29 June 2017
Reporter: Stephanie Palmer

MiFID II a threat to market liquidity

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: “It seems that that was not the intention of the legislators.”

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 “in the context of the situation”, taking into account the “client’s obligation to the firm and the assets that are subject to the title transfer collateral arrangements”.

The firm must also provide “additional warning” around what the effect of the arrangement may be—a requirement that Biala called “surprising”.

She concluded that custodians should consider that “the new rules might have an impact on securities lending and repo transactions”, and a wider effect on the market.

“[MiFID II] might impact market liquidity,” she warned.

Segregation rules under the directive are quite restrictive, and “the 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”.

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