One month in and it is fair to say that the implementation of the markets in financial instruments directive (Mifid 2) has not been without confusion, anxiety and also criticism, according to Amelie Labbe, managing editor, International Financial Law Review, who moderated the Law Firm Round Table discussion at the 15th Annual Europe Structured Products & Derivatives conference at the Etc.venues, County Hall, in London on February 9.
"What is the feedback that you have been getting from clients about Mifid 2, how have they been handling it coming into effect, and also, looking to the future, are there new issues that your clients are seeing in relation to financial products being traded," Labbe asked the panellists.
"Despite the fact that we all knew this was coming, I think it is fair to say that when it all went life at the beginning of January there were quite a lot of different approaches in a lot of the detail," said Andrew Coats (pictured), partner, structured products and derivatives group, Clifford Chance.
Whereas in the past products might have been marketed to both wholesale and retail at the same time, now, with the additional compliance burden of Mifid 2, some issuers, distributors and manufacturers are taken the view that going to retail is just too difficult, according to Coats. "One of the unfortunate impacts of this is that there is a slightly less rich market for retail investors."
On the whole the implementation process has gone pretty smoothly, according to Jasmine Tiw, partner, securities and derivatives group, Ashurst. "Most of the key provisions have seemed to have gone ok," she said. "What we are seeing now is that people are finding that when it's coming to the details they are having problems and there might also be some knock-on effects because of the new requirements," said Tiw noting that a number of exchanges have decided to move the listing and trading of securities to the MTFs (multilateral trading facility) rather than the regulated market.
"This is due to the requirement under Mifid 2 to have central counterparty clearance arrangements in place," said Tiw. "We have some clients who are really struggling with this because of some products that were sold on the basis that they were going to be traded on the regulated market and there may be concerns in terms of the liquidity. In certain cases there may be some tax implications as well."
According to Coats, a lot of the uncertainty is caused by the overlay between Mifid 2 and the packaged retail and insurance based investment products (Priips). "In Mifid you have manufacturers and co-manufacturers and in Priips you can only have a single manufacturer. That causes quite a lot of confusion," said Coats.
"The retail structured products market, those which are deliberately creating structured products have created Kid (key information document) producing machinery and that has gone reasonably well," said Coats when asked how the different segments of the market have been handling Priips. "When you come to the performance scenarios there have been some surprising outcomes." The FCA has issued a statement declaring that the market should follow the legislation and, if necessary, put out additional disclosure if the numbers that have come out are misleading. "It may well be that the rules are going to need some fine tuning to put it mildly in order to avoid that scenario," said Coats.
By and large, for the structured products sector of the market, the Kid production has been a massive undertaking to get ready for but it is operating reasonably well, according to Coats. "The area which is more difficult is at the fringes, where retail meets the more vanilla bond market for example." That sector of the market felt that Priips should not be applied to them but due to the lack of regulatory guidance of what really does constitute a Priip we are now finding that more products are being treated as being Priips, according to Coats.
"People are putting legends on pricing supplements, on final terms, on marketing materials, saying 'no retail sales', in circumstances were this is probably unnecessary," said Coats. "This could actually result in limiting the products which are perfectly suitable for retail investors actually being made available to them."
According to Tiw, although the major structured product players have been quite well prepared, there have been difficulties in terms of rolling out new products to cater to changes in the market. "Even though there are templates in place, what we are finding is that for more exotic or new mechanisms they are struggling to find the right templates, or even finding the expertise to do calculations, and for the smaller players that is going to be a heavier burden to bare," said Tiw who received feedback that some retail investors wanting to purchase vanilla bonds with caps or collars have not been able to access the market because the brokers are refusing to sell it to them due to the fact that the issuers have not prepared a Priips/Kid.
"There seems to be some impact on liquidity but there is still quite a bit of uncertainty in the market as to whether or not you prepare a Kid."
Some of the disclosure that ends up on websites may say whether a Kid has been prepared or not but it won't necessarily say whether product is a Priip, according to Coats. "Where does that leave the distributor?" he asked. "This is probably not such a problem for real targeted structured products sold through distribution arrangements but it is a problem for products sold through other platforms which are potentially sold to markets other than pure retail."
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