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ICMA Consults On Standards For Sovereign Bond Issues

by Ulrika Lomas,, Brussels

26 November 2010

The International Capital Market Association (ICMA) is consulting with its members over the issuance of sovereign bonds to international investors, with the intention of promoting improvements in the standards of transparency and of best market practice relating to their contractual terms and conditions.

ICMA represents financial institutions active in the international capital market worldwide. Its members are located in 47 countries, including all the world’s main financial centres, and its debt market conventions and standards have been used for over 40 years, providing the framework of rules governing market practice.

It has now sent a paper to its members as a basis for discussion for all sovereign issuance, and the proposals it contains are also designed to incorporate processes and procedures in the event of an orderly reorganization – for example they are designed to be complementary to any future crisis resolution mechanism agreed at European Union level.

As the sovereign debt crisis continues, it says that investors are paying increasing attention to the fact that sovereign bonds are not risk-free, and the credit quality of each sovereign issuer is different. However, while investors want to know more about the contractual terms and conditions of individual sovereign issues, those are not always readily available.

It points out that it became apparent during the crisis that some investors were unaware of the specific contractual terms of the bonds they had purchased, in some cases including whether they were issued under the national law of the issuer or under foreign law.

The ICMA consultation paper therefore makes two key recommendations. Firstly, it requests that all sovereign issuers should be fully transparent about the contractual terms and conditions which apply to their bonds by making them available in full in English in electronic form on a public website until final repayment. While some benchmark sovereign issuers do this already, all sovereign issuers should consistently do so.

Secondly, the contractual terms and conditions of sovereign bond issues should as far as possible comply with standards of best market practice. Model “concepts” for these standards are set out in the consultation paper. The model concepts cover the gross-up for withholding tax; pari passu status (where one series of equity will have the same rights and privileges as another series of equity); negative pledge; events of default and acceleration; purchase of bonds and consequences of ownership; collective action clauses, which can facilitate an orderly process for the amendment of their terms and conditions; and governing law.

Hans-Joerg Rudloff, Chairman of ICMA, commented:

“It is clearly in the interest of investors in sovereign debt to have access to full information on the terms of the bonds in which they are investing. It is also desirable that sovereign issuers follow standards of best practice on terms and conditions and disclose clearly where they choose to deviate from these.”

“It is also critical that the terms and conditions are consistent with mechanisms for an orderly reorganization Improved transparency and contractual terms will be of benefit for all market participants, including issuers, facilitating the further growth and development of standardised, cost effective and efficient capital markets.”

ICMA has invited its members’ views on the proposals in the consultation paper by December 17.

TAGS: tax | investment | law | capital markets | withholding tax | standards

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