The distribution of financial instruments issued by Italian unlisted credit institutions on multilateral trading facilities
The measures taken by credit institutions in order to comply with Consob Communication no. 0092492, one year after its adoption
With the initial trading day of the shares issued by Banca Popolare Valconca, scheduled on 9 October 2017, the number of unlisted bank issuers financial instruments having wide public circulation, which have chosen to trade their own shares on a multilateral trading facility, has increased to 15.
In this respect, it should be noted that the only multilateral trading facility active in Italy, in which unlisted credit institutions may negotiate their shares is Hi-MTF. Hi-MTF is, in particular, a multilateral trading platform managed by Hi-MTF Sim S. p. A., where the securities issued by unlisted banks are traded through the “order driven” execution model. According to the order driven trading model, trading orders are executed through their interactions with the orders placed by other intermediaries participating in the market, thus creating the so called “trading book”. The price of any linked purchase and sale order follows the rules of the “bidding auction” (asta a chiamata) that sets the price at which the largest number of shares can be negotiated. Nevertheless, in order to avoid sharp price collapses, there are a number of restrictions on the entry of purchase and selling prices with regard to orders.
The decision to trade financial instruments on the HI-MTF platform is, however, the result of a decision taken by credit institutions to comply with the Consob Communication no. 0092492, issued on 18 October 2016, (the “Communication”). In this Communication, the Italian Supervisory Authority set out non-binding guidelines  regarding the – direct and indirect – distribution of those financial instruments that are reserved to retail clients. Among those instructions, the requirement for the trading of securities issued by unlisted financial intermediaries on multilateral trading facilities stands out. Multilateral trading facilities, like Hi-MTF, are platforms not directly managed by the issuer in which financial instruments are negotiated, allowing the matching of supply and demand.
The content of the Consob communication
The Communication is part of a wider range of regulatory changes introduced by the Supervisory Authority to safeguard retail investors. It follows two earlier Consob communications  in which Consob required financial operators to be more transparent and informative when selling and distributing financial instruments that are either structurally complex – and thus not comprehensible to investors – or are illiquid – and thus non-negotiable within a reasonable period of time.
According to the Italian Supervisory Authority, the informational asymmetry present in the relationship between financial intermediaries and their clients, during the distribution phase, can prevent investors from fully understanding the risks, hence – frequently- altering their capability to take informed investment decisions.
The new Communication takes up again the rules of conduct and transparency in the distribution of financial instruments, in particular securities issued by banks. This became necessary as legislative developments for credit institutions at the EU level – designed to strengthen the stability of the banking system and its ability to support the economy – introduced a series of elements of complexity and rigidity that make trading in these securities more complex. 
After imposing higher and better capital requirements on banks, Directive 2014/59/UE on the recovery and resolution of credit institutions, was issued. This Directive introduced the principle that the burdens of an eventual collapse should also be carried by shareholders and by other bearers of financial instruments issued by the credit institution.
The new rule caused a significant increase in the liquidity risk of all those securities that are issued by financial entities to which the new regulation applies. The increase of the risk of liquidity occurred both because of the greater exposure of such instruments to tensions on capital markets, and because of the limited capacity of retail investors to understand and react to any signal concerning the crisis of the credit institution which issued the instruments.
The strong illiquid nature of banking financial instruments, on one hand, and the strictness of the new rules of prudential supervision, on the other, have increased the risk of misconduct by intermediaries in the distribution of such instruments, especially in the event that financial instruments are offered directly by the bank issuer (“self-placement”). In the case of self-placement, the “best interest” of retail investors, could be sacrificed in favour of the self-interest of the intermediaries, especially during challenging economic periods, characterized by the need of capital stabilization and funding.
Consob stresses that risks of the misalignment of interests in the distribution phase can be even greater in the case of the execution of operations in which there is not enough available information regarding the economic condition of the transactions concluded on the secondary market, or in case of lack of references regarding the market in which the price has been determined .
In order to remedy the information asymmetries described above, the Supervisory Authority has deemed it necessary to recommend new organisational measures and safeguards that should be adopted by financial intermediaries, in order to ensure that the trading of financial instruments takes place through mechanisms that are effective in relation to the prices, costs and timing of the relevant transaction, also in accordance with the provisions of Article 21 of Legislative Decree no. 58/1998 (the “Consolidated Financial Act”). It is important to highlight that the Communication does not introduce new regulatory requirements for financial intermediaries, but represents Consob’s interpretation of some primary and secondary Italian rules transposing Directive 2004/39/EC (MiFID), laid down in the Consolidated Finance Act and in the Consob Regulation no. 16190 of 29 October 2007.
In this respect, Consob recommends that financial intermediaries adopt adequate transparency levels during the distribution phase of securities to retail investors, thereby allowing themselves to make use of multilateral trading facilities.
The use of multilateral trading facilities for the distribution of financial instruments is, in fact, more appropriate to ensure, already on the primary market, that the negotiations are more transparent and efficient in terms of price-formation process, costs and transaction completion times. In this respect, the selected multilateral trading facility should, therefore, allow:
- The issuer to place on the platform, directly or through another appointed intermediary, a selling proposition that is equal to the total amount of the issuance; and
- Market participants to place purchase orders, related to a client’s order, or their specific capital needs, according to the ordinary placing on the market and proposals’ managing with informatics structures supporting negotiations, in respect of the non-discretional execution rules, adopted for the ordinary trading activity on the secondary market.
In conclusion, the distribution of financial instruments on multilateral trading facilities, although not assuring liquidity ‘per se’, can surely enhance transparency in price formation, as well as enabling a greater degree of liquidity of the investment, thanks to clear and predetermined rules of negotiation. In addition, the multilateral platform ensures continuity between primary and secondary markets, thanks to the fact that it concentrates both phases in a single place. This allows more certainty (and faster timescales) that the execution of a transaction on the primary market is accompanied by a contextual negotiation on the secondary market.
Moreover, the distribution model recommended by Consob, favouring a wider circulation of trading transactions, can also contribute to the development of an “open” distribution architecture that is not limited to traditional channels, thus reducing conflict of interests, with consequent direct benefit for retail investors. In the Consob Q&A of April 2017 accompanying the Communication, the Supervisory Authority clarified that operating schemes aimed at limiting the possibility for intermediaries (which act as distributors) to submit subscription proposals for the financial instruments issued, do not respond to the goals that the Communication aims to achieve, it being understood that the issuer can always appoint intermediaries for the distribution of financial instruments, in order to orient the offer towards predefined targets of clients, according to the new logic of product governance recently introduced by the European lawmaker .
Even though the scope of the Communication is that of preventing the proliferation of small markets (so called “borsini”) established by intermediaries themselves – in which transparency rules set forth to protect retail investors are not always respected – it should be noted that the number of intermediaries which have currently decided to have recourse to a multilateral trading facility in order to trade their securities are still small in number, given that the number of banks covered by the Communication is almost one hundred, to which an equal number of investment companies should be added.
The contents of this article is meant for informative purposes only and cannot be considered as professional advice.
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 As such, the guidelines set out in the Communication can be qualified as “soft law” instruments which, although they allow a different behaviour for financial operators, have nevertheless a very strong impact in terms of moral suasion. In the event that a financial intermediary decides not to comply with the recommendations set out in the above-mentioned Communication, it shall describe to Consob in detail the distribution procedures and modalities actually adopted and how they can ensure the liquidity and the possibility to dispose of the relevant financial instruments held by retail investors.
 Specifically, “di operazioni in relazione alle quali non siano disponibili sufficienti informazioni sulle condizioni delle transazioni sul mercato secondario nonché nel caso in cui vi sia assenza di riferimenti costituiti da prezzi formati su mercati efficienti […]”.
 In particular, Directive 2014/65/UE (MiFID 2) and Regulation (UE) n. 1286/2014/UE concerning PRIIPS. Those rules are not unknown to financial operators, since they have been partially implemented, thanks to ESMA’s Opinion, dated march 27th ,2014 denominated “Structured Retail Products – Good practices for product governance arrangements”, and especially by Consob’s Communication of 22 December 2014 concerning the distribution of financial instruments to retail investors.