Corporate treasurers should not assume that MiFID II regulations won’t impact them. What do they need to know about the EU directive?
MiFID II will impact all financial organizations through high-level goals such as increasing transparency within markets; improving best execution; and making the costs of trading and investing more explicit.
The new regulations will affect all parties dealing in and processing financial instruments within European markets. But that doesn’t mean non-financial institutions are automatically exempt.
If the activities carried out by your company, or any entity in your supply chain, directly or indirectly involve the distribution and trading of financial instruments in the EU or through an EU-based exchange, then MiFID II could affect you.
Treasury function impact
Corporate treasurers clearly need to understand whether or not they will be impacted by MiFID II.
The first step is to develop a broad overview of your organization’s transaction lifecycles before drilling down to uncover any EU touch point.
These may be EU-based clients, whether or not you book through an EU-based entity, or if you have direct membership exchanges with EU-based partners.
If any EU touch points are present, you may be affected by MiFID II and should immediately assess your organization by carrying out certain prescribed tests.
Two separate tests are required and only derivatives that are not used for hedging purposes are included:
- The market size test compares the size of the corporation’s trading volume of derivatives (not used for hedging) with the overall EU market. Thresholds are set by the European Securities and Markets Authority.
- The main business test must be conducted if the trading entity falls below all specified thresholds and this test looks at the overall size of derivatives (not used for hedging) and compares them to the sum of the company’s derivatives transactions volumes.
Even if you believe that you are not subject to MiFID II, you should nevertheless ensure that you are in a position to prove this.
FX trading platforms
MiFID II will require multilateral systems for trading financial instruments to be registered as a trading venue if operated by an EU legal entity. For example, FXall will be a multilateral trading facility (MTF) from January 2018.
This will impact corporate treasurers as all firms established in the European Economic Area (EEA) will be required to onboard to the MTF if they wish to continue trading on their FX trading platform. This will require corporate treasurers to provide additional information to their FX trading platform.
Non-EEA corporate firms will have the choice to trade on the MTF if they want to; this will be necessary to continue trading with European banks on FXall.
Other MiFID II considerations
Regardless of whether or not a corporate is subject to compliance with MiFID II based on the tests above, the new regulations will still have a ripple effect that treasurers should be aware of, as in the following examples:
Corporates and other non-financial institutions will be classified by financial institutions and this classification will affect the products that can be offered to them.
This could affect, for example, a corporate’s pension fund provisioning, because their classification will determine what kinds of products and services they can consume.
- Unbundling research
MiFID II will require all research consumed by an asset manager to be paid for in explicit terms, rather than bundled as part of the brokerage commission.
Asset managers will need to decide if they are prepared to absorb the additional cost of research or whether this will be passed on to corporates. This will most likely impact corporate decision-making processes when it comes to choosing providers.
- Hedging designation
Hedging designation needs to be accurate in order to ensure that all non-hedging derivatives are identified and treated separately, because only these instruments form part of the specified thresholds. This could have an impact on internal processes and procedures.
- Treasury management systems
Treasury management systems should also be in a position to separate out any transactions that are exempted from use in the MiFID II threshold tests, particularly in cases where their use as hedging instruments is not clear.
MiFID II will have far-reaching implications for many organizations — both financial and non-financial — with the goal of rendering financial markets more secure, robust, efficient and transparent.
As with all new regulations, the sooner changes are embraced to ensure compliance, the better; and forward-thinking organizations should therefore implement the necessary measures now to ensure that they remain ahead of this particular curve.
For further information and insight, access our MiFID II webinar recording, with contributions from John Mason, Global Head, Regulatory & Market Structure Proposition; Chris Leonard-Appleton, Director, Regulation; and Geri Westphal, Senior Director at NeuGroup.