MiFID II a threat to market liquidity
29 June 2017 Warsaw
Image: Shutterstock
New rules under the second Markets in Financial Instruments Directive (MiFID II) could restrict liquidity in the market and have a negative effect on securities lending and repo industry, according to Anna Biala, a partner at Clifford Chance.
Speaking at The Network Forum in Warsaw, Biala highlighted some of the challenges of MiFID II that could affect custodians, including pointing out that the directive prohibits title transfer collateral arrangements with retail clients.
She said it is currently unclear as to whether this includes securities lending and repo transactions, adding: 鈥淚t seems that that was not the intention of the legislators.鈥�
However, Biala pointed to restrictions relating to these arrangements with professional clients. If an investment firm wants to enter into a title transfer collateral arrangement with a professional client, it is required to consider the use of the transfer 鈥渋n the context of the situation鈥�, taking into account the 鈥渃lient鈥檚 obligation to the firm and the assets that are subject to the title transfer collateral arrangements鈥�.
The firm must also provide 鈥渁dditional warning鈥� around what the effect of the arrangement may be鈥攁 requirement that Biala called 鈥渟urprising鈥�.
She concluded that custodians should consider that 鈥渢he new rules might have an impact on securities lending and repo transactions鈥�, and a wider effect on the market.
鈥淸MiFID II] might impact market liquidity,鈥� she warned.
Segregation rules under the directive are quite restrictive, and 鈥渢he risk is that this will disrupt the flow of collateral in the financial systems, which is quite problematic bearing in mind that various regulations now require additional collateral鈥�.
Speaking at The Network Forum in Warsaw, Biala highlighted some of the challenges of MiFID II that could affect custodians, including pointing out that the directive prohibits title transfer collateral arrangements with retail clients.
She said it is currently unclear as to whether this includes securities lending and repo transactions, adding: 鈥淚t seems that that was not the intention of the legislators.鈥�
However, Biala pointed to restrictions relating to these arrangements with professional clients. If an investment firm wants to enter into a title transfer collateral arrangement with a professional client, it is required to consider the use of the transfer 鈥渋n the context of the situation鈥�, taking into account the 鈥渃lient鈥檚 obligation to the firm and the assets that are subject to the title transfer collateral arrangements鈥�.
The firm must also provide 鈥渁dditional warning鈥� around what the effect of the arrangement may be鈥攁 requirement that Biala called 鈥渟urprising鈥�.
She concluded that custodians should consider that 鈥渢he new rules might have an impact on securities lending and repo transactions鈥�, and a wider effect on the market.
鈥淸MiFID II] might impact market liquidity,鈥� she warned.
Segregation rules under the directive are quite restrictive, and 鈥渢he risk is that this will disrupt the flow of collateral in the financial systems, which is quite problematic bearing in mind that various regulations now require additional collateral鈥�.
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