Capital Markets

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.
Current issues
 The total value of IPOs in the UK on the Main Market and AIM for the first half of 2017
(£3.8 billion) showed an increase when compared to the first half of 2016 (£2.7 billion).
Good news? Look a little further back and you'll notice the first-half numbers for 2014 and
2015 were far higher (£13 billion and £6.8 billion respectively). While political uncertainty
is still present (largely due to Brexit negotiations), the lack of potentially destabilising
votes in 2017/18 means there's a chance to pave the road to recovery.
 Inflation is coming and there's talk that bonds – a resilient market since the financial crash
– may be on the wane. The US Federal Reserve raised its interest rates, and the Bank of
England has moved closer to doing the same (both tell-tale policy decisions to curtail
inflation). However, these increases do make high-yield corporate bonds more attractive,
especially those which are lower rated (their shorter maturities are key).
 Bonds are suffering, but stocks are soaring. The US stock market is being buoyed by
Trump's perceived pro-business, anti-regulation stance and his infrastructure promises.
But it's not alone: the FTSE 100 and the German Dax also show equity prices reaching
record highs. Reasons for this include China's massive 'Belt and Road' initiative (a boon to
mining companies) and a commitment to an oil output cut by Russia and Saudi Arabia.
 The UK's access to the single market now depends on complex political negotiations with
Brussels. London is a hub for capital markets work for the whole of Europe, but Britain's
exit from the EU 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). In June
2017, MarketAxess, one of the largest bond trading platforms, decided to open in
Amsterdam for exactly that purpose. Then there's the clearing of euro-denominated
transactions in the UK, an £880 million-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.
The Big Short, with Steve Carrell, Christian Bale, Ryan Gosling and Brad Pitt, showed
how credit default swaps – perhaps the best known derivative – allowed a lucky few to
bet on the collapse of the US housing market, and thereby profit from the 2008 financial
crash. It's worth a watch.