The Key Concerns Regarding MIFID for Issuers Are

Reply to the PUBLIC CONSULTATION on the, REVIEW OF THE MARKETS IN FINANCIAL INSTRUMENTS DIRECTIVE (MIFID) OF DEC. 8, 2010

Summary

The key concerns regarding MIFID for issuers are:

•Companies may miss out on fund raising opportunities by not understanding where their stock really trades. Underestimation of the true liquidity in stocks may be occurring if companies look only at the main market on which their shares are listed rather than including liquidity in alternative venues. Given that fund mandates (i.e. the agreement between the fund manager and its clients e.g. pension funds) may include liquidity requirements, underestimating a company’s true liquidity could reduce its ability to raise capital.

•Potential to misvalue financial instrumenassets – again, by using only the primary venue to value company stock and other financial instruments, companies may not have sufficient information for the price discovery process needed by corporate treasurers and investor relations departments for buy-back programmes, valuing convertible securities, compliance with accounting standards prescribing valuation of assets and liabilitiesatby reference tomarket fair value and other financial operations. This in turn may mean that investors are not receiving sufficient information from companies;

•Increased potential for market abuse - multiple venues and opacity may make it easier for those who wish to game the system;

•As a result of high frequency trading, destabilization of markets and pricesand disparity in access to technology, market data and markets;

•Impact on smaller quoted companies - while MIFID has opened up trading to competition which has had benefits for many blue-chip companies[f1], there may be side effects in terms of the impact on exchange revenues leading to decreased emphasis on and visibility for smaller companies.

•Focus on wrong measures of investor protection – the requirements on disclosure and suitability of advice may not always work as intended e.g. smaller companies in particular suffer from not being able to make investment research which they have commissioned themselves available to investors on their website, since this is classified as (sales – awaiting QCA response for full details). We would rather support the approach which we understand is being advocated in the PRIPS framework that investors should be given sufficient information to understand the nature of the services they are being given (whether sales / advisory etc). This way, such research should be clearly labelled as having been paid for by the company, but investors should then be able to judge for themselves whether to use the information given or not.

The key changes which issuers support are therefore:

•Increased transparency

•Smaller issuers -

•Data consolidation

•Best execution

To be completed once we agree the main text.

INTRODUCTION

The main role of the capital markets isto provide access to capital for issuers from investors and to facilitate ongoing communication between companies and shareholders via the primary markets. The secondary markets, investment services and MIFID, should therefore serve that purpose, along with increased transparency and safety for investors.

DEVELOPMENTS IN MARKET STRUCTURES

2.1 Admission to trading

What purpose is this definition supposed to serve? We would not support a “one size fits all” approach imposing the same level of regulation on all issuers, whether admitted to MTFs or regulated markets.

AFEP comments: ...Where applicable, theintroductionof anew definitioninMiFID-basedonthedecision by the operator ofa regulated market, MTF, or OTF to allow a financial instrument to be traded on its systems - should have no effectsforissuers, in the absence of prior express consentfromthem[f2].Inparticular, such adecisionshould innocase leadtoimposenewobligationson the issuer (such as disclosure or information obligations).Inanyevent,thedecisionofanoperatortotrade financial instrumentsshouldbe reported to the issuer.

ANSA comments: EI considers that extending the scope of admission to trading[MM3] to venues other than RM would not only result in increased disclosure requirements for issuers[f4] but would also be in contradiction with the objective of tailored requirements for SME markets, which operate within MTF. Currently, admission to trading is one of the feature that differentiates RM and MTF, as provided for in MiFiD and in the Prospectus and Transparency directive. Hence the question of admission to trading should rather be an issue to be considered under the Prospectus and the Transparency directives.

ULC comments:Admission to trading in multiple venues may in certain cases increase the dispersion of the instrument among investors while in other case may just increase the velocity and daily turnover of the stock. Our main concern is that, irrespective of the number of venues that the share may be admitted in, the rules should be harmonized. It is not effective for example for a stock to be banned from short selling in one venue while the same instrument could be sold short in other venues. The same pertains for supervision which should be enforced uniformly across all type of venues. Therefore, although in general we are favoring competition between venues for secondary trading we should also look into having information regarding where instruments of the same issuer are trading. Therefore, based on the experience during the latest financial crisis we believe that the Regulatory Authority of the country of the initial listing, the Operator of the market where the instrument was initially listed and most importantly the issuer should be informed regarding admission of an instrument in another venue by the venue Operator.

Assonime: I think the research published by Emittenti Titoli raised a question as to the purpose of admission to trading v listing.

2.2 Organised trading facilities

Competition – good in theory but needs some work in practice

ULC comments:One of the main targets of MiFID has been the creation and efficient use of venues, Regulated Markets, MTFs and Systematic Internalisers to increase competition in the execution of orders. To this end, during the last 3 years we have seen benefits as trading fees applied by market operators have been significantly reduced[f5] (see OXERA report, January 2011 – e.g. close to 50% in Greece). However, two points of major concern have been (a) the rise of OTC trades to figures, according to CESR, of up to 40% of the pan-European securities trading and (b) the increased fragmentation of trading which has led to decreased transparency. The definitions of the venues that has been used in MiFID clearly needs some re-drafting as business that is registered as OTC today can fall either in the MTF or in the Systematic Internalisation regime. We do not believe that adding venues based on technology, discretion of the broker, use of thresholds or other parameters will help as that will increase regulatory monitoring cost, it will increase complexity and will imply further market and price fragmentation[f6]. As a result the implied cost for investors will be increased for the detriment of the instruments traded. Therefore, we believe that the principle of “same business, same rules” should apply uniformly across the 3 existing types of venues that will be re-defined and OTCs should be the exception for a small percentage of bilateral transactions.

ANSA and AFEP comments: agree with Commission proposals – see SWS for detailed comments

EI agrees with the rationale behind the introduction of a new category of organised trading facility (OTF), which aims at restricting the scope of unregulated OTC transactions and ensuring that the “same, business, same rules” principle apply uniformly across existing trading venues and OTF.

DAI comments: Not supportive of a broad definition of organized trading facility since probably not only in Germany but all over Europe companies are using electronic trading platforms for example for trading derivatives…. Will most certainly result in raised cost for the users.

(ICMA has raised a question as to whether money market instruments such as commercial paper might be caught but should not be since MIFID generally applies to transferable securities which excludes such instruments.)

Trading of standardised OTC derivatives

ANSA supports Commission proposal; AFEP seeks exception for non-financial counterparties[f7]; DAI

questions whether more transparency is what companies really want and what impact this may have on corporate derivatives. See SWS for detailed comments.

EI welcomes the Commission proposal to move standardised OTC derivatives moves to organised trading platforms which would be subject to the same operational and transparency requirements as indicated above.

In respect of corporate derivatives, EI support the findings of the “Draft Report on efficient, safe and sound derivatives markets: future policy action” published by the ECON Committee of the European Parliament, which states that “ Unlike pure financial market products traded between banks, corporate derivatives involve no major systemic risk for financial markets (...) Better and tougher regulation of derivative markets must take account of the special position of firms which have to continue hedging their financial and operating risks on favourable, tailor-made terms by means of derivatives. (...) Since corporate derivatives - unlike financial institutions' derivatives - have not been a major factor in the financial market crisis, a more discriminating view is imperative here. “

2.3 Automated trading and related issues

We have concerns about the development of a two-tier market, whereby some market participants may have access to data earlier than others. We agree that high frequency trading should be authorised as an investment activity above specific thresholds.

More detailed comments provided by ANSA and AFEP – see SWS.

2.6 SME Markets

ULC comments:In principle we believe that the definition of an SME market across Europe is a good idea, however, it is very difficult to successfully implement it in practice as the eligibility criteria cannot be set uniformly across Europe on an absolute or a relative base.

We would be against absolute base criteria as this would create an unlevel playing field between issuers of larger and smaller markets.Also relative criteria are not suitable. For example over the last 10 years data shows that the correlation between large caps and SMEs has considerably varied over time, therefore it does not make practical sense to have relative criteria(e.g. x% of the average market cap) even within a single market as there is large fluctuation of that ratio over time.

Also, since data indicates that SMEs have mostly trading and holding interest locally, in the market in which they are incorporated and listed, it would make more sense to give the right to each market to set the criteria in its own way in order to assist growth of SMEs locally.

Therefore, it is important to give to the Operators of regulated markets the RIGHT to list SMEs on their main markets or on their dedicated MTF(s) which they currently operate for small and medium companies according to criteria that they deem appropriate for their market with reduced sources of regulatory cost. We believe that it will be the in the interest of both the issuers and the listing venues to determine rules that would fit the market and will allow the smooth transition from the SME market segment to the larger capitalisation segment.

Awaiting QCA comments

SLH comments:We support the principle of differentiation between MTFs which provide primary growth markets for smaller issuers and other MTFs which provide pan-EU trading venues. We do not, however, support the current proposals in the consultation document, nor do we believe that any proposals should be implemented in a rushed timeframe without proper consideration, which would appear to be a danger. At this stage, all that should be required is recognition of the need for differentiation and the need for further work to understand the existing structures, the differences between them and the reasons for those differences.

We will respond in more detail to the Single Market Act consultation shortly, but we would like to see the Commission take the time to identify the problems facing smaller companies, to analyse the options for dealing with those problems and only then to propose solutions. Rushed solutions now may well make matters worse. We see the need for a more holistic and considered review of the burdens on smaller and mid-cap companies and of the appropriate regulatory approach for primary and secondary markets.

We are not convinced at this stage that harmonised requirements or EU as opposed to national alternative markets are workable, given the need to understand and analyse the differences in national regimes before any conclusion could be reached and the existence of the subsidiarity principle, given that we understand that up to 97% of investors in such markets may be domestic investors. We would therefore suggest that, if any EU regime is to be considered, it should be optional, so that the exchange could choose to opt in to the regime if appropriate to its market.

Finally we would prefer that the term “SMEs” be used for initiatives aimed at non-listed companies to avoid confusion and that the term “SMILEs” (Small and Medium Issuers Listed in Europe) or “SQCs” (Smaller Quoted Companies) be used instead.

Pre- and post-trade transparency

Comments from Assonime seminar:

Companies have concerns about lack of transparency as follows[f8]:

•Potential to misvalue assets – again, by using only the primary venue to value company stock, companies may not have sufficient information for the price discovery process needed by corporate treasurers and investor relations departments for buy-back programmes, valuing convertible securities, compliance with accounting standards prescribing valuation of assets at market value and other financial operations. This in turn may mean that investors are not receiving sufficient information from companies;

•Increased potential for market abuse - multiple venues and opacity may make it easier for those who wish to game the system;

ULC comments:We support the view that transparency needs to be improved as a result of the increased fragmentation that has been observed following the application of MiFID. This implies three main directions for improvement:

(a) In the pre-trade regime we would strongly support tightening of the exemptions from pre-trade transparency as the amount of trading in Europe without pre-trade transparency (i.e. 44% according to CESR’s findings) is very high in absolute terms. Currently, 30 to 40 % of transactions are traded OTC, which by definition elude the pre-trade transparency. A further 10% of transactions executed on organised markets under pre-trade waivers should be added to that figure, meaning that half of all executed transactions escape pre-trade requirements. Price discovery mechanisms should be favored in order to increase efficiency in markets. The EU must adopt a policy to safeguard price formation and must ensure that the supervisory framework can implement it to ensure fair and orderly markets. The aim of MiFID was to increase the transparency to address the risks of the fragmentation of trading. As currently implemented, MiFID falls short of this policy aim. This will allow treasurers and finance directors of issuers to be able to determine market prices of all instruments (derivatives, bonds etc) more effectively and thus be able to decide on the most appropriate way (venue, type of execution) to conclude a hedge or to invest their deposits. EI agrees that waivers should be recast, provided they kept to a minimum, and considers that the issue should be viewed against the background of half of executed transactions, including OTC, escaping pre-trade transparency.

(b) In the OTC regime we would clearly like to see increased pre and post-trade transparency via the OTF concept as today such information is not only sparse but also expensive.

(d) EI also welcomes the Commission proposal to require both pre- and post-trade transparency for all trades in specific non-equity products, whether executed on regulated markets, MTFs, organised trading facilities or OTF.

Equity like instruments

Transparency requirements are already in place for all instruments, equity, equity-like and non-equity, that are traded today on-exchange. With regard to the proposal to applying MiFID transparency to equity-like instruments also if traded off-exchange, we believe that it would indeed increase transparency and therefore fully support this proposal. There is a need to restore confidence in these markets with long-lasting solutions, of which transparency is one important element.This rule practically applies today for listed ETFs that trade in regulated markets and should also be harmonised through regulation for the benefit of the market.