Thursday, October 5, 2017

MFID2 PROBLEM & DEMAND

MFID2 the name might sound like Nuclear weapon but for financial markets it’s going to be something of that kind. January 3rd 2018 the European market will witness one of the biggest reforms in the financial market. The recession of 2008 gave birth to many new norms to save guard the investors. MFID2 is a similar policy governing many segments of European financial markets going ahead.  The bond market which is one of the biggest markets followed with complex products are going to take a huge toll on the product manufacturers. In Simple terms MFID 2 means transparency in non equity product trading which is herculean task for the EU product manufacturers. At present, there is little data produced on how individual securities trade, leaving many market participants in the dark. The new norm requires publish information on the liquidity classification of financial instruments and the sizes large in scale compared to normal market size and the size specific to the instrument . European bond market will face the heat while selling bonds in 2018.

 Asian and Emerging markets Bonds Demand  to Grow.

After MFID2 is implemented Asian bond markets will become attractive as outflow of capital will increase. Emerging markets bonds will also become attractive and hence inflows will increase in debt instrument. Infrastructure bonds and other bonds will soon find huge demand for the Asian markets in the coming 2018. Corporate bonds and other masala bonds will become more attractive going ahead and also low CAD of India makes it more lucrative followed with stable currency,l ow inflation rates ,high level of reform polices and domestic growth drivers. Data show that the average daily corporate bond investments have been consistently rising since December 2016 and have achieved an approximate 42.3% increase as on date. In mid-September, the percentage utilisation of the limit for foreign portfolio investment in corporate bonds reached 99.99% indicating foreign investors’ confidence in the Indian market.

Very recently RBI shifted masala bonds from being part of FPI limits in corporate bonds to being subject to External Commercial Borrowing (ECB) limits. The additional 18% headroom created will be available for further investments by FPIs over the next two quarters.Currently the Indian bond market raised  of Rs. 6.7 lakh crore in FY17, a 36% jump over the preceding year’s figures.

If you remember recently there have been some hybrid bonds which have been traded and offered to investors and investments were also done. These bonds were of high quality complicated bonds of hybrid nature where the bond indenture was never explained in full to the clients. MFID2 will help to have a very clear transparency about the holding of the same and the liquidity aspect of the same. Investors will be better informed about these non equity based products. Green bonds will be under huge threat as the parameter for the investors in these bonds are expected to be socially strong in terms of credentials.  Another key area which will get exposed is inter -bank hedging which till now remained in closed doors. After MFID2 is implemented all these hedging details will need to be exposed.

Selling bonds will be difficult in the next year and this would affect currency and investors as many of them will flock for redemption out of panic.

The biggest pain will be for those investors who will not be able to withdraw from the small self-administered scheme in January unless their scheme has met Mifid II rules. Penison schemes will be under pressure if they don’t comply with MFID 2. Hence the problem is going to create simply panic before and during that time frame. The client has to wait until the trustees have applied to the London Stock Exchange (LSE) for the document and the scheme has been registered. The catch point is that in between if markets have fallen in the intervening period, the scheme could lose money if the trustee carries out the trade in a down market.

Buyers of the non equity products will have an open option to buy research or not which earlier used to be part of the product in gamut. Transparency is the key. US banks and its other financial arms that are holding these bonds as well as looking ahead to buy such products in future will face one of the toughest days coming ahead. It’s about unbundling the products and this will lead to quality research output as well as many shops will be shut down and many research segments to upgrade their works.

Data will be public and European bonds will be under huge pressure going ahead as closed doors transactions and other gimmicks comes to an end going ahead. From January 3 2018, one of the EU’s most ambitious, packages of financial reforms will be rolled out. Monopoly of the bond players and exchanges will come to an end through this new law.

The last 2 years European banks have been riding rough ride based on profitability issues and liquidity injection where some banks came up with bond issues to save the banks. Most of these bonds were invested by those who knew little about the Hybrid aspect of the bonds. From banks to institutional investors, exchanges, brokers, hedge funds and high-frequency traders all will come under the transparency guideline and hence many of the bonds will face hard times as institutions will have to report more information about most trades immediately, including price and volume.

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