MiFID II (Markets in Financial Instruments Directive), looms large in Europe.
At the end of last year, we shared some insight into how the new regulation will affect issuers, but when it goes into effect in January 2018, it will impact all sides of the markets.
To shed further light on what MiFID II is, and how some of its broader implications will affect the primary markets, the Ipreo Blog turned to our Global Head of Capital Markets, Duncan Phillips.
Below is Duncan’s first installment of a two-part series on what to expect from MiFID II, and how Ipreo is addressing the ramifications of this far-reaching regulation.
MiFID II: A Broader Look
At Ipreo we’re spending considerable time and resources on building tools that help our clients meet regulatory standards. Consistent with our legacy products, much of our focus is on primary markets.
The big topic for 2017 is MiFID II (Markets in Financial Instruments Directive), an enormous legislative regime that exists across multiple tiers of legislation and expands into a wide variety of broad topics such as trade reporting, record keeping and managing conflicts of interests, among many others.
One interesting aspect to EU legislation is the way the rules apply at the Member State levels. The primary legislative text, Directive 2014/65, is binding as to the result achieved, but gives Member States flexibility on how to incorporate the law.
Conversely, a number of “Delegated Regulations” which contain important provisions that expand beyond the general principles of MiFID II itself have direct effects and are directly binding on Member States.
Beyond MiFID II are some other important texts. For example, The FCA handbook contains a number of provisions relating to primary markets. Further, the International Capital Market Association and the FICC Markets Standards Board have developed and published guidance on primary market best practices.
At Ipreo we’re working to incorporate this larger body of regulation into our solutions, rather than looking solely at MiFID II, because we are dedicated to building holistic solutions. In fact, the spirit of the regulations plays a significant role in our overall product development.
One of the interesting aspects of regulation in a primary markets context is that the onus is primarily on the underwriting banks. For example, trade reporting usually requires the seller of the securities to prepare and submit the report to the authorities.
As a result, the group of relevant parties is relatively small compared to the market as a whole in a secondary market context. How the underwriting banks want to adhere to the regulations is a consistent focus for us and we’ve had many one-on-one sessions with our bank clients to develop solutions that meet their needs.
That said, there are other beneficiaries of this progress. Investors are also clearly attracted to the ability to track and audit each step of their participation in a transaction, from viewing deal terms, to submitting orders, to receiving their allocation. Issuers, too, will appreciate an environment in which regulations are adhered to, processes are transparent and everything is recorded.
What’s clear is that the primary market overall is progressing toward greater use of technology. We’ve already observed this over the years as some of our other products have become popular. Both IssueBook (our flagship book building tool) and IssueNet (our book sharing tool) are each used by over 100 banks globally.
IssueNet has received considerable more usage in the U.S. in the past six months as the U.S.-based syndicate desks have begun to unlock the benefits of automatic reconciliation, particularly on larger transactions with multiple tranches.
Similarly, we’ve seen significant progress with our Investor Access solution, initially offered for the fixed income market. This allows investors to receive deal terms in a standardized format, submit orders directly into the primary book and receive their allocations─all electronically. Although a very new development, several deals a week receive electronic orders in this way.
The gradual electronification of capital market workflows is a very natural evolution given changes in other areas of finance, but it requires a level of specificity around regulations and protocols that hasn’t been seen before. At Ipreo, we’re addressing this need and ensuring our products put accuracy and auditability first for our capital markets clients.
In our followup blog post, we will share more details on what we’re actually building in our solution.
This is part 1 of a two-part blog post on Ipreo’s approach to primary markets regulation.