Corporate Treasurers Dodge an Unintended Bullet

by Abel Clark, Managing Director, Financial, Thomson Reuters

Abel Clark, Managing Director, Financial, Thomson Reuters, looks at the significance of recent changes to the MiFID II text that clear the path for corporates hedging on regulated platforms.

Although not widely reported, this month saw a significant change to the MiFID II text that had been causing rumblings across the corporate treasury industry for some time. On May 2, MiFID II regulators confirmed the removal of non-financial corporates hedging on authorized platforms from MiFID II obligations which is a significant step forward for fair and efficient derivatives markets.

Prior to this move, corporates accessing multi-dealer platforms to undertake hedging activity, either directly or via direct electronic access carried a requirement to be an authorised financial firm. For non-financial firms, authorisation would have had a severe effect on their balance sheets as they would have been subject to the capital requirements in Basel III. In addition they would have become classed as financial counterparties under the European Markets Infrastructure Regulation (EMIR), and therefore subject to the full panoply of requirements such as the clearing mandates and bilateral margining.

A number of industry participants expressed their concern regarding this situation, indeed you will have seen reported on these very pages that the European Association of Corporate Treasurers wrote an open letter to Marcus Ferber in February clearly stating the industry’s concerns. To effect change, the industry needed a strong and clear voice and Thomson Reuters led discussions for some time with the European Commission, the Parliament, and the member states to present a clear argument for this change – and they have listened. MiFID II and Basel obligations would have seen those firms exiting regulated trading venues, impairing their ability to hedge effectively and significantly increasing their cost of capital. Together we have ensured that MiFID II is once again in line with the G20 goal of moving OTC trading onto authorised platforms.

In making this change, the EU has opted to help safeguard jobs and investment in the real economy; any firm dealing on own account specifically for the purposes of hedging, and where they do not undertake algorithmic trading strategies, will not have to apply the authorisation requirement. In terms of next steps, we expect the vote in plenary to be held towards the beginning of June, paving the way for the changes to be published in the Official Journal from the end of July.

The MiFID regulations are bold and ambitious and these latest amendments are a positive step for financial markets, avoiding what were clearly unintended consequences. The changes will help to drive transparent and liquid markets and also help to ensure that corporate firms can continue to invest in economic growth and job creation.