The European Securities and Markets Authority (ESMA) released a statement highlighting the risks of securities lending in relation to retail client financial instruments and clarifying certain important MiFID II investor protection requirements.
Certain firms in the EU engage in securities lending and other securities financing transactions (SFTs) in relation to retail client financial instruments. While SFTs may bring the benefit of generating extra returns on financial instruments, SFTs are also a risky and complex practice that is difficult to understand for the average retail client.
MiFID II therefore imposes strict requirements regulating the use of client financial instruments. ESMA addresses this statement to firms and highlights the retail investor protection concerns relating to SFTs. Moreover, ESMA wishes to remind firms engaging in SFTs in relation to retail client financial instruments about certain important applicable MiFID II investor protection requirements.
Lastly, some practices related to securities lending are described to illustrate ESMA’s expectations about the practical application of the relevant MiFID II requirements, including the expectation that revenues arising from SFTs should accrue to the client.