While the Markets in Financial Instruments Directive’s (Mifid II) technical standards and advice contain helpful proposals, there is a risk that a number of European Securities and Markets Authority’s (Esma) recommendations will have a materially adverse impact on investors and corporate issuers and ultimately on economic growth, according to the Association for Financial Markets in Europe (Afme) which submitted a response to the December 2014 Esma consultation paper on draft technical standards earlier this week.
Afme is urging the European regulator to deliver a regime which is consistent with the Capital Markets Union and optimises transparency without impeding market makers’ ability to commit capital to the benefit of both investors and issuers, said Christian Krohn, managing director, capital markets at the trade body in a statement.
Afme disagrees with Esma’s proposal for the definition of a liquid market and that the definition of securitised derivatives in the RTS is extremely broad and would capture a diverse range of securities, including investment certificates, plain vanilla covered warrants, leverage certificates, exotic covered warrants, exchange-traded-commodities, exchange-traded notes, negotiable rights, structured medium-term-notes and other warrants.
The definition overlaps with many types of derivatives, since it captures securitised and unsecuritised instruments, stated Afme in its response. Afme has asked Esma to review and refine the definition of securitised derivatives.”
With regard to the liquidity calibration, given the breadth and diversity of the universe of instruments that would be classified as securitised derivatives, Esma should take a more granular approach, said Afme.
Afme does not agree with a presumption that the presence of a market maker implies liquidity in all markets, and that the nature of the product as well as the number and type of market participants is relevant to such a determination, stated the trade body. Within this universe, there is a subset of instruments that can be categorised as liquid because they are mainly retail focused, have genuine secondary market activity (either with or without the presence of a market maker) and transactions are often executed in relatively small sizes, such as exchange-traded derivatives.
However, there are many other instruments in this class, such as structured notes that are wholesale products and are illiquid, said Afme. To ensure that there is minimal overlap between bond definitions and to remove ambiguity over bond classification, Afme said that a new definition of “structured debt security” should refer to a transferable security with an embedded derivative which is not a convertible bond.
The definition of convertible should also be amended to instruments consisting of a bond or a securitised debt instrument with an embedded derivative, such as an option to buy the underlying equity or acquire shares of an issuer or a member of the issuer’s group, said Afme.
Plain vanilla covered warrants, leverage certificates, exotic warrants, exchange-traded-commodities, ETNs, negotiable rights and structured medium-term-notes (and other structured debt securities) should be considered securitised derivatives, according to Afme.
Other areas of concern include the proposed definition of liquid markets for bond market transparency, as it is “overly broad and does not recognise the dynamic nature of liquidity”, and that the SSTI (size specific to the instrument) and LIS (large in scale) thresholds for pre- and post-trade transparency are unsuitably high.
Afme supports Esma’s recognition that equity research is not prohibited as an inducement if it is paid for by the recipient investment manager or by its clients. But even there, there was a caveat, with concern expressed that the proposed conditions for using client resources to fund research are so restrictive that they will render the regime unworkable.
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