Due to the multitude of structured products and issuers, there is no single regulation or authority applicable to the issuance, sale and promotion of structured products. The principal regulations that govern structured products in the EU are set out below.
Regulation
MARKETS IN FINANCIAL INSTRUMENTS DIRECTIVES AND REGULATION (MIFID, MIFIR)
The central piece of legislation governing structured products in the EU are the Markets in Financial Instruments Directive (MiFID II) and the Markets in Financial Instruments Regulation (MiFIR), with effect 3rd of January 2018. Among other things, MiFID II and MiFIR require market participants to:
- set up a product governance if they are manufacturers and/or distributors of structured products.
- obtain information from clients to determine whether the services or products offered are appropriate for them.
- categorise their clients into one of three groups (eligible counterparties, professional clients, and retail clients) in order to define whether a transaction is suitable and how much disclosure is needed.
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) has to be produced for each eligible product and has to be available before the product is sold to retail investors. Where a PRIIP is not going to be sold to retail investors, a KID does not need to be produced. 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.
EUROPEAN MARKET INFRASTRUCTURE REGULATION (EMIR)
The European market infrastructure regulation (EMIR) lays down rules on “Over The Counter” derivatives (OTC). The aims are to increase transparency in the OTC derivatives markets, mitigate credit risk and to reduce operational risk.
PROSPECTUS REGULATION
EU prospectus rules ensure that adequate and equivalent disclosure standards are in place in all EU countries so that investors can benefit from the same level of information. Under these rules, once a prospectus has been approved in one EU country, it is valid throughout the EU (single passport for the issuers).
MARKET ABUSE REGULATION
Market abuse can be defined by the market manipulation and insider dealing, which could arise from distributing false information, distorting prices or improper use of insider information. The market abuse regulation (MAR) broadens the scope of instruments covered by the market abuse framework, strengthening in particular the regime for commodity and related derivative markets. It explicitly bans the manipulation of benchmarks (such as LIBOR) and reinforces the investigative and sanctioning powers of regulators.
TRANSPARENCY DIRECTIVE
The Transparency Directive (TD) issued in 2004 and revised in 2013 aims to ensure transparency of information for investors through a regular flow of disclosure of periodic and on-going regulated information and the dissemination of such information to the public.
CRD IV
EU rules on prudential requirements mainly concern the amount of capital and liquidity that banks hold. The goal of these rules is to strengthen the resilience of the EU banking sector so that it can better absorb economic shocks, while ensuring that banks continue to finance economic activity and growth.
SHORT SELLING REGULATION
The regulation increases transparency by requiring the flagging of short sales; gives national regulators powers – in exceptional circumstances, and subject to coordination by European Securities and Markets Authority (ESMA) – to temporarily restrict or ban short selling of any financial instrument; requires central counterparties providing clearing services to ensure that there are adequate arrangements in place for buy-in of shares as well as fines for settlement failure.
CENTRAL SECURITIES DEPOSITORIES (CSDR) & SETTLEMENT FINALITY DIRECTIVE (SFD)
The main objective of CSDR is to increase the safety and efficiency of securities settlement and settlement infrastructures (CSDs) in the EU. The Settlement Finality Directive aims at reducing the systemic risk associated with participation in payment and securities settlement systems, and in particular the risk linked to the insolvency of a participant in such a system.
SECURITIES FINANCING TRANSACTIONS
Securities Financing Transactions include a variety of secured transactions that have similar economic effects such as lending or borrowing securities and commodities, repurchase (repo) or reverse repurchase transactions (reverse repo) and buy-sell back or sell-buy back transactions, including collateral and liquidity swaps.
CAPITAL MARKETS UNION (CMU)
On 30 September 2015, the European Commission launched its first Capital Markets Union (CMU) Action Plan aimed at building a true single market for capital across the EU Member States. The CMU action plan proposes 16 legislative and non-legislative actions with 3 key objectives:
- Support a green, digital, inclusive and resilient economic recovery by making financing more accessible to European companies.
- Make the EU an even safer place for individuals to save and invest long-term
- Integrate national capital markets into a genuine single market
SUSTAINABLE FINANCE
ESMA aims to ensure that the financial markets support and promote the shift toward a more sustainable finance by ensuring the integration of environmental, social and governance (ESG) factors across its core activities. The key priorities for ESMA include transparency obligations, risk analysis on green bonds, ESG investing, convergence of national supervisory practices on ESG factors, taxonomy, and supervision.
OTHERS
- The Bank Recovery and Resolution Directive
- The Securitisation Regulation
- The Credit rating agencies (CRA) regulations
- Solvency II
This is not a complete collection of the regulatory texts but they are the most common ones that market participants active in the structured product business must comply with.
