[Newsflash n. 15]

On 18 October 2016 CONSOB issued a Recommendation on the distribution of financial instruments (the “Recommendation”), after a public consultation launched on 9 May 2016 (see our Newsflash n. 7) as part of the three proposed actions aimed at strengthening investor protection.

The Regulator raises attention on potential flaws in the way financial instruments are distributed, which are detrimental to the investors and more likely to happen (a) when the issuer places its own securities (self-placement) and the interest of issuer may prevail on that of the investor, (b) when the financial instruments are not liquid (i.e. the investor cannot easily divest), (c) when there are information asymmetries between the distributor and the investor, and (d) also in light of recent bail-in regime that makes securities subject to bail-in less tradable especially during critical period in the financial industry.

In light of the above, CONSOB is of the opinion that the distribution of financial instruments on multilateral trading venues (including also MTFs an not only regulated markets) (for ease of reference, “OPV”) would allow a more effective investor protection. In particular, the concentration of both the phases of issuance and trading in a single venue can offer certainty (and celerity) about the existence of a real secondary market, as it would give the possibility to liquidate the investment.

To this end, in light of the positive outcome of the introduction of the OPV tool on Borsa Italiana, CONSOB recommends intermediaries to place securities through the direct distribution on multilateral trading sites (identifying and separating the fee component to be awarded to distributors) and, at the same time, encourages managers of trading facilities to set up the necessary infrastructure to allow placement through their platforms.

In particular, the Regulator adopts the “comply or explain” approach, according to which the interested entities shall abide by the Recommendation not later than six months from its adoption (i.e. by 18 April 2017) or, if they decide not to do so, they shall: (i) have in place distribution models, reflected in their internal policies, that ensure transparency and efficiency of the placement and the possibility for the investor to divest from investment in the securities offered, and (ii) provide detailed information on the potential trading of the securities on systematic internalisers or cross-trades or other divestment systems.

Analogously, pursuant to the same timeline, entities managing trading venues are required to inform CONSOB on how and when they will implement the Recommendation or, otherwise, to clarify the reason for not complying with it.

CONSOB specifies that the determinations taken by the intermediaries in connection with this recommendation will be taken into account by the Regulator in order to direct its supervisory actions.

The OPV model can be considered as an evolution of the so-called “direct listing”, with the difference that in case of OPV issuers can collect subscriptions in the market before issuing them, thus allowing the issuance of an exact amount of securities depending on the number of securities placed. In addition, in light of the clarification provided by CONSOB on the tool introduced by Borsa Italiana that the OPV shall be deemed as public distribution, in order to carry out such placement, the issuer shall be either authorised or appoint a distributor.

If there are clear upsides from an investor protection perspective, it is also true that there are elements that can make this innovative distribution channel appealing for market players too, such as the wider reach offered by a multilateral trading venue, the increased likelihood to place a security whose secondary market is already guaranteed, the possibility to negotiate lower subscription fees, the possibility to self-place the securities without the need of a captive network.

Given that Borsa Italiana has already introduced the possibility to carry out direct placement on its bond (MOT), securitised derivatives (SeDeX) market segments and, soon (on 24 October 2016), also on its MTF (ExtraMOT), it is reasonable to expect to see EuroTLX taking into consideration the opportunity to make a distribution procedure available on its market.

Please do not hesitate to contact us should you need any further clarification on this Recommendation.

 

Contacts:

Vito Vittore
Senior Partner

Elena Pagnoni
Of counsel

Luigi Bonifacio
Associate