Tuesday, 25 June 2019

DCM gets the MiFID II fear

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As MiFID II fast approaches, bond bankers and trade associations haven’t got a clue

Fears are growing that the traditional January rush of bond issuance won’t happen because borrowers are wary of coming to market when banks are uncertain about how to implement MiFID II.

The new rules, aimed at improving transparency in Europe’s financial markets, come into effect in just over a month on January 3 2018.

“Issuers don’t want to be guinea pigs while we find out what we can and can’t do,” said one senior DCM banker.

Questions that bond bankers still don’t have authoritative answers to include:

  • How will the rules requiring disclosure of fees for arranging primary bond deals be implemented?
  • Do the rules apply to deals in which a non-EU bank sells a bond offering for a non-EU issuer but where some of the bonds are distributed in an EU country?
  • How should in-demand bond deals be allocated? Will it still be possible to favour certain buyside clients?
  • Is it possible that the primary bond markets might be granted a carve-out from the new rules (as is the case in some areas of primary equity markets)?
  • Some issuers (such as the EIB) are exempt from MiFID II – does that mean that the rules don’t apply for banks doing deals on their behalf, or do the rules apply because the banks are captured?

“We’re discussing this stuff all the time in our internal working groups, but can’t get clear answers,” the banker said. “The legal advice is contradictory. No one has a clue.”

The various trade associations have found it impossible to provide members with convincing answers – largely, they say, because they have had little guidance from EU authorities.

“Given the scale of work entailed in preparing for MiFID II, it is perhaps not surprising that the market’s trade associations have yet to give clear guidance on possible acceptable approaches, although we are very close to the wire,” said Stuart Willey, a partner at law firm White & Case.

“There do not appear to be consensus views in the market on the approaches to be taken. This is an area of uncertainty.”

Ruari Ewing, senior director for primary markets at the International Capital Market Association, said there were no specific guidelines on how banks should comply with the new rules, with little over a month to go until the new regime.

“Members are considering their understanding of potential implications of various aspects of MiFID II and various options to address,” he said, pointing out that there were more than one million paragraphs in the directive to be considered.


The issue of fee disclosure may prove particularly tricky.

Bankers are unsure, for example, whether the new rules will require them to disclose so-called “side letters”, in which issuers agree to give certain banks on a deal extra fees (sometimes based on performance) over and above those paid to the rest of the syndicate.

The tactic is used to reward the strongest bond houses in a situation when other banks are put on to a bond syndicate as a reflection of their lending to – or relationship with – a client, rather than their bond market prowess.

If such fees are disclosed, it will be clear to all that a syndicate made up of nominally equal global coordinators or bookrunners is anything but – and might lead to pressure to change league tables to reflect that fact.

If they’re not, then the spirit of the new rules will surely have been flouted.


Some bankers hope that average fees will rise because cut-price deals – where banks charge a lower fee in order to win business from clients in order to boost their position in issuance league tables – will no longer take place.

“When you have to disclose a 3bp fee, you’re named and shamed - and you have to think about the implications for your next deal,” another DCM banker said.

On the other hand, fees might fall as it becomes clear to issuers what other companies are paying.

One syndicate banker said issuers will be under pressure to show they are getting as good a deal as rivals in their peer group. “Some [banks] don’t want to disclose, because they fear issuers will try to look good in front of their bosses and undercut their peer group,” he said.

Some level of fee disclosure exists already. In the US, all fees must be disclosed under SEC regulations, while fees paid on public-sector bonds in Europe and elsewhere are also disclosed.

It is also possible to estimate the level of fees paid on bond deals done through 144A regulations – because such bonds disclose net proceeds. Deals done under Reg S rules do not have to disclose net proceeds.

Additional reporting by Sudip Roy and Alex Chambers


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