposure to the euro, and raise cash for acquisitions. In 2015, the United States was the largest source of issuers in the European corporate bond markets, and, according to Dealogic, by mid-March 2016, U.S. issuers had accounted for 23% of all euro-denominated bond issues in 2016.

As with other securities issued in Europe, Reverse Yankee Bonds are typically listed on a stock exchange. Bonds are not typically listed in the United States. The reasons for listing bonds in Europe include the following:

  • The “quoted Eurobond exemption,” which exempts a UK or Irish company from withholding taxes on an interest payment if interest is paid on a security admitted to trading and included in the official list of a “recognized stock exchange” (recognized stock exchanges include all European Economic Area and U.S. stock exchanges, plus the Channel Islands Stock Exchange (which is in Guernsey—part of the United Kingdom, but not part of the EU) and the Cayman Islands Stock Exchange, among others)
  • Investment restrictions for certain European investment funds that prohibit investments in unlisted bonds

Market practice in Europe is that all bonds are listed on a recognized exchange, whether or not there is a UK or Irish company in the issuer group. There is, however, no legal requirement to list euro-denominated bonds.

The GEM and the EuroMTF are popular listing venues for European bonds. These are multilateral trading facilities under EU law, meaning that so long as a bond issuance has a minimum denomination of at least €100,000, a listing on the GEM or EuroMTF will exempt the issuer from complying with the requirements of the EU Prospectus Directive, the EU Transparency Directive, and (prior to MAD II) the EU market abuse regime. The GEM and the EuroMTF (prior to MAD II) are regulated by the stock exchanges themselves, not by the local securities regulators (The Central Bank of Ireland (CBI) for the Irish Stock Exchange and the Commission de Surveillance du Secteur Financier (CSSF) for the Luxembourg Stock Exchange).

As a result, issuers listed bonds on the GEM and the EuroMTF with the understanding that the listing would be hassle- and liability-free. So long as the issuer provided the reports required under its bonds’ reporting covenants and any other information affecting bondholder rights to the GEM or the EuroMTF and paid an annual listing fee, the listing would be maintained. Liability under EU securities regulations has not previously applied.

MAD II will bring the GEM and the EuroMTF and all the bonds listed on them into the same inside information and market abuse disclosure and liability regime as other listed securities in the EU. For issuers of Listed Reverse Yankee Bonds who may not be attuned to EU securities regulation, the risks of noncompliance are high, and include administrative and criminal sanctions, including fines and prison time.

Key Aspects of MAD II for Listed Reverse Yankee Bonds

MAD II defines inside information, regulates disclosure of inside information, regulates dealings by Insiders, and mandates the recordkeeping and disclosure requirements described below.

Inside Information:

MAD II defines inside information as follows:

  • Information of a precise nature, which has not been made public, relating directly or indirectly to one or more issuers or to one or more financial instruments, and which, if it were made public, would be likely to have a significant effect on the price of those financial instruments or on the price of related derivative financial instruments
  • Information is of a precise nature if it indicates a set of circumstances that exists or may reasonably be expected to come into existence, or an event that has occurred or may reasonably be expected to occur, and is specific enough to enable a conclusion to be drawn as to the possible effect of that set of circumstances or event on the prices of the relevant financial instruments, including any intermediate steps
  • Information is likely to have a significant effect on the price of financial instruments if a reasonable investor would likely use it as part of the basis of its investment decision

An issuer must inform the public as soon as possible of inside information that directly concerns it. Inside information must be announced without delay and in a manner that allows fast access and a complete, correct, and timely assessment of the information by the public. The public may be informed either via an approved wire service or by an announcement published by the stock exchange.

In addition, all inside information that an issuer is required to disclose publicly must be published on its website and maintained there for a period of at least five years. There is no safe harbor for publishing information on another government’s official website, such as the U.S. Securities and Exchange Commission’s EDGAR filing service, to comply with these disclosure requirements.

Delaying Disclosure of Inside Information:

MAD II provides that an issuer may delay the publication of inside information when each of the three following conditions is met:

  • The immediate disclosure of the information is likely to prejudice the legitimate interests of the issuer.
  • Delay of disclosure is not likely to mislead the public.
  • The issuer is able to ensure the confidentiality of that information.

Legitimate Interests:

While legitimate interests must be assessed on a case-by-case basis, examples include:

  • Ongoing negotiations where the outcome or normal pattern of those negotiations would be likely to be affected by public disclosure (including in a distressed context).
  • Competitive situations (e.g., where a contract was being negotiated but had not been finalized and disclosure would jeopardize the conclusion or threaten its loss to another party).
  • Product development, patents, inventions, etc., where the issuer needs to protect its rights (though events that impact on major product developments should be disclosed as soon as possible).
  • When an issuer decides to buy or sell a major holding in another entity and the deal will fail with premature disclosure.
  • Impending developments that could be jeopardized by premature disclosure.

Note that a contractual requirement to selectively provide inside information (e.g., reporting of monthly management accounts to private lenders) has not specifically been noted as a legitimate interest, so there may be a requirement to disclose such information publicly at the same time it is disclosed pursuant to the contractual obligation.

Likely to Mislead the Public:

Delaying the disclosure of insider information is likely to mislead the public where, for example:

  • The inside information is materially different from a previous public announcement on the matter.
  • The inside information regards the fact that the issuer’s financial objectives are likely not to be met, where such objectives were previously publicly announced.
  • The inside information is in contrast with the market’s expectations, where such expectations are based on signals that the issuer has previously set (e.g., an interview with the CEO).

Recordkeeping in Relation to Delay of Disclosure:

When publication of inside information is delayed, the issuer must maintain records of:

  • The identity of all persons with responsibility for the decision to delay the publication of the inside information
  • The identity of the person making the notification to the competent national authority, including their professional e-mail and telephone number
  • The date and time when the inside information first existed within the issuer
  • The date and time of the decision to delay the publication of the information (including the time zone)
  • The reasoning in respect of each of the three conditions of the decision to delay
  • The manner in which compliance with confidentiality and the conditions for delay are monitored
  • Decisions relating to when public disclosure should be made

The issuer must notify the relevant competent authority of the delay in publication in writing as soon as possible after the inside information is made public and provide a written explanation of the reason for the delay and how each of the above three conditions of the decision were met.

Insider Dealing:

It is an offense under MAD II to:

  • Use inside information to buy or sell financial instruments
  • Disclose inside information to any other person, unless done in the normal course of business of a person’s employment, profession, or duties
  • Recommend or induce another person to transact on the basis of inside information

A person who deals (including the amendment or cancellation of an order) while in possession of inside information will be presumed to have used that information. Certain exemptions are available for market soundings and transactions customary in a relevant jurisdiction.

Market Manipulation:

Market manipulation or attempted market manipulation—a trade does not have to be placed or an order executed—is prohibited under MAD II, including the following activities:

  • Entering a transaction, placing an order to trade, or any other behavior that
  • Gives or is likely to give false or misleading signals as to the supply of, demand for, or price of, a financial instrument
  • Secures or is likely to secure the price of one or several financial instruments at an abnormal or artificial level; or
  • Unless the person entering into a transaction, placing an order to trade, or engaging in any other behavior, establishes that such transaction, order, or behavior has been carried out for legitimate reasons and conforms with accepted local market practices
  • Activity or behavior that affects or is likely to affect the price of one or several financial instruments that employs a fictitious device or other form of deception or contrivance
  • Disseminating information through the media, including the Internet, or by any other means, which gives, or is likely to give, false or misleading signals as to the supply of, demand for, or price of, a financial instrument, or secures, or is likely to secure, the price of one or several financial instruments at an abnormal or artificial level, including the dissemination of rumors, where the person who made the dissemination knew, or ought to have known, that the information was false or misleading

Manager Transactions:

MAD II requires Managers and persons closely associated with them to disclose transactions in listed shares and listed debt instruments, as well as in derivatives or financial instruments linked to such shares or debt securities.

Managers or persons closely associated with them are obligated to notify both the issuer and the competent national authority, and the issuer must notify the competent authority and the public of the relevant transaction within a timeframe of three business days of the transaction.

A Manager is defined as a person discharging managerial responsibilities, and may further be defined as a person within an issuer who is:

  • A member of the administrative, management, or supervisory body of that entity
  • A senior executive who is not a member of the bodies referred to in the previous bullet, but who has regular access to inside information relating directly or indirectly to that entity and power to take managerial decisions affecting the future developments and business prospects of that entity

A person closely associated to a Manager means:

  • A spouse, or a partner considered to be equivalent to a spouse in accordance with national law
  • A dependent child, in accordance with national law
  • A relative who has shared the same household for at least one year on the date of the transaction concerned
  • A legal entity controlled by or benefiting a person described above

Note that the definition of Manager applies only to the issuer itself. It is unclear whether regulatory authorities and prosecutors will read MAD II to include managers of parent companies or other control persons who are not also Managers of the issuer.

Blackout Close Periods for Insider Trading Policies:

MAD II introduces a period of 30 calendar days before the publication of an interim financial report or a year-end report in which a Manager, or a person closely associated with a Manager, must not conduct transactions for its own or a third party’s account, directly or indirectly, relating to the listed securities of the relevant issuer or to derivatives or other financial instruments linked to such listed securities. Issuers of Listed Reverse Yankee Bonds should update their insider trading policies to comply with this requirement.

Insider Lists:

Issuers must maintain a list of persons working for them who may have access to inside information. These lists should be promptly updated whenever there is a change in the reason why a person is on the list, to add a new person, or whenever any person on the list no longer has access to inside information, and these lists must be maintained for a period of at least five years. Insiders include service providers, who may maintain their own lists and provide those lists to issuers (though issuers remain responsible for completeness). Separate lists for permanent and deal- or information-specific Insiders may be maintained if preferable.

The information required of each Insider (including service providers) includes:

  • Name (and birth name, if different)
  • Professional and personal telephone numbers
  • PPS/national identification number
  • Time and date of access to inside information
  • The reason for including that person on the Insider list
  • The date on which the Insider list was drawn up or updated

The issuer must take all reasonable steps to ensure that persons on the list acknowledge in writing the legal and regulatory duties entailed and are aware of sanctions applicable to insider trading and unlawful disclosure of such information. Insiders’ lists must be provided to the applicable exchange regulator (i.e., the CBI or CSSF) upon request.

Penalties for Noncompliance

MAD II includes administrative and criminal sanctions for noncompliance. Although most jurisdictions already have legislated criminal sanctions for market abuse and insider trading, MAD II significantly expands the scope of potential sanction for Listed Reverse Yankee Bond issuers and their shareholders, employees, and service providers, especially in respect of reporting and recordkeeping requirements. It is important to note that natural persons involved as perpetrators, inciters, or accessories will potentially have the same liability as the party in noncompliance.


De-listing from the GEM or the EuroMTF to avoid the requirements of MAD II may be difficult. Many eurodenominated bonds (or the underwriting agreements in respect of such bonds) include covenants requiring the issuer to use commercially reasonable efforts to maintain a listing. Choosing to de-list from an exchange may also result in negative publicity or impact the trading price of listed bonds. Possible alternatives to the GEM and EuroMTF include the Channel Islands Stock Exchange and the Cayman Islands Stock Exchange, both of which benefit from the quoted Eurobond exemption but fall outside the ambit of EU regulation. Still, listing bonds on these exchanges is relatively untested, and may result in other unintended consequences. Other issuers, particularly those with no UK- or Irish-sourced income, should consider and discuss with their advisers whether to de-list bonds altogether.

Future issuers should assess whether the compliance costs of listing their euro-denominated bonds outweigh the benefits of a listing, and work closely with their advisers to determine a listing venue if listing is necessary.

Matthew Merkle is a capital markets partner in the London office of Kirkland & Ellis International LLP.

RESEARCH PATH: Securities and Capital Markets > Corporate Governance and Compliance Requirements for Public Companies > Corporate Governance > Practice Notes > International Market Regulation

1. Regulation 596/2014 on market abuse and Directive 2014/57/EU on criminal sanctions for market abuse. The provisions of the regulation will be directly applicable in EU Member States on July 3, 2016. The provisions of the directive will be implemented by EU Member States via domestic legislation. 2. MAD II applies to any financial instruments listed or traded on multilateral trading facilities (such as the GEM and the EuroMTF) and organised trading facilities (each as defined in the EU legislative package known as “MiFID II” comprising Directive 2014/65/EU on Markets in Financial Instruments and Regulation No. 600/2014 on Markets in Financial Instruments which will replace the current Marketing in Financial Instruments Directive in January 2018), among other things. This article is not meant to be a recitation of all applicable regulations or an analysis of all considerations under MAD II.