The Swedish Corporate Bond Market and Bondholder Rights

2. Regulation of the Swedish corporate bond market

Abstract

This chapter offers a brief summary of the core parts of the regulation of the Swedish bond market. Specifically, it considers regulatory aspects of the bond issuance process; market transparency and issuers’ information disclosure; and equal treatment of bondholders.

2.1. Transparency in the issuance process

The information given in relation to bond issuances is first and foremost regulated in Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC (the “Prospectus regulation”).1 The purpose of the Prospectus regulation is to ensure investor protection, efficiency and trust in the internal capital market.2 According to Article 3 in the Prospectus regulation, a prospectus should be published before a security is offered to the public or is admitted to trading on a regulated market in the Union. According to Article 6.1, a prospectus shall contain the necessary information which is material to an investor when making an informed assessment of the issuer’s and any guarantors’ current and future financial positions, the rights attaching to the securities, and the reasons for the issuance and its impact on the issuer. According to the same article, the information may vary depending on the nature of the issuer, the type of security issued, the circumstances of the issuer, and whether or not the bonds have a denomination per unit of at least EUR 100 000 or are to be traded only on a regulated market (or a specific segment thereof, to which only qualified investors have access to trading). According to Article 6.2, the information in a prospectus shall be written and presented in an easily analysable, concise and comprehensible form.

However, the Prospectus regulation contains a number of exemptions from the duty to produce a prospectus. According to Article 1.4, a prospectus is for instance not required when offering securities (i) solely to qualified investors, (ii) to fewer than 150 natural or legal persons per Member State (other than qualified investors), (iii) where the denomination per unit amounts to at least EUR 100 000, or (iv) to investors who acquire securities for a total consideration of at least EUR 100 000 per investor, for each separate offer. However, it is important to note that the exemptions in Article 1.4 apply to offers of securities, not admittance to trading on a regulated market. The exemptions from the duty to produce a prospectus before admittance to trading according to Article 1.5 is rarely relevant when admitting corporate bonds to trading.

Market practice in Sweden is for corporate bonds to have a unit value of at least EUR 100 000, with offers typically directed only to qualified investors, which is why the Prospectus regulation’s exemption from the obligation to produce a prospectus under Article 1.4 will generally apply. However, when listing corporate bonds on one of the regulated marketplaces for corporate bonds (the main one being Nasdaq Stockholm), a prospectus must generally be published in connection with admission to trading. Nevertheless, since the issue is normally fully subscribed and the books are closed before the bonds are admitted to trading (and before the application for admission to trading is submitted), the prospectus is not typically included in the investment basis for those investing in the bond on the primary market. Instead, investors make their decisions based on an investment memorandum, which is not a regulated document in the same sense as a prospectus and therefore does not include all material information provided in the latter. Since the secondary market is very limited in Sweden, the consequence is that the Prospectus regulation has little practical significance for corporate bond investors.

2.2. Market transparency and issuers’ disclosure of information

The Swedish regulation of trading in corporate bonds is based on Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (“MiFID 2”) and Regulation 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 (“MiFIR”), as well as delegated regulations and directives. MiFID 2 has been transposed into Swedish law through the Securities Market Act (2007:528). Some rules that are relevant to trading in corporate bonds can also be found in the Act on Trading in Financial Instruments (1991:980) as well as in the FSA’s regulation. In addition, issuers of listed corporate bonds are regulated by the exchanges’ rulebooks, most notably Nasdaq’s Rule Book for Issuers of Fixed Income Instruments (the “Rulebook”).

Transparency requirements regarding trading in corporate bonds are found in Chapter 2 and Articles 8 and 10 of MiFIR; Chapter 15, 16 and 17 of the Securities Market Act; and the FSA regulations FFFS 2007:17 and FFFS 2017:5. The Swedish Securities Markets Association has also produced a recommendation on transparency in the Swedish corporate bond market.

Article 8 (1) of MiFIR regulates the obligation to publish information before trading in bonds. According to the article, market operators and investment firms operating a trading venue must, during normal market opening hours, continuously publish current bid and ask orders as well as order depths for bond transactions. Article 8 effectively seeks publication of trading information in real time. However, under MiFIR Article 9, competent authorities have the possibility to grant exemptions from the disclosure requirement under Article 8. Exemptions may be granted for transactions that either: are larger than normal on the market; exceed a size specific to the financial instrument in question, which would expose liquidity providers to undue risk and which take into account whether the market participants concerned are retail or wholesale investors; and/or relate to instruments for which there is no liquid market. The Swedish FSA has decided that exemptions shall be granted when the conditions according to MiFIR Article 9 are met.3 Such exemptions are used to a very high degree, and the FSA describes pre‑trade transparency as “very limited”.4

Article 10 of MiFIR regulates the obligation to publish post-trade information. According to the article, market operators and investment firms operating a trading venue shall disclose the price, volume and timing of bond transactions as close to real time as technically possible. However, under Article 11, competent authorities also have the possibility to authorise the suspension of the publication of transactions. As noted under section 1.8, authorisation shall be granted “in particular” in respect of transactions which: are larger than normal on the market; relate to an instrument, or category of instruments, traded on a trading venue, for which there is no liquid market; exceed a size specific to an instrument, or category of instruments, traded on a trading venue, for which there is no liquid market, which would expose liquidity providers to undue risk and which take into account whether the market participants concerned are non-professional or professional investors. As previously mentioned, only a few Swedish bonds are judged to be liquid according to MiFIR definitions. Deferred publication after trading in accordance with Article 11 can therefore be applied to almost all trading on the Swedish market.5 The conclusion is that the transparency in the Swedish corporate bond market has, in general, decreased as a result of MiFID 2 and MiFIR.6

To increase transparency in the Swedish bond market, the Swedish Securities Markets Association has produced a self-regulatory recommendation on transparency in the Swedish bond market.7 It is intended to be applied by all Swedish securities institutions and foreign counterparts that trade in bonds denominated in Swedish krona which are admitted to trading on a regulated market in Sweden or traded on a trading venue in Sweden, and thus does not apply to securities admitted to trading on a foreign market. The disclosure should include the following closing information: (i) weighted average of traded volume during the trading day, (ii) maximum closing price during the trading day, (iii) minimum closing price during the trading day, and (iv) total volume of all trading during the trading day. Transactions carried out until 17.00 must be published no later than 19.00 on the same business day. The publication of trading information may be postponed when a securities institution has traded on its own behalf and the transaction exceeds SEK 50 million. Deferred publication shall take place no later than seven business days after the transaction date.

MiFIR’s rules on the disclosure of trading information are supplemented by disclosure requirements in accordance with MiFID 2, transposed into Swedish law through the Securities Market Act. When corporate bonds are admitted to trading on a regulated market, the issuer is obliged to provide information to the stock exchange on an ongoing basis. The issuer is obliged to continuously inform the stock exchange about its activities, and to provide it with the information needed for the exchange to be able to fulfil its constitutional obligations. When corporate bonds are traded on a regulated market, the issuer is also obliged to immediately publish all changes in the rights attached to the securities. In the case of corporate bonds, typical changes that require immediate publication are, for example, changes in interest rates or other loan terms.8

An issuer domiciled in Sweden and whose transferable securities are admitted to trading on a regulated market shall publish regular financial information in accordance with Chapter 16 of the Securities Market Act. However, for bonds or other transferable debt obligations that each have a nominal value corresponding to at least EUR 100 000, the rules in Chapter 16 do not apply as a main rule. As corporate bonds usually have a nominal value of at least EUR 100 000 this exemption often applies to these securities in particular. The Securities Markets Act’s requirement for regular disclosure of financial information thus often does not apply to corporate bond issuers.

Information shall be published to be available to the public within the European Economic Area (EEA) quickly and in a non-discriminatory manner. According to Chapter 10, Section 5 of the FSA’s regulation FFFS 2007:17 (which complements ch. 17, sec. 2 of the Securities Market Act and specifies the requirement for non-discrimination), the issuer is obliged to publish information in such a way that the information can be disseminated to the public in Sweden and the EEA as soon as possible. The information must also be published on the issuer’s website as soon as possible, and significant changes to previously published information shall be published as soon as possible after the change has occurred via the same channels that were used in the publication of the original information.

Another information issue of potential relevance to the functioning of the corporate bond market concerns the list of bondholders and others with rights linked to the bonds, which can be generated via Euroclear’s system (control account). Information on existing holders is not public or available to potential investors or existing bondholders, but could nevertheless be relevant information for potential acquirers of corporate bonds. According to ch. 8 sec. 1 of the Act on Central Securities Depositories and the Accounting of Financial Instruments (1998: 1 479), the transparency of a control account is limited to those who are registered in the account in question. Owners, mortgagees and any other data subject have the right to receive information about the contents of the account to the extent that the content concerns the data subject’s rights. Thus, the information on the bondholders is available only to a limited extent.

Issuers of listed corporate bonds are also required to publish inside information in accordance with Regulation No. 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC (“MAR”). According to Article 7 and 17 in MAR, an issuer is required to disclose inside information as soon as possible after the inside information arises (subject to certain exemptions). It is, however, not entirely clear what type of information constitutes inside information according to Article 7 in MAR for a bond issuer, since most of the legal discussion around the MAR regime as well as the case law has been focused on what constitutes inside information for issuers of shares.9 To date, there is neither any guidance nor case law in Sweden. Taken together, there is some legal uncertainty with regard to what information an issuer of corporate bonds is required to disclose.

Finally, issuers of listed corporate bonds are regulated by the exchanges’ own rules. According to the Nasdaq Rulebook, issuers of bond listed on the exchange are obliged to continuously disclose certain information. Section 3 in the Rulebook contains several specific disclosure requirements, for instance regarding annual and bi‑annual reports, forecasts and forward-looking statements, information on resolutions adopted by the Annual General Meeting and changes in the terms of the securities. Issuers must also, well before the admission to trading, have procedures, controls and financial reporting systems in place that provide the market with reliable and accurate information in a timely manner in accordance with Nasdaq’s issuer rules (Section 2.4). The issuer shall also have the capacity to publish information in accordance with MAR. According to Section 3.3.2, the issuer must publish all financial reports that it is required to prepare. An issuer whose debt instruments are primarily admitted to trading on Nasdaq Stockholm must publish an annual financial statement as well as a bi‑annual financial statement. Publication shall take place in the manner prescribed in Article 17 of MAR. According to Section 3.2 of Nasdaq’s issuer rules, the issuer must have its own website where published information should be available for at least five years.

2.3. Equal treatment of bondholders

The extent to which Swedish law requires equal treatment of bondholders is not entirely clear. According to ch. 18 sec. 3 of the Swedish Securities Markets Act, a bond issuer shall ensure that all bondholders of instruments that have been issued at the same time and on the same terms are treated equally with respect to the rights attached to the security. The rule was enacted as a step in the incorporation of the Transparency Directive in Swedish law (Article 18.1). Article 18.1 states that “[t]he issuer of debt securities admitted to trading on a regulated market shall ensure that all holders of debt securities ranking pari passu are given equal treatment in respect of all the rights attaching to those debt securities”. In reason 22 in the preamble to the Directive, it is also stated that (italics added):

Ongoing information to holders of securities admitted to trading on a regulated market should […] be based on the principle of equal treatment. Such equal treatment only relates to shareholders in the same position and does not therefore prejudice the issue of how many voting rights may be attached to a particular share. By the same token, holders of debt securities ranking pari passu should continue to benefit from equal treatment […]. Information to holders of shares and/or debt securities in general meetings should be facilitated. […] For the same reasons, it should be decided in a general meeting of holders of shares and/or debt securities whether the use of modern information and communication technologies should become a reality. In that case, issuers should put in place arrangements in order effectively to inform holders of their shares and/or debt securities, insofar as it is possible for them to identify those holders.

As apparent by reason 22 as well as the headline for Article 18 (Information requirements for issuers whose debt securities are admitted to trading on a regulated market), the requirement on equal treatment is first and foremost aimed towards equal treatment with respect to information. For this reason, it is unclear how broadly ch. 18 sec. 3 in the Swedish Securities Markets Act should be interpreted. While a literal interpretation of the rule can be broad, an interpretation conforming to the Directive would stipulate that the rule in ch. 18 sec. 3 is limited to equal treatment with respect to information.10 While the first interpretation is supported by the letter of the law, and perhaps also by the general tendency for securities to be governed by principles of equal treatment, the later interpretation is supported by the fact that the preparatory works to the rule only states that it is an implementation of Article 18.1.11

Notes

← 1.  Supplemented by the Commission’s delegated regulations 2019/980 and 2019/979.

← 2.  Reason 7 in the preamble.

← 3.  See FI-tillsyn no. 15, 17 October 2019 p. 5‑6 (in Swedish only).

← 4.  See FI-tillsyn no. 15, 17 October 2019 p. 7 (in Swedish only).

← 5.  See FI-tillsyn no. 15, 17 October 2019 p. 9 (in Swedish only).

← 6.  See FI-tillsyn no. 15, 17 October 2019 p. 13 (in Swedish only).

← 7.  See The Swedish Securities Markets Association’s recommendation regarding transparency on the Swedish bond market of 2020, available at: https://svenskvardepappersmarknad.se/wp-content/uploads/2020/11/SSMA-Recommendation-on-bond-market-transparency-Nov-2020.pdf

← 8.  See preparatory work 2006/07:65 p. 336.

← 9.  See for instance the two major commentaries in English MAR, Marco Ventoruzzo & Sebastian Mock (2022), Market Abuse Regulation: Commentary and Annoted Guide, Oxford University Press, and Susanne Kalss, Martin Oppitz, Ulrich Torggler & Martin Winner (2021), EU Market Abuse Regulation: A Commentary on Regulation (EU) No 596/2014, Edward Elgar Publishing.

← 10.  See Andreasson & Lidman, Transparens och likabehandling på företagsobligationsmarknaden, Nordisk Tidsskrift for Selskabsret, no. 2 of 2022, p. 69.

← 11.  See preparatory work 2006/08:65.