This is not a complete collection of the regulatory texts, but they are the most common ones that European market participants active in the structured product business must comply with.
Regulation
MARKETS IN FINANCIAL INSTRUMENTS DIRECTIVES AND REGULATION (MIFID, MIFIR)
The MiFID II Regulation (Markets in Financial Instruments Directive) and its complementary MiFIR Regulation (Markets in Financial Instruments Regulation) constitute the most important European regulatory framework for financial markets. They came into force in January 2018 and have profoundly transformed the way financial products are distributed, traded and supervised in Europe.
The main objectives of MiFID (II) are to strengthen investor protection, increase transparency, efficiency and resilience of European financial markets and enhanced competition among financial institutions.
Who must comply with the directive?
MiFID II applies to investment firms, market operators, and data reporting services providers. Certain provisions are also applied to credit institutions providing investment services / activities.
What activities are covered by the Directive?
Investment services and activities within scope of MiFID II include inter alia dealing, underwriting, placing, portfolio management and investment advice and ancillary services such as investment research.
Which products fall within the scope of the directive?
Products within scope of MiFID II include transferrable securities (e.g. bonds, structured products, and shares negotiable on the capital market), derivatives (including commodity derivatives), units in collective investment schemes and structured deposits.
Why does this have an impact on structured products?
- There are requirements to maintain appropriate structured product governance policies and procedures, including product approval processes, to ensure (i) investment products are designed appropriately, (ii) consistent with the needs of identified target markets, (iii) distributed appropriately, (iv) the relevant risks are assessed, (v) and appropriate information is made available.
- MiFID II sets stricter rules for how firms interact with clients, including suitability and appropriateness assessments. In particular, the firm must assess whether the structured product is appropriate for the prospect’s investment objectives, knowledge and experience, risk tolerance and financial situation.
- Companies must provide their clients with more detailed information on investment recommendations and the risks associated with complex financial products, which include most structured products.
- Investment firms are required to take “all sufficient steps” to obtain the best possible outcome for their clients taking account of factors such as price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order
- MiFID II requires firms to provide clients pre-and post-trade with detailed information about costs, charges of the proposed and traded structured products. Moreover, it requires a formal remuneration policy that should be aimed at the alignment of remuneration structures to encourage responsible business conduct, fair treatment of clients and to avoid conflicts of interest.
- To enhance market transparency and integrity, MiFID II requires firms to publicly disclose—and report to regulators—key trade details, including price, volume, timestamp, and involved parties, for eligible financial instruments.
https://www.esma.europa.eu/publications-and-data/interactive-single-rulebook/mifid-ii
PACKAGED RETAIL AND INSURANCE-BASED INVESTMENT PRODUCTS REGULATION (PRIIPS)
PRIIPs regulation aims is to improve the comprehensibility and comparability of Packaged Retail and Insurance-based Investment Products (PRIIPs), ensuring adequate disclosures are provided when products are sold to retail investors.
A disclosure document called a Key Information Document (KID) must be produced for each eligible product and must be available before the product is sold to retail investors. The KID is a short summary of the product which should be easily understandable to a retail investor. It contains answers to key questions retail investors may have on features, risks and the costs of the products. The key information document shall be a stand-alone document, clearly separate from marketing materials and shall be written in the official languages, or in one of the official languages, used in the part of the Member State where the PRIIP is distributed, or in another language accepted by the competent authorities of that Member State.
Why does this have an impact on structured products?
Most structured products, being considered complex products, must have a KID if the distributor wishes to propose them to retail clients. The KID shall be accurate, fair, clear and not misleading. It shall be a stand-alone document, clearly separate from marketing materials.
- The KID must include a quick description of the mechanism of the product, a risk indicator (1 to 7) being a combination of Market Risk Measure (1 to 7) and Credit Risk Measure (1 to 6), 4 probabilistic scenarios (stress, unfavourable, moderate and favourable), a table of the cost & charges and reduction in yield.
- Following information which must also be included, among others, are the name and address of the manufacturer, a notification of specific environmental or social outcomes targeted by the structured product, a description of the types of investors for whom the investment product is intended, especially in terms of risk appetite and investment horizon, a brief description of the risk and reward profile of the investment product, a brief description outlining, in the event of the initiator being unable to make the payments covered, whether the investment product is covered by a compensation scheme and information about how and to whom a client can make a claim.
PROSPECTUS DIRECTIVE
The EU Prospectus Regulation became effective on 21 July 2019 and established the rules for preparing, approving, and distributing prospectuses, which are mandatory when securities are offered to the public or listed on a regulated market. On 14 November 2024, the publication of the EU Listing Act Package introduced significant updates to the EU Prospectus Regulation, aimed at making EU public capital markets more accessible and attractive.
Why does this have an impact on structured products?
Approved Prospectuses are required for securities, including structured products, offered to the public in the EU, and/or admitted to trading on one or more EU regulated markets. The documents to be registered are, among others, the following ones:
- The Base Prospectus includes a comprehensive description of the issuer, the associated issuer-related risk factors, as well as the descriptions and risk factors of the various products that may be issued under its framework.
- The Final Terms (also known as Pricing Supplement or Definitive Terms) are a legal and technical document that specifies the definitive terms and conditions of a particular issue of a structured product. The Final Terms determine which of the options in the Base Prospectus are applicable to the individual issue.
EUROPEAN MARKET INFRASTRUCTURE REGULATION (EMIR)
The EMIR Regulation (European Market Infrastructure Regulation) is a key European Union text aimed at strengthening the stability and transparency of derivatives markets. The main objectives are to reduce the systemic risk associated with “Over The Counter” (OTC) derivatives, to improve transparency by requiring counterparties to report their transactions, and to secure transactions by imposing strict rules for clearing and collateral.
The EMIR regulation has a significant impact on structured products, mainly because their composition is often linked to derivatives (swaps, options, futures contracts, etc…) which fall under EMIR.
BENCHMARK REGULATION (BMR)
The Benchmark Regulation (BMR), or EU Regulation 2016/1011, is a European text that came into force in 2018 to strengthen the integrity and reliability of financial indices (benchmarks). The BMR applies to all financial indices used in the EU, whether they are Regulated (such as interbank rates: Euribor, Sonia, €STR), Unregulated (such as private or sectoral indices) and/or used for financial instruments (derivative contracts, index funds, structured products, etc.). Structured products issuers must now use BMR-compliant indices to avoid penalties.
SFDR REGULATION (SUSTAINABLE FINANCE DISCLOSURE REGULATION)
The SFDR (Sustainable Finance Disclosure Regulation) is a key European piece of legislation that came into force in March 2021, aimed at enhancing the transparency and comparability of sustainability information in the financial sector. It is part of the EU Action Plan for Sustainable Finance and has a direct impact on structured products, particularly those incorporating ESG (Environmental, Social, and Governance) criteria. The SFDR applies to all financial products (investment funds, structured products, life insurance, etc.) marketed in the EU by all financial market participants (banks, asset managers, investment advisors and issuers of structured products. Structured products must now be classified according to their sustainability characteristics (Article 6, 8, or 9) and offered to clients based on their ESG preferences.
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32019R2088
MARKET ABUSE REGULATION (MAR)
The Market Abuse Regulation is a key European piece of legislation aimed at combating market manipulation and insider trading. Although it applies to all financial instruments, it is particularly important for structured products due to their complexity, their dependence on underlying markets, and their sensitivity to inside information.
- Structured Products are complex and sometimes difficult to evaluate. This makes them vulnerable to abuse as sophisticated financial actors could exploit this complexity to manipulate prices and distort the value of the structured product.
- Furthermore, most Structured Products are linked to underlying assets and/or derivatives. If these underlying assets or derivatives are manipulated, especially if they are illiquid, it could be used to conceal conflicts of interest and/or insider information.
- Issuers of structured products (often banks) may also have conflicts of interest if they also trade the underlying assets, or even if they issue on their own shares.
SETTLEMENT FINALITY DIRECTIVE (SFD) & CENTRAL SECURITIES DEPOSITORIES REGULATION (CSDR)
The Settlement Finality Directive (SFD) aims at reducing the systemic risk associated with participation in payment and securities settlement systems, and particularly the risk linked to the insolvency of a participant in such a system.
Although it does not directly target structured products, it has an indirect but significant impact on their security, liquidity, and operational processing.
- The SFD provides a clear legal framework for the settlement of transactions, which is crucial for structured products, which are often cross-border and complex.
- The SFD protects markets participants by ensuring securities settlement systems are final and irrevocable, even if a participating institution becomes insolvent.
Most structured products in Europe settle through the Delivery versus Payment (DVP) mechanism. The DVP is a securities settlement mechanism defined by the European Securities and Markets Authority (ESMA) under the Central Securities Depositories Regulation (CSDR), which links a securities transfer with a cash transfer to ensure the delivery of securities happens if and only if the corresponding payment is made. In essence, DVP eliminates the “principal risk” that a party might deliver securities without receiving payment, or vice versa, ensuring a safe and simultaneous exchange of ownership.
DIGITAL OPERATIONAL RESILIENCE ACT (DORA)
The DORA Regulation (Digital Operational Resilience Act) is a European text applicable from January 2025 which aims to strengthen the digital operational resilience of financial actors, including issuers and intermediaries of structured products.
Although DORA does not directly target structured products, its impact is significant due to their dependence on IT systems, data, and third-party technology providers. Issuers and distributors of structured products must test their infrastructure (e.g., trading platforms, back-office systems) and correct any flaws. They must also ensure that valuation, settlement, and reporting systems for structured products are well protected from cyber-attacks and that they remain operational even in the event of a crisis.
BANK RECOVERY AND RESOLUTION
The Bank Recovery and Resolution Directive (BRRD) and its complementary regulation (Single Resolution Mechanism Regulation, SRMR) form a European framework aimed at preventing disorderly bank failures and protecting taxpayers in the event of a crisis.
Although these texts do not directly target structured products, they have a significant impact on their design, marketing, and risk, particularly due to their dependence on bank issuers and resolution mechanisms. Structured products are often issued by banks or depend on their financial health (e.g., guarantees, underlying assets). Structured products issued in the form of EMTN and/or Certificates may be subject to bail-in, by being cancelled or converted, if the issuing bank is in resolution.
https://finance.ec.europa.eu/banking/banking-regulation/bank-recovery-and-resolution_en
SECURITIES FINANCING TRANSACTIONS REGULATION (SFTR)
The main purpose of the SFTR is to improve transparency and reduce systemic risks associated with securities financing transactions (such as securities lending/borrowing, repurchase agreements, reverse repurchase agreements, or repurchase transactions). In this sense, the SFTR has an indirect but significant impact on structured products.
SHORT SELLING REGULATION
The Short Selling Regulation (SSR) is a European text that regulates short selling and certain derivative transactions to limit the risks of market manipulation and excessive volatility. Although it does not directly target structured products, it may have an indirect impact on their design, valuation, and liquidity, particularly when these products are linked to underlying assets (equities, bonds, indices) that may be targeted by short selling.