Article 25(10) of the Markets in Financial Instruments Directive (recast) (MiFID II) mandates the European Securities and Markets Authority (ESMA) to develop guidelines for the assessment of:
- bonds, other forms of securitised debt and money market instruments incorporating a structure which makes it difficult for the client to understand the risk involved; and
- structured deposits incorporating a structure which makes it difficult for the client to understand the risk of return or the cost of exiting the product before term.
ESMA has now published a consultation paper which sets out draft guidelines on related issues that are important for the correct classification of debt instruments (bonds, securitised debt and money market instruments) as either “complex” or “non-complex”, specifically, the concept of embedded derivative for debt instruments.
ESMA considers it necessary to address both “embedded derivatives” and complex “structures” because these are alternative criteria that need to be differentiated and divergent practices persist despite previous CESR Q&As. ESMA considers that the draft guidelines are an appropriate tool for addressing all the relevant issues.
ESMA also notes that the proposed criteria and the resulting classification as either “complex” or “non-complex” securities or structured deposits contained within the draft guidelines will only be relevant with regard to Article 25(4) of MiFID II.
The deadline for comments on the consultation paper is 15 June 2015. ESMA expects to publish final guidelines in Q4 2015.