New European market rules could leave some investors stranded © Reuters
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Banks are pushing for an eleventh-hour reprieve for a key part of new European markets rules because about a fifth of their clients do not have the vital tag they will need to continue trading.
They are worried that some investors could be shut out of deals from the start of January because thousands of counterparties or corporate issuers will not have their unique trade identifiers.
In recent weeks the banks, which play a critical role in the market organising trades, have undertaken campaigns to raise awareness among customers before the arrival of the new Mifid II rules on January 3.
At the same time they have been pressing for regulators to ease their hardline stance and are growing increasingly confident authorities are set to grant a grace period of several months.
The laws — aimed at increasing market transparency — mandates tougher audit trails for deals and will force market participants to have their own unique 20-character alphanumeric code, known as a Legal Entity Identifier (LEI). Codes for the buyer, seller and issuer will be needed to complete a trade.
Yet of the near-15,000 companies listed on European exchanges, only two-thirds at present have an LEI, according to data from Thomson Reuters.
A senior executive at a large investment bank said that “15 to 20 per cent” of his clients do not yet have LEIs and that the bank expects the situation to change little in the next three weeks.
Senior executives at three other banks said they were in a similar, or worse, position. An executive at a fourth said that it would be a “s*** show” if his bank was forced to refuse to do business with clients without LEIs from January 3.
The DTCC, a US LEI issuer, began a fast-track service last week to cope with added demand. Banks and data providers say it is mainly infrequent traders, local pension funds and corporate issuers who do not have an LEI. Normally it takes three to five days to apply for an LEI.
Market participants are hoping a meeting by the European Securities Markets Authority (Esma) on Thursday will give them breathing space, and a two-month grace period in which they can retrospectively report deals once the client has its LEI. Esma declined to comment.
The UK’s Financial Conduct Authority (FCA), like Esma, has frequently told the industry it will take a tough “No LEI, no trade” stance for Mifid. However, three people who have discussed the issue with the FCA say they detect signs of its position softening.
“They (the FCA) are effectively saying they’re not in a position to take differing views (to Esma),” one banker said, adding that he hoped Thursday’s Esma meeting would yield a “pragmatic solution”.
Steven Fine, chief executive of City broker Peel Hunt, said that only 5 per cent of its clients did not have LEIs. “The issue seems to be from counterparties that are outside the EU . . . as well as trustees and other more esoteric ‘guardians’,” he added.
Some of the biggest investment banks route their Asian trading through London — that means that their clients in Hong Kong, Singapore and Tokyo need the codes because they are trading with an EU entity.
Neil Robson, a lawyer at Katten Muchin Rosenman in London, said: “Asian applications for LEIs are lagging way behind those from European entities and US entities.”