In a nutshell
The world's capital markets are trading floors (either real or virtual) on which cash-hungry businesses obtain funding by selling a share of their business (equity) or receiving a loan (debt) from lenders. Capital markets lawyers advise companies ('issuers') and investment banks ('underwriters') on these complex transactions. Here are some of the terms you'll encounter.
Equity capital markets: where a private company raises capital by making its shares available to the public by listing itself on a stock exchange and executing an initial public offering (IPO), as a result of which it becomes a public company (or plc). The London Stock Exchange (LSE) and New York Stock Exchange (NYSE) are the most prestigious exchanges, but companies may list on many other exchanges worldwide. Once listed, a company's shares can be bought and sold by investors at a price determined by the market.
Debt capital markets: where borrowers raise capital by selling tradable bonds to investors, who expect the full amount lent to be paid back to them with interest. Structured finance: this area can get gloriously complicated, but its aims are simple – to increase liquidity and limit or trade on risk, which in turn offers up extra funding for borrowers.
Derivatives: financial instruments used by banks and businesses to hedge risks to which they are exposed due to factors outside of their control. The value of a derivative at any given time is derived from the value of an underlying asset, security, index or interest rate.
What lawyers do
- Carry out due diligence on issuers and draft prospectuses which provide information about the company and its finances, as well as past financial statements. Under current rules, a prospectus must comply with the requirements of the EU's prospectus and transparency directives.
- Negotiate approval of a listing on the stock exchange. This involves the submission of documentation, certifications and letters that prove the client satisfies the listing requirements. As soon as a company undergoes an IPO, it will be subject to all the rules and requirements of a public company, so the necessary organisational structure must be in place before then.
- Work with underwriters and issuers to draw up the structure of a security and help the parties negotiate the terms of the structure. The underwriter's lawyers draft most documents related to a bond issue. An issuer's lawyers will comment on them and negotiate changes.
- With derivatives, lawyers communicate back and forth with the client discussing legal issues and risks related to various possible structures for the product, as well as suggesting ways to resolve or mitigate those problems and issues.
- Issuer's and underwriter's counsel work together with a team of bankers, accountants, insurers and an issuer's management to get securities issued.
Realities of the job
- Capital markets lawyers are mostly based in the City of London. The biggest firms have specialist departments focused on capital markets or one of its sub-groups, while mid-size firms may lump capital markets work in with corporate.
- Clients can be very demanding and lawyers work very long hours. On the plus side, large law firms usually have strong and close relationships with investment bank clients and financial institutions, meaning that trainees and NQs can get frequent client contact.
- Lawyers have to gauge the needs and personality of the company they're working with and require an aptitude for responding to and resolving issues as they arise.
- Capital markets lawyers feel all the highs and lows of market forces – if you're trying to get a deal done market conditions often matter more than the willingness of the parties involved. Even if a deal has been organised, unpredictable market conditions can mean it falls through.
- The total value of IPOs on the LSE's Main Market and AIM (its junior stock exchange) for the first half of 2019 was £4.1 billion, a slight increase when compared to the first half of 2018 (£3.9 billion). While there has been steady, if slow, growth since 2016, the first-half numbers for 2014 and 2015 were far higher (£13 billion and £6.8 billion respectively). Despite uncertainty surrounding Brexit, London has remained the heart of capital markets in Europe and accounted for 42% of IPO values in H1 2019.
- Concerns surrounding Brexit are impacting on bonds, however, as investors seek security in longer-term gilts. Bloomberg reported in January 2019 that yield premiums on ten-year securities over two-year ones had fallen lower than any point since the referendum.
- The intersection between a host of new regulatory measures and the innovation and growth of the fintech industry is likely to keep law firms that specialise in capital markets busy. Reports by capital market commentators have described AI, tech, automation and data mining as integral to the future of capital markets, but noted that security concerns have prompted regulations requiring stricter standards of data use including GDPR.
- London is a hub for capital markets work for the whole of Europe, but Britain's exit from the EU and its single market for services could see activity previously undertaken in London shifting to cities in the remaining 27 member states, especially Frankfurt. Several trading platforms are already looking closely at Europe and its post-Brexit contingencies, as they can no longer rely on London for their access to the single market (through passporting rights). Cboe Europe and TP ICAP, two of the biggest UK-headquartered trading groups, have set out plans to move to Amsterdam and Paris for this reason. They’ll follow in the steps of MarketAxess, which opened in Amsterdam in June 2017. Then there's the clearing of euro-denominated transactions in the UK, a £755 billion-a-day trade. Euro-clearing involves financial products priced in euros being traded between 'clearing houses' which act on behalf of investment banks and the like. It's not unlikely that Brussels will grab a slice of the pie during negotiations.
- Before Brexit, Europe hatched a plan for a Capital Markets Union (CMU), to achieve a shake-up of financial markets within Europe. At its heart it aimed to rid businesses of a dependence on banks for investment, making it far easier to access capital markets, and encouraging investment across borders. But in light of Brexit, these plans have gained even more significance for the EU. The initiative will now look to strengthen the capital markets of the remaining countries. John Cronin, president of the British Irish Chamber of Commerce, argued in an interview with the Independent that Brexit could be used “as a positive stimulus to achieving one of the principal elements of the wider EU's financial services agenda.”
- Any further trade wars between two of the world’s biggest economies, China and the US, are likely to have widespread impact on capital markets. The initial skirmishes depressed several markets worldwide: the FTSE 100 went down by more than 2%, Germany’s DAX dropped by more than 3%, France’s CAC 40 index by 3.6%, the Dow Jones dipped by 98 points, and Japan’s Nikkei closed 2.1% down. The rise of protectionist policies in the US and elsewhere have lead some to consider an existential threat to the trend of globalisation.