MiFID II, the European Union’s Markets in Financial Instruments Directive, came into force at the beginning of the year to much fanfare, largely due to its far-reaching impact on investment firms, trading venues and other entities that provide services linked to financial instruments trading.
The directive is a vast and complex regulation (running to more than one million paragraphs) – and its aim is greater price transparency. The sponsoring regulatory force behind it, the European Securities and Markets Authority (ESMA), wants to see the market for derivatives and bonds move from OTC transactions to electronic trading, with pre- and post-transaction pricing published.
For the vast majority of non-financial corporates (NFCs), MiFID II will have little impact. For instance, NFCs dealing on their own account in financial instruments other than commodity derivatives or emission allowances are exempt from its main stricture – the need to apply to become authorised as investment firms – unless the firm is a market maker, a member of a trading venue, using a high-frequency trading algorithm or executing client orders.
However, there are some nuances within this directive that corporates need to be aware of. For certain corporate users of derivatives, especially commodities derivatives, emissions allowances and related products, the rules may result in increased reporting or regulatory notifications.
Additionally, there may be a significant implication for smaller corporates. MiFID II brings in restrictions on the provision of ‘free’ research to investors, which may result in research on smaller corporates no longer being published, potentially restricting the investor base for issues from those organisations.
More broadly, the uncertainty that this highly complex directive brings in its wake has already begun to affect how corporates operate in the market. For example, issuers are limiting the classes of investors they will issue to (ie no longer making issues available to retail investors) so that they don’t get caught by clauses within MiFID II that are either extremely onerous (such as the requirement to produce a Key Investor Information Document, or KIID) or simply not fully understood at this point.
On top of that, law firms and even national regulators are offering guidance that varies from firm to firm and from country to country. It seems likely that ESMA will need to step in to clarify aspects of MiFID II, which remains very much a ‘watch this space’ matter.