The Impact of MiFID II on Capital Markets and Compliance with MAR

As the year is coming to a close, financial services firms globally have been rushing to enter into compliance with MiFID II, with the deadline of 3rd January 2018 looming. MiFID II encompasses a huge variety of different areas: pre and post trade reporting, research unbundling (placing a value on research interactions between buy-side investors and research providers, such that equity research divisions of banks can no longer provide research to investors free of charge) and product governance to name a few. However, the impact on capital markets has not been as widely explored and as a result of this, Issufy has been working to help clarify the repercussions of MiFID II, and more broadly, regulatory change in this area by working closely with partners across the investment banking and asset management communities, as well as Clifford Chance, specifically the regulatory team — Simon Gleeson, Peter Chapman and Adam Robins.

Issufy’s findings of the impact of MiFID II in the capital markets space are the following points:

1. Allocation Justification: One of the most critical issues at hand is to justify more strongly how allocation decisions for securities offered have been made in primary capital markets transactions. Whilst the industry is still coming to a consensus on what this means in practice, we believe that this increased level of justification requirement means that firms will need to ensure that they keep sufficient records at each stage of the deal distribution process, to enable cross-referencing back to these records from different stages of the transaction, to demonstrate how allocation decisions were made. Combine this with the increased focus on evidence based compliance decision making within the industry and this calls for a complete audit trail of all interactions across the chain where it is easy to see all changes that have been made, especially changes to critical deal information across time in real time.

2. Pre-deal Research: Pre-deal research created by 3rd parties (i.e. connected research) for the issuance of new securities, whether the 3rd party regularly produces research for the issuer on an ongoing basis or not, should be treated as an inducement, unless it is paid for by the issuer and available to every single investor at the same time. The FCA appears to have moved in the direction of treating pre-deal research in the current form as a minor non-monetary benefit. What is clear to us is that there needs to be a mechanism to easily and efficiently track dissemination and usage of pre-deal research at the individual level and then also effectively tie that into information about investor participation in a deal context.

3. Product Governance: We think that since a primary capital markets transaction constitutes creating a product for distribution, and such ‘products’ refer to financial instruments, investment banks need to have a system in place that controls the design, approval, marketing, and ongoing management of the products to meet legal and regulatory requirements. Board level accountability and compliance oversight over the whole process must be ensured, such that the manufacture and distribution process of the financial instrument is overseen throughout. As noted earlier and especially with a move towards real time, evidence based compliance, there needs to be a cohesive solution that allows for easy interrogation of the build up of the entire deal profile.

4. Recording Information: All conversations and communications with clients that ‘relate to or intend to lead to the conclusion of a transaction’ must be recorded and stored for a minimum of five years. For face-to-face meetings, written meeting minutes or notes on all relevant information must be recorded, while telephone conversations must be taped. Crucially, recordings should be on a durable medium which technology solutions can provide.

The Market Abuse Regulations (MAR) which came into effect 3rd July 2016 implement new procedures on conducting Market Soundings, indicating that investors who may have been disclosed insider information to must provide written consent and are prohibited from dealing on the basis of that information or any additional information. In a capital markets transaction that may not have been publicly announced yet, the market sounding process of gauging investor interest applies in this case.

The Issufy solution has been principally designed to target all of the points above to enable investment banks to comply with MiFID II and MAR to the highest possible standards, from every aspect of the regulations. If you are interested in finding out more about the Issufy platform, please get in touch by sending an email to [email protected] or calling us at +44 208 528 1659. You can also get in touch with Nawaz Imam, Issufy’s CEO directly on [email protected].

Note: The information above is not exhaustive and is not legal, financial or any other form of advice; you should not rely upon it and no liability is accepted for any loss whatsoever that may arise from its use. For advice in relation to the content of this information, you should consult professional legal advisors.