Following a corruption scandal involving the People's Party, in June 2018 the conservative Spanish Prime Minister, Mariano Rajoy, was voted out of office after six years as a result of a no-confidence motion brought by the socialist Pedro Sánchez and supported by six other parties, among them the hard-left Podemos. However, this change of government is unlikely to yield profound changes. Pedro Sánchez's socialist party has fewer than a quarter of parliamentary seats, meaning that the party will struggle to find allies to get legislation enacted unless it follows the demands of the variety of parties who backed his motion. This uncertain political framework, and the current Catalan independence movement, threatens investor confidence in Spain.
ii Structure of the law
Until late 2015, the most important piece of legislation regarding the securities market in Spain was Law 24/1988, of 28 July, on the securities market (LMV), which had been amended on numerous occasions (inter alia, by Royal Decree 726/1989, of 23 June, on the governing bodies and members of stock exchange companies, sociedad de bolsas and collateral requirements, by Royal Decree 948/2001, of 3 August, on systems of investor indemnification, and by Royal Decree 1082/2012, of 13 July, on collective investment schemes). For reasons of coherence, the government decided to approve Royal Legislative Decree 4/2015, of 23 October, that is, the consolidated text of the Securities Market Act (TRLMV).
The TRLMV contains the principles governing all securities markets in Spain, and is the law into which most of the EU Directives on securities markets have been incorporated. As such, capital market regulations in Spain are significantly aligned with those of other EU countries. The TRLMV establishes which securities are tradable and the way they should be represented (in particular, by book entries and how book entries should be made).
On June 2017, the TRLMV was slightly amended pursuant to Royal Decree 11/2017, of 23 June, on urgent measures on financial matters, to clarify the definition of the financial instruments that will not be considered as non-complex.
Another important piece of legislation is Royal Decree 878/2015, of 2 October, on clearing, settlement and registry of negotiable securities, on the legal regime of central securities depositories and central counterparties, and transparency requirements of issuers of securities trading in an official secondary market. It amended Law 41/1999, of 12 November, on clearing and settlement of securities systems, which transposed into Spanish law Directive 98/26/EC of the European Parliament and of the Council, of 19 May 1998, on settlement finality in payment and securities settlement systems.
In addition, on 30 June 2017, Regulation No. 2017/1129 of the European Parliament and of the Council on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market was published. Apart from repealing Directive 2003/71/EC, Regulation 2017/1129 constitutes an advance towards the consummation of the Capital Market Union, which aims at making markets work more efficiently and offering investors and savers new opportunities to put their capital to work. Regulation 2017/1129 entered into force on 20 July 2017 and will be generally applicable from 21 July 2019, except for certain exceptions to publishing a prospectus, which will apply as of the entry into force of Regulation 2017/1129. The main amendments introduced by Regulation 2017/1129 are set out in Section II.
iii Structure of the courts
The commercial courts are the specialist first instance courts generally entrusted with hearing civil claims lodged with regard to corporate and insolvency law. Other matters (inter alia, those related to civil liability arising from inadequate commercialisation and placement of financial instruments) are normally heard by general first instance courts.
iv Regulatory authorities
The most important regulatory authority in the Spanish capital markets is the National Securities Market Commission (CNMV).2 However, the Bank of Spain (in respect of the public debt market), the Ministry of Economy and Competitiveness (regarding certain approvals and the imposition of penalties) and the departments of economy of some autonomous regions also have certain supervisory powers.
The CNMV is an entity with its own legal personality separate from that of central government or the autonomous regions. The CNMV is governed by a board of directors made up of a chair and a vice chair (both appointed by the Council of Ministers), the Director General of the Treasury and Financial Policy, the Deputy Governor of the Bank of Spain, and three other directors appointed by the Minister of Economy and Competitiveness.
The main functions of the CNMV are to supervise and inspect the securities markets and the activity of all individuals or legal entities related thereto, as well as to impose any penalties for infringements of securities market legislation. It must ensure the transparency and efficiency of the securities markets, protect investors and disseminate any information that may be necessary for these purposes. Likewise, when so empowered by law on a case-by-case basis, it can also issue circulars containing mandatory rules for the implementation and enforcement of the regulations issued by the Council of Ministers or the Minister of Economy and Competitiveness.
The Bank of Spain has two main functions. As a member of the European System of Central Banks, it is in charge of defining and implementing the Eurosystem's monetary policy, carrying out foreign exchange transactions consistent with the provisions of Article 219 of the Treaty on the Functioning of the European Union, and holding and managing Spain's official currency reserves. Secondly, as a national central bank, the Bank of Spain is responsible for managing the Market for Public Debt Represented by Book Entries and for issuing circulars that develop regulations governing that market (among other matters).
II THE YEAR IN REVIEW
i Developments affecting debt and equity offerings
As mentioned in Section I, the main amendments introduced by Regulation 2017/1129 are the following:
- the reduction of the maximum amount of the offering (in a 12-month period) excluded from the scope of application from a limit of €5 million to €1 million. In any case, Member States are allowed to the increase this limit up to €8 million;
- the increase from 10 per cent to 20 per cent of the threshold of the exception for the admission of securities already admitted in the same market, and a broadening of the scope of the exception to securities that are fungible with securities already admitted to trading;
- the addition of an exception to the offer and admission of non-equity securities issued by credit institutions involving total aggregated consideration of less than €75 million, provided that these securities are not subordinated, convertible or exchangeable and do not give the right to subscribe for or acquire other types of securities and are not linked to a derivative instrument; and
- the limitation of the exemption to admit shares resulting from conversion or exchange of other securities to 20 per cent.
Current initial public offering activity
Initial public offering (IPO) activity has been scarce since late 2017. In fact, the only noteworthy IPO has been Metrovacesa's return to the stock market in February 2018. However, Italian motorway operator Atlantia and Spanish construction group ACS reached a deal to combine forces to take over Spain's Abertis. Atlantia and ACS had previously spent months competing with each other to take over Abertis, making a series of rising bids. However, fears had been growing that the offers on the table were already elevated and a bidding war could make it more expensive. They therefore decided to cease hostilities and created a holding company to own Abertis, in which Atlantia will take a 50 per cent stake plus one share and ACS will take the rest.
On another note, Banco Mare Nostrum and Bankia completed their merger in January 2018. The merged bank will be the fourth largest financial institution in the Spanish market, with managed assets of €223,000 million.
Reform of the clearing, settlement and registry system of securities transactions
Royal Decree 878/2015, of 2 October, on clearing, settlement and registry of negotiable securities, on the legal regime of central securities depositories and central counterparties, and transparency requirements of issuers of securities trading in an official secondary market, has implemented the changes advanced in Law 32/2011, of 4 October.
The reform of the Spanish clearing, settlement and registry system of securities transactions was implemented in two subsequent phases.
The first phase, which was completed in April 2016 pursuant to the provisions of Royal Decree 878/2015, included the central counterparty (CCP) implementation and migration of the equity settlement system to the new platform, ARCO.
The second and definitive phase (which was implemented in September 2017) included the Spanish system's connection to T2S,3 and the transfer of fixed-income securities to the ARCO platform, which entailed the unification of the registry and settlement approach for both equities and fixed-income instruments. Furthermore, as a result of the connection to T2S, the settlement process is now performed in accordance with the procedures and time periods established by T2S.
Although the market framework will not experience any modifications in relation to the trading platforms as a consequence of the reform, it will nevertheless imply some changes to trading members' systems, including some modifications to the communication protocols of the trades to the trading platform to add new optional information on the clearing side. It also may be necessary to put controls in place regarding the activity between trading and clearing members.
ii Developments affecting derivatives, securitisations and other structured products
New securitisation legal regime introduced by Regulation (EU) 2017/2401 and Regulation (EU) 2017/2402
On 28 December 2017, Regulation (EU) 2017/2402 (the Securitisation Regulation) and the related CRR Amending Regulation (Regulation (EU) 2017/2401) were published in the Official Journal of the European Union. These new Regulations represent the most material reform of securitisation regulation in the European Union for many years. The main new elements that have been introduced are aimed at:
- harmonising existing rules on due diligence, risk retention, disclosure and credit-granting, which will uniformly apply to all securitisations, securitising entities and all types of EU-regulated institutional investors;
- creating a new framework for simple, transparent and standardised long-term securitisations and asset-backed commercial paper programmes; and
- implementing the revised Basel securitisation framework.
iii Cases and dispute settlement
On 6 June 2017, and after some critical days when depositors were said to be withdrawing €2 billion a day and its stock market value had halved, Banco Popular was declared to be 'failing or likely to fail' by the European Central Bank. The Single Resolution Board (SRB), a key element of the Banking Union and its Single Resolution Mechanism (the mission of which is to ensure the orderly resolution of failing banks, with as little effect as possible on the real economy of EU countries), acted swiftly after this communication. In the exercise of its powers, the SRB agreed to declare Banco Popular's resolution and approved all the measures to be applied to the credit institution.
The resolution scheme places the credit institution under resolution, determining the application of pertinent resolution tools upon the entity, instructing the Fund for Orderly Bank Restructuring (FROB),4 as executive resolution authority, to take the measures required to apply the scheme, exercising its powers.
The resolution mechanism adopted by the SRB establishes that the resolution instrument to be applied to Banco Popular is the sale of its business by means of the transfer of shares, subsequent to the write-down and conversion of the relevant capital instruments determined by the loss absorption needed to meet the resolution objectives.
The valuation from an independent expert obtained by the SRB estimated the value of the entity at minus €2 billion in the base case and minus €8.2 billion in the most stressed scenario.
That being said, the regulatory framework is based on the idea that the shareholders and creditors of an entity under resolution must be the first to bear losses in accordance with the order of priority of claims laid down in insolvency law, with the legally established exemptions. This principle aims to minimise the effects and consequences of an entity's resolution on taxpayers, and ensure that shareholders and creditors bear an appropriate proportional share of the resolution's costs. The clear hierarchy of claims in the context of a resolution establishes that holders of ordinary shares and holders of Additional Tier 1 and Tier 2 capital instruments must bear the corresponding losses before any other resolution action is adopted.
Pursuant to these principles and the resolution adopted by the SRB, the FROB must write down or convert the capital instruments in combination, in this instance, with the sale of the entity's business.
In executing the powers to write down and convert, the following actions must be taken:
- reducing the entity's share capital to zero euros by writing down the shares currently outstanding to establish a non-distributable voluntary reserve;
- executing a capital increase to convert all the Additional Tier 1 capital instruments into share capital for an amount of €1,346,542,000;
- reducing share capital to zero euros by writing down the shares subscribed by way of conversion of the Additional Tier 1 capital instruments and creation of a non-distributable voluntary reserve; and
- simultaneous capital increase to convert all the Tier 2 capital instruments into newly issued shares for a total amount of €684,024,000.
As explained before, the resolution tool stipulates that the sale of the business may consist of the transfer of the instruments of ownership issued by the institution under resolution. For that purpose, the FROB had to begin an open tender process to sell the entity. Upon conclusion of the process, the offer submitted by Banco Santander was the only one to fulfil the requirements for acceptance. The SRB decided to accept the offer, given the effects a possible insolvency proceeding could have on the continuity of the entity's critical functions. After all these actions, it was agreed to transfer all the shares comprising Banco Popular's share capital issued as a result of the conversion of Tier 2 capital instruments in exchange for €1. This transfer was performed on behalf and in the name of the shareholders without the need to obtain their consent as per Article 25.7 of Law 11/2015.
On another related note and to make as much information publicly available as possible, the SRB has been publishing certain non-confidential versions of documents relating to the resolution process, among which we find a summary of its resolution decision, as well as valuation reports conducted by Deloitte, which were used to justify putting Banco Popular through the resolution process.
iv Relevant tax and insolvency law
Non-resident taxpayers are subject to non-resident income tax (NRIT) on Spanish-source income, and must generally declare and pay NRIT during the first 20 days of April, July, October and January: in these cases, NRIT is paid on income obtained during the calendar quarter immediately preceding these payment periods.
Spanish-source income would include, inter alia:
- interest paid by a Spanish-resident taxpayer or with respect to financing used in Spain;
- income triggered by the disposal of bonds issued by Spanish-resident persons;
- dividends distributed by Spanish-resident entities; and
- capital gains on the disposal of shares and units issued by Spanish-resident entities or undertakings for collective investment (UCIs).
Income deemed to be obtained in Spain is generally subject to NRIT at a rate of:
- 19 per cent for entities or individuals resident in an EU or EEA Member State that has an effective exchange of tax information in relation to Spain; and
- 24 per cent for NRIT taxpayers who are not resident in an EU or EEA Member State that has an effective exchange of tax information in relation to Spain.
In addition, a reduced tax rate of 19 per cent is applied to dividends, interest and capital gains deriving from the sale of assets. Each income is subject to taxation separately on a gross basis (with certain exceptions, no expenses are deductible, except for entities or individuals resident in an EU Member State under specific conditions). Normally, a withholding tax generally equal to the non-resident's final tax liability is levied on interest, dividends and capital gains on UCIs, in which case the taxpayer does not need to file an NRIT return with the Spanish tax authorities to declare and assess its NRIT liability.
A brief overview of the Spanish taxation applicable to non-resident investors is provided below. Please note that this refers to individuals or entities not resident in Spain for tax purposes, and not acting through a permanent establishment located in Spain.
Capital gains on transfer of interests in Spanish corporations or undertakings for collective investment
In general, capital gains obtained in Spain by a non-resident taxpayer from the transfer of interests in Spanish corporations or UCIs will be taxed under NRIT at a rate of 19 per cent. No withholding tax is levied on capital gains, except for those related to an investment in a Spanish UCI.
Domestic legislation provides for an exemption from tax for the benefit of residents of countries that have entered into a convention for the avoidance of double taxation (CDT) with Spain, and that includes an exchange-of-information clause in the case of transfers of shares of Spanish companies or reimbursements of units in a UCI that are carried out in a Spanish official secondary securities market.
In addition, EU residents are entitled to an exemption on capital gains obtained upon disposal of shares, provided that the following conditions are met:
- most of the value of the assets of the company to which the shares belong does not derive (directly or indirectly) of real estate located in Spain;
- in the case of a non-resident individual, he or she has not held a direct or indirect interest of at least 25 per cent in the relevant Spanish company's capital or net equity during the 12 months preceding the transfer;
- in the case of non-resident entities, the transfer fulfils the requirements of Article 21 of the Corporate Income Tax Law (which are highly complex and must be analysed case by case); and
- the capital gain is not obtained through a tax haven jurisdiction or a permanent establishment located in a country or jurisdiction that is not an EU Member State.
Finally, most CDTs provide for an exemption from capital gains tax, except when the assets are allocated to a permanent Spanish establishment or when the assets are Spanish real property (also generally including for this purpose any capital gains from the transfer of Spanish 'land-rich' companies, with some exceptions). In some cases, when the assets consist of shares in a Spanish-resident entity, the exemption is conditional on the fact that the holding is below significant participation thresholds (below 15 or 25 per cent).
Interest and dividends
In general, interest and dividends obtained in Spain by a non-resident taxpayer will be taxed under NRIT at a rate of 19 per cent, and will be subject to withholding tax on account of NRIT.
Domestic rules provide certain tax exemptions on income obtained by non-residents (e.g., income derived from Spanish public debt or listed preference participations and debt instruments meeting certain requirements, or interest accrued on non-residents' bank accounts). In particular, in the case of preference participations and debt securities issued under the first additional provision of Law 10/2014, of 26 June (which can be issued not only by banks or listed companies, but also by any Spanish corporation, provided the securities are listed in a regulated market, an MTF or an organised market, among other requirements), non-resident taxpayers will not be subject to taxation or withholding in Spain.
In addition, EU residents are entitled to an exemption on interest obtained in Spain, provided that interest is not obtained through a tax haven jurisdiction or a permanent establishment located in Spain or in a country or jurisdiction that is not an EU Member State.
Regarding dividends, under the Parent-Subsidiary Directive, no Spanish withholding taxes should be levied on the dividends distributed by a Spanish subsidiary to its EU parent company (and EEA parent companies under additional specific conditions) to the extent that, in brief:
- the EU parent company maintains a direct holding in the capital of the Spanish subsidiary of at least 5 per cent (or the acquisition basis of the interest exceeds €20 million) without interruption during the year prior to the date on which the distributed profit is due;
- the EU parent company is incorporated under the laws of an EU Member State (other than a tax haven jurisdiction) and is subject to corporate income tax in a Member State, without the possibility of being exempt; and
- the distributed dividends do not derive from the subsidiary's liquidation.
The implementation of the Parent-Subsidiary Directive in Spain includes an anti-abuse provision, by virtue of which the withholding tax exemption will not be applicable when the majority of the voting rights of the parent company are held directly or indirectly by individuals or entities not resident in the European Union, except when the EU parent company evidences that it has been incorporated and operates for valid economic and substantive business reasons. The EU Parent-Subsidiary exemption may also apply to parent companies resident in an EEA Member State that has ratified an effective exchange of tax information agreement with Spain under similar conditions.
Finally, non-residents who are resident in a country that has entered into a CDT with Spain will be entitled to apply the reduced tax rates or exemption provided in the relevant CDT (CDTs usually establish rates ranging from zero to 15 per cent on interest and dividends).
The most important piece of Spanish legislation on this matter is Law 22/2003, of 9 July, on insolvency, which has been amended on a number of occasions in the past few years to facilitate the refinancing processes undertaken by Spanish companies and their general recapitalisation.
One of the main particularities of this Law is that, in the case of issuers of securities or derivative instruments traded in an official secondary market, the insolvency trustee will either be a CNMV staff expert or a person designated by the CNMV to fulfil certain requirements (basically, an economist or an auditor with a certain specialisation and experience, a Big Four firm or an audit company).
However, other pieces of legislation may also be relevant in an insolvency context. Article 88 of the TRLMV allows the CNMV to suspend trading by a financial instrument in Spanish official secondary markets when special circumstances occur that may disrupt the usual course of transactions over said financial instrument or when such a measure is advisable to protect investors. The CNMV generally resorts to this faculty to suspend trading of a listed company when a petition for insolvency is filed.
v Role of exchanges and central counterparties
Secondary markets and multilateral trading facilities
Under Spanish law, in the area of securities markets, an initial and basic distinction is made between primary and secondary markets. In the primary market (also known as the issuance market), issuers put into circulation (i.e., issue) securities, which are subscribed by investors, either directly or through financial intermediaries. In the secondary markets, previously issued securities are traded. Secondary markets offer liquidity to those securities that have already been issued in the primary market and facilitate their subscription, since the existence of the secondary markets allows investors to sell the relevant securities in an uncomplicated manner.
The official secondary markets are also known as regulated markets and mainly include:
- the stock exchanges;
- the Market for Public Debt Represented by Book Entries;
- futures and options and other derivative markets, notwithstanding the underlying assets (either financial or non-financial); and
- the AIAF5 Fixed Income Market.
There are currently four stock exchanges in Spain, all subject to the supervision of the CNMV. These are established in Madrid, Barcelona, Bilbao and Valencia; there is also the 'interconnection system between stock exchanges' (SIBE). Only those securities previously admitted to listing on at least two of the Spanish stock exchanges are traded on the SIBE, provided that the prior authorisation of the CNMV is obtained.
In addition to the official secondary markets, multilateral trading facilities (MTFs) are increasingly relevant. An MTF is a multilateral system operated by an investment firm or a market operator that brings together multiple third-party buying and selling interests in financial instruments – in the system and in accordance with non-discretionary rules – in a way that results in an agreement in accordance with the LMV. Examples of Spanish MTFs are:
- the Alternative Stock Market (MaB),6 implemented in 2006 as a less-regulated market for SICAVs (open-ended collective investment companies) and stocks with small market capitalisation; and
- the Alternative Fixed-Income Market (MARF),7 implemented in 2013 as an alternative source of funding for medium-sized companies with positive business prospects and usually unlisted shares.
Spain's third trading environment concerns systematic internalisers (SIs). SIs are investment services firms and credit institutions that execute, through the regulated market or a multilateral trading system, on their own account, client orders for shares listed on regulated markets in an organised, frequent and systematic way. SI transactions are subject to compliance with specific requirements on the transparency and size of transactions.
In the past, the only Spanish markets that provided CCP services were the futures and options market, with the former Spanish Financial Futures and Options Exchange (MEFF) acting as both an official secondary market and as a CCP. After the amendments to the LMV introduced by Law 44/2002, it was made possible to incorporate CCP companies to provide a counterparty to one or more securities traded in the different securities markets.
Given the need to separate trading and clearing activities pursuant to the European Market Infrastructure Regulation, the clearing activity carried out by MEFF is now carried out by BME Clearing, the first and only CCP incorporated to date in Spain. In this regard, BME Clearing's activities, currently covering financial derivatives, public debt repos and electricity derivatives, will extend to cash markets (equities and fixed income) in the context of the reform of the clearing and settlement activities in Spain referred to above.
The clearing activity is carried out through a 'subjective novation', whereby the CCP intervenes as a party to the contracts traded in the relevant market (as purchaser in relation to the selling party and as seller in relation to the purchasing party), guaranteeing full compliance with the relevant contract.
In June 2018, the European Securities and Markets Authority (ESMA) published an opinion addressed to competent authorities responsible for CCP supervision (in Spain, the CNMV), which sets out how CCPs in the European Union should consider in their internal risk models the liquidity risk posed by all entities towards which the CCP has a liquidity exposure, such as liquidity providers. The opinion outlines the assessment of the liquidity risk posed by liquidity providers regardless of whether or not they are a clearing member. ESMA clarifies that CCPs should include, when measuring their liquidity needs, the default of their top two clearing members in all their capacities vis-à-vis the CCP, in addition to assessing in their stress testing scenarios all entities towards which the CCP has a liquidity exposure.
vi Other strategic considerations
Structural reforms: credit institutions
The new institutional and legal framework for the Spanish banking system is in its final stages of implementation under a process that commenced in 2012, expanded in 2013 and is likely to continue for the next few years.
One notable recent reform is Royal Decree 84/2015, of 13 February, implementing Law 10/2014, of 26 June, on the organisation, supervision and solvency of credit institutions, whose purpose is to continue adapting the Spanish legal system to the new provisions of Directive 2013/36/EU (CRD IV)8 and Regulation (EU) No. 575/2013 (CRR),9 as well as the new provisions included in Council Regulation (EU) No. 1024/201310 with regard to the Single Supervisory Mechanism.
III OUTLOOK AND CONCLUSIONS
The Spanish market is still losing ground with frequent falls of the Ibex Index. Volatility in the markets will continue as investors try to guess what the current political turmoil will bring. So far, the newly elected prime minister has already hinted at reforms regarding income and financial transactions taxes. Any political compromise or measure will be tainted by the fact that its implementation or enactment would depend on a fractious coalition of parties. Also, tensions between the Spanish and Catalan governments are not expected to cease in the short to medium term. These political challenges occur in a weak labour market: structural unemployment, especially youth employment, is still high despite the recovery experienced in recent years, and in the EU field, Brexit raises questions as to how the euro will be affected.
1 David García-Ochoa Mayor is a partner and José María Eguía Moreno is an associate at Uría Menéndez Abogados, SLP. The authors gratefully acknowledge the assistance of David López Pombo (partner at Uría Menéndez Abogados, SLP) regarding the tax aspects of this chapter.
2 Comisión Nacional del Mercado de Valores.
3 T2S (TARGET2-Securities) is a securities settlement entity that offers centralised delivery-versus-payment settlement in central bank money in all European securities markets.
4 Fondo de reestructuración ordenada bancaria.
5 AIAF Mercado de Renta Fija SA is the reference market for corporate debt or private fixed income integrated into Spanish stock exchanges and markets.
6 Mercado Alternativo Bursátil.
7 Mercado Alternativo de Renta Fija.
8 Directive on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms.
9 Regulation on prudential requirements for credit institutions and investment firms.
10 Regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions.