The Investment Association (which represents Investment Managers) and the Association for Financial Markets in Europe (the trade body that represents banks and brokers) (together, the “Associations”) have published a new code of conduct for the communication of indications of interest (“IOIs”) which marks a milestone in the relationship between the investment and broking industries. IOIs are used by brokers to express their willingness to buy or sell shares at a given price. The code is now live on investor trading terminals across Europe.
The new code will make it easier for investment professionals to process large trading deals and is designed to ensure the impact of European equity market deals is more predictable, to improve transparency and consequently help investors find liquidity. The obligations in the code arise for both those participants who issue IOIs and the recipients that react to them. The Investment Association view the new framework as another step by the industry to using technology effectively to the benefit of clients.
The Associations completed phase 1 of the code in 2015 when a distinction was drawn in the code between ‘C:1 Client Natural’ (orders that can be satisfied immediately) and ‘P:1 Potential’ (orders that may not yet be firm and may involve market impact). The Associations have now updated the classification model by adding a complementary IOI category to the Client class to offer investment managers the opportunity to see orders that can be filled in their entirety and those that can be proportionally met. The framework will play an important part in ensuring that block trades can be carried out with a more predictable market impact, meaning better client returns.
The Associations have also added a filtering tool on trading terminals, including Bloomberg to ensure that investment managers can see the orders most appropriate to them. The filtering tool allows managers to distinguish between IOIs that are backed by a client position and those that reflect a position held or wanted internally by a broker (referred to as ‘House Interest’).
For any advice on indications of interest and the new code implications for your firm, Cleveland & Co, your External In-house Counsel are here to help.