Financial services updater - Italy
23 April 2012

New admitted market practice on bond buybacks at predetermined conditions

CONSOB, the Italian Securities and Exchange Authority, recently published a consultation document on the recognition of “admitted practice” under article 1 of Directive 2003/6/CE of a market practice concerning bond buyback at predetermined conditions. This practice consists of a buyback of bonds at conditions specified in an offering document, operated by an investment firm (so called “price makers”) appointed by an issuer in order to protect the value of the securities concerned in the event that the credit rating of the issuer worsens.

When the conditions set out in the offering document are satisfied, the price maker in charge of the buyback will re-purchase a portion (normally between 10 per cent and 4 per cent) of the securities initially issued on the market at a price, calculated on the basis of the spread implied in the yield-to-maturity offered to bond investors at the time the securities were issued.

The recognition of this market practice was encouraged by Assosim, the Italian broker dealers Association, in consideration of its widespread use and of the risk for price makers to incur in market manipulation infringements.

According to the consultation document, in order to fall within the perimeter of the “admitted market practice”, several operating and transparency requirements have to be satisfied, including but not limited to:

• the buy back shall take place on all markets in which the securities are admitted to trading
• firms are required to insert buy orders at the conditions predetermined in the offering document
• the procedure adopted by the firm in the pricing of the bonds should be predetermined and allow the determination of the credit spread.

With respect to transparency requirements, investors should be adequately informed in a clear and transparent manner about the buyback conditions and procedure, including the indication of the maximum securities that will be bought back. CONSOB will also require that a warning be given to investors that market prices of the bonds may be influenced by the buyback activity significantly, and that, once the activity stops, the price of the securities will reflect market conditions, and it could be lower than the price indicated in the proposals made in accordance with the predetermined conditions as set out in the offering documents.

CONSOB views the above market practice favourably particularly as it believes that it enhances investor protection, particularly in relation to retail investors who are often unable to make an adequate assessment of the pricing of the issuer’s credit rating.

The consultation closes on 30 April 2012.

Back to top

Consultation Paper on Consob Regulation of Issuers and Regulation of Markets

In the course of 2011, following the financial crisis, the Italian regulator, Consob, started and directed a process to study and revise certain regulations in order to revise provisions which would favour access to the market by companies and investors. As a result, the first set of amendments which were aimed at reducing the administrative and economic burdens on the market (Deliberation no 18079, January 2012) were approved earlier this year. In late 2011, Consob conducted further work with a view to amending certain provisions in connection to issuers and the market for the purposes of: (i) maintaining an adequate level of national regulation when compared to European regulation; (ii) simplifying the requirements in connection with the status of a “company listed on a regulated market” in order to reduce procedural costs, and to maintain an efficient level of control of the market in order to protect the rights of the investors. Following this work Consob published, on 22 March 2012, a consultation paper proposing further amendments to the Consob Regulations of the Issuers (IR) and to the Consob Regulation on the Markets (MR). The deadline for comments on the consultation paper is 23 April 2012.

The main amendments proposed are, inter alia, the following.

Amendment of the definition criteria for the Issuers of financial instruments widely distributed among the public

Increased threshold (from 200 to 500) in the number of shareholders and bondholders for the applicability of the regime of the so called “Issuers of financial instruments widely distributed among the public”, enhancing the effectiveness of the diffusion of the financial instruments amongst the public. Further, with respect to companies issuing bond securities, it is required that such issue has a nominal value equal to or above Euro 5 million.

Therefore the proposed definition criteria is intended to streamline and reduce the regulatory regime applicable to the current number of companies that will no longer fall into the definition.

Public offerings

Reduction to Euro 100,000 (from Euro 250,000) of the minimum subscription for the application of the exemption from the publication of a prospectus in public offers involving: a) open-ended collective investment undertakings; and b) financial products issued by insurance companies. An identical reduction has also been proposed for the exemption to launch a takeover bid or tender offer, by the issuer, aiming to acquire or offer units of investment schemes or financial products issued by insurance companies. The proposed changes will serve a double purpose: (i) align the IR with the Prospectus Directive as amended; and (ii) extend the application of the regime on tender and exchange offers also to investment schemes and offers of financial products issued by insurance companies.

Moreover, in order to deal with the issue of so called “splitting”, the consultation paper proposes to extend an extension of the publication exemption of an offering document, to the event offor exchange offers of securities with: (i) a value of no less then Euro 50,000 000 and; (ii) where the bondholders, who did not reach the amount of bond required for the exchange, are provided with a money consideration [sorry but I don't follow - can we please re-word?].

Shareholders’ rights

In light of the current reduction in capitalization and market volatility, the consultation paper amends the criteria for the calculation of the percentage requested for the submission of the lists of candidates for appointment to the board of directors: (a) variation of the capitalization parameter to 1 billion Euros; and (b) subsequent variation of the percentage for the list’s submission: 1 per cent for the companies whose capitalization is between 1 billion and 15 billion, and 2.5 per cent for companies whose capitalization is less than Euro1 billion, with no variation for the other thresholds of 1.5 per cent and 2 per cent.

Moreover, in order to guarantee greater fairness amongst shareholders and to encourage IPOs, companies intending to go public may adopt as reference criteria for the submission of lists, and up until the second renewal term of the managing boards, a percentage of share capital possession ownership equal to 2.5% share capital possession [is possession the right word?] with no regards to the capitalization.

Information duties

To achieve maximum harmonization on obligations concerning ownership structure, so as to lighten regulatory requirements on investors the consultation paper proposes a simplification of the disclosure procedure of significant holdings as follows:

• removal of the communication duties on the significant holding as per article 117 IR, which are additional to the ones pursuant to the Transparency Directive (35, 40, 45, 75 per cent)
• extension of the application of the significant holdings regulation to all parties (EU and non-EU) which perform asset management activities, with the extension of the exemption from the communication of the significant holdings between 2 per cent and 5 per cent in order to allow the application to non harmonized close ended collective investment undertakings
• streamlining of the disclosure obligations of fiduciary companies, to the sole circumstance of the trustees exercising discretionally the right of vote on the registered
• new exemption for the temporary acquisition of shares below the threshold of 5 per cent by qualified investors.

In light of the above amendments, it is clear that the intention of the consultation paper is the simplification and harmonization of procedures in order to make entry to the market easier and more affordable.

Back to top

Definition of professional clients applicable to governmental entities and bodies

After a consultation process which followed a number of financial disruptions involving governmental and local authorities investing in complex financial instruments and derivatives, a Ministerial Decree has been published in the Italian Official Gazzette (the Decree). In the Decreethe Italian Ministry of Economy and Finance has laid down the eligibility criteria for public entities and bodies to qualify as professional clients pursuant to the Italian Consolidated Law on Finance (Legislative Decree 24 February 1998, n. 58) which implements the Markets in Financial Instruments Directive.

According to the Decree, public entities and bodies which are considered as “professional clients” by operation of law are:

• the Italian Government, and
• the Bank of Italy.

Moreover, the following governmental entities and bodies can be treated as professional clients upon request:

• regions
• autonomous Provinces of Trento and Bolzano
• other territorial entities and bodies such as, inter alia, municipalities, other local councils and communities, consortia established between governmental and local authorities
• national and regional non-territorial public entities;

provided that all of the following conditions are met: (i) the entities’ revenues, reported in the last approved financial account, are higher than Euro 40 million; (ii) the entity has completed transactions on financial markets of an aggregate value higher than Euro100 million in the course of the last three years; (iii) the personnel in charge of the financial management of the entity holds adequate competences, skills, knowledge and experience in respect of investment services (including collective portfolio management) and financial instruments.

The process for being up-graded to professional client requires several stringent steps to be complied with by both the client and the intermediary- including, inter alia: (a) a written request of the client; (b) a statement of the personnel from the appropriate officer, in charge of the entity’s financial management, declaring that he holds adequate competences, skills, knowledge and experience; (c) a written awareness declaration from the clienton the loss of protection due to the up-grading as professional client; and (d) an assessment by the intermediary that the above requirements (including items (i) to (iii)) are fulfilled.

The Ministerial Decree was expected by market operators for some time and entered into force on 22 March 2012.

Back to top