Article 25(4) MiFID II allows investment firms to provide order-handling services (reception and transmission of orders, as well as execution of orders on behalf of clients) without performing the appropriateness test described in Article 25(3). In addition to some other conditions, Article 25(4) requires that such services relate to specific types of products – usually termed “non-complex” – including certain debt instruments as well as certain structured deposits.
MiFID II also identifies the conditions under which these products cannot be classified as “non-complex” with the result of narrowing the list of non-complex instruments currently regulated by MiFID.
Article 25(10) MiFID II provides that the European Securities and Markets Authority (ESMA) shall develop guidelines by 3 January 2016 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.
Following a consultation earlier this year ESMA has now published a final report on guidelines on complex debt instruments and structured deposits. Following the analysis of the response to the consultation, ESMA has modified the guidelines and reviewed some of the examples highlighted in the consultation. In particular, the following instruments should not fall under the category of instruments embedding a derivative or presenting a structure which makes it difficult for the client to understand the risk:
- inflation-linked notes;
- debt instruments denominated in a currency different from the one of the jurisdiction (or a currency that is pegged to the currency of the jurisdiction) where the investment services are provided;
- structured deposits in which the return is linked to a currency which is not the one of the jurisdiction where the structured deposit is offered; and
- debt instruments that would be regarded as “packaged products” by virtue of the Regulation on key information documents for packaged retail and insurance-based investment products since they should be classified as “complex” instruments in accordance with criteria applicable to any other financial instruments.
ESMA has also:
- clarified that instruments with complex mechanisms to determine or calculate the return should be deemed complex in accordance with the guidelines since they incorporate a structure making it difficult for the client to understand the risk of the instrument; and
- added a new example of structured deposit incorporating a structure making it difficult for the client to understand the risk of return. Specifically, ESMA considers that a structured deposit where the credit institution has the unilateral right to terminate the agreement before term should be deemed complex.
View ESMA final report on guidelines on complex instruments and structured deposits in MiFID II, 30 November 2015