Posts tagged "FINSA"

Licensing of Reviewing Bodies Under the Financial Services Act – An Initial Assessment


From January 1, 2020, FinSA (together with FinSO) implemented a new prospectus regime for Swiss capital markets, including specific statutory requirements, applicable to all financial instruments (subject to exemptions and customizations for certain financial instruments), under which

(i) any individual in Switzerland who makes a public offer to purchase securities or

(ii) any person seeking the admission of securities to trading on a Swiss trading venue must first publish a prospectus (article 35(1) FinSA).

Perhaps most significantly, and in contrast to the previous system, any such prospectus has to be submitted to a Reviewing Body for approval before publication (i.e., ex-ante prospectus approval) (article 51(1) FinSA). Notably, prospectus approval may be requested for qualifying debt instruments after the prospectus is published (i.e., ex-post prospectus approval).

BX Swiss AG (BX Swiss) and SIX Exchange Regulation AG (SIX Exchange Regulation) stated on May 28, 2020, that they had received clearance from FINMA to function as Reviewing Bodies under FinSA beginning on June 1, 2020. As a result, the prospectus review offices at SIX Exchange Regulation and BX Swiss accept prospectus review and/or deposit applications by FinSA.

According to FinSO, when a public offer or a request for admission to trade on a trading venue is submitted, the need to publish a FinSA approved prospectus will only take effect on December 1, 2020 (i.e., six months after the Reviewing Bodies were licensed by FINMA, article 108(1) FinSO). Therefore, until December 1, 2020, issuers may continue to comply with the former system, in which a so-called offering and listing prospectus may be prepared in line with the Swiss Code of Obligations (CO) and/or the listing requirements of the relevant exchange (where applicable) (article 109(2) FinSO).

After the six-month transition period expires, the duty to issue a FinSA compliant prospectus will apply to all publicly offered securities in Switzerland as well as to those looking to be admitted to trading.

Following their designation as Reviewing Bodies, SIX Exchange Regulation and BX Swiss have now issued the respective rules, lists, directives, and fee schedules of their prospectus offices as anticipated by FinSA and FinSO.

Importantly, if FINMA gives a license to more than one Reviewing Body, it must guarantee adequate coordination of their activity, under article 72(5) FinSO. The prospectus review offices of BX Swiss and SIX Exchange Regulation have collaborated on a number of directives and lists.

Under the new prospectus framework imposed by FinSA and FinSO, the prospectus approval procedure and entry to trade on a Swiss trading venue are often two concurrent processes:

– FinSA prospectus approval (i.e., by a Reviewing Body such as SIX Exchange Regulation or BX Swiss, subject to exclusions and adaptations); and

– Application for trading access on the applicable trading venue (i.e., by the exchange admission body, such as SIX Exchange Regulation).

Following the implementation of the new prospectus system, the Swiss stock exchanges revised their listing regulations to allow these two procedures to run concurrently. However, and probably most importantly, parties are not required to submit a prospectus for approval to the prospectus office of the trading venue on which they are also seeking admission to trade. For example, the BX Swiss prospectus office might approve a FinSA compliant prospectus for an issuer who is also seeking admission to trade on the SIX Swiss Exchange (through the SIX Exchange Regulation application procedure) and vice versa.

This might result in some rivalry in the Swiss market between the two licensed Reviewing Bodies in terms of, among other things, speed, efficiency, and accessibility. Nonetheless, FINMA must guarantee that their processes remain coordinated (see FinSO article 72(5)).

Structured Products under FinSA

The Swiss regulatory environment for structured products has changed considerably as a result of the FinSA and FinSO’s implementation. Certain amendments to structured product regulations are made directly, but the great majority are made as a result of their inclusion in the FinSA’s broader framework. This article discusses the new structured product regulations, as well as a few particular issues.

This part will serve as a primer on the subject.

When the Financial Services Act (FinSA) and the Financial Services Ordinance took effect in January 2020, structured product regulation underwent significant changes. (FinSO). Until 2019, structured products were governed under Article 5 of the Collective Investment Schemes Act (CISA), and the previous Collective Investment Schemes Ordinance articles 3(7) and 4. (CISO). Since these legislative restrictions do not fulfill the criteria of a “collective investment plan,” they cannot be enforced to the fullest degree feasible.

Starting with 2020, Articles 70 and 96 of the FinSA and FinSO, which govern structured commodities, have been repositioned. As a result, relevant parts of CISA and CISO have been eliminated. Because the FinSA and FinSO have made significant modifications to structured product regulation, this is not a simple transfer of previous regulations. Certain modifications are immediately apparent because they are reflected in the applicable regulations. The inclusion of structured products in the FinSA’s broad regulatory framework has a number of less obvious but nevertheless significant repercussions.

Article 94(3)(a) of the Financial Market Infrastructure Act (FMIA), which exempts structured products from derivatives trading limitations, has also been preserved (i.e., clearing, reporting, risk mitigation, etc.).

Structured products have been added to the list of financial instruments permitted for investment purposes according to FinSA article 3(a) (4). As a result, the same laws that govern the sale and distribution of financial instruments, as well as financial services, must apply. The FinSA’s Articles 70 and 96 go into further detail on structured products in addition to the FinSA’s overarching framework. In any event, the previous “ad hoc” system of commodity regulation has been phased down.

Under the FinSA, structured goods are not defined in the same way as they were under the CISA. According to Article 3(a) of the FinSA, “financial instruments” include “capital-protected commodities, capped return products, and certificates” (4). Article 5 of CISA has a similar group of examples. Along with “exchange-traded goods,” this regulation covers all other types of instruments, such as trackers, certificates of reverse convertibles, and warrants.

If there is any uncertainty about whether a product qualifies as a structured product under FinSA’s definition, one of the following options is available:

Verify that the category in which you are interested in one that is recognized by the Swiss Structured Products Association (see FinSO Annex 3, sections 1.2.2 and 3.0).

Consider the following ESMA definition, which we believe is equivalent to Swiss practice: “To give economic exposure to reference assets such as benchmarks or portfolios, an embedded derivative (or derivatives) may be included into a note, fund, or deposit. The term “structured retail products” refers to these financial instruments. They give investors with predetermined pay-offs based on the performance of reference assets, indexes, or other economic indicators.” 2nd Instead of structured products under article 3(a)(4) of FinSA, structured funds and structured deposits are classified as units in collective investment schemes and variable return deposits under article 3(a)(3) and 6 FinSA, respectively. This is a significant difference.

A prospectus is necessary.

Due to the fact that structured products are now deemed financial instruments under FinSA article 3(a), they must be accompanied by a prospectus if they jointly offer any of the following risks:

Additionally, it is a security, as defined in FinSA article 3(b) for instruments issued for mass trading in financial markets, as defined in FinSA article 3(a) for instruments issued for mass trading in financial markets, as defined in FinSA article 3(a) for instruments issued for mass trading in financial markets, as defined in FinSA article 3(a) for instruments issued for mass trading in financial markets, as defined in FinSA article 3(a) for instruments issued for mass trading in financial markets, as defined in FinSA (b).

The product may be offered openly or via a trading venue, as defined in Article 35(1) of the Financial Services Act.

The prospectus should be written in line with FinSO Annex 3 if all of these requirements are satisfied. (“Minimum prospectus content: Derivatives scheme”). If the requirements set out in article 51(2) FinSA are satisfied, structured product prospectuses may be published prior to submission to the reviewing authority under item 2 of FinSO Annex 7 prospectuses.

This is a private client-only service.

Previously, structured product distributors were required to provide non-qualified investors with a “simplified prospectus” (old CISA article 5(1)(b)). “Guidelines on Educating Investors about Structured Products,” most recently revised in 2014, have been endorsed by INMA, the Swiss Bankers Association, and the Swiss Structured Products Association.

Numerous provisions of the FinSA are triggered by an “offer to private customers” rather than a “distribution to ineligible investors.”Article 3(g) FinSA (as well as article 3(5) FinSO) defines an instrument as an offer if it contains enough information about the terms of the offer and the instrument itself. Individuals who do not match the professional-client qualifications set out in article 4(3) FinSA are referred to in article 4(2) FinSA as private consumers.

Structured products marketed to retail investors must comply with the following criteria:

Given the inclusion of structured products in the FinSA’s fundamental design, issuers must create a Key Information Document (article 58 FinSA; FinSO Annex 9). Articles received on behalf of customers as part of a portfolio management agreement are exempt from this legislation.

The goods must be backed by a regulated institution (financial services act, section 70(1); financial services act, section 96(3)). This offer is not needed to be made by customers’ portfolio managers or investment advisers (as defined in FinSO article 96(1)).

Offerings by “special-purpose entities” as defined in FinSO must be made via a regulated institution, and collateral must be guaranteed by another regulated institution (FinSA article 70(2)), if applicable.

Structured sales and offers are also considered to be a kind of financial service (see below).

Excluding funds, manager services would have two significant consequences.

Non-regulated issuers will initially find it substantially simpler to sell their product via regulated institutions such as banks, securities companies, or asset managers. In other words, unregulated issuers are encouraged to partner with regulated institutions to market their products to their customers on their behalf rather than directly to end consumers.

Additionally, portfolio managers will have relatively unrestricted access to ad hoc structured products issued by third-party issuers on behalf of their clients, as well as their own proprietary structured products. As a consequence, the FinSA’s standards for portfolio managers ensure that customers’ interests are effectively protected (see FinSA articles 6 and ff.).

Distribution and promotion

Structured products must adhere to the advertising rules for financial instruments, which begin with articles 68 and 95 of the FinSA. Article 68(2) of the FinSA demands the inclusion and proper identification of all relevant documents (see also article 68(1) of the FinSA).

In the context of FinSA article 3(c)(1), direct sales of structured products may be considered a financial service (“acquisition or disposal of financial instruments”). It is considered to encompass any action-oriented especially towards individual consumers and directed at the purchase or disposal of a financial instrument within the definition of [3(c)(1) FinSA] as per article 3(2) FinSO. Consumers may be influenced to purchase a certain financial instrument by a variety of activities, according to the FinSO of the Federal Council. Thus, we question FinSO’s article 3(2), which substantially changes the ordinance’s meaning because of FinSA 3(c)(1). Article 3(c)(1) requires that the FinSA be widely implemented. There’s no way to tell for sure, unfortunately.

If the promotion and selling of structured products were deemed a financial service under FinSA Article 3(c)(1) and FinSO Article 3(2), actors would be obliged to adhere to the FinSA Code of Conduct (Article 7 ff. FinSA) and be registered as advisers (article 28 ff. FinSA). The future will reveal if this expansive vision of financial services is maintained or narrowed.