|The Jolly Contrarian’s Dictionary |
The snippy guide to financial services lingo.™
Financial instrument /fɪˈnanʃ(ə)l ˈɪnstrʊm(ə)nt/ (n.)
Colloquially, a contract creating financial liabilities between two parties. It can, but need not, be negotiable, but its main feature — its sine qua non — is that it cannot be created, maintained, managed, looked after, transferred, monetised or redeemed — it cannot move or breathe, in other words — except through the agency of someone who will deduct a fee from the proceeds of your investment for the privilege.
what isn’t a MiFID financial instrument
A good place to look (if your interest level counts as “fiendish”) is the snappily titled Commission Delegated Regulation 2017/565/EU (EUR Lex) of 25 April 2016 supplementing Directive 2014/65/EU (EUR Lex) of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive.
Why aren’t debt securities traded on exchange?
Unlike shares which can trade on exchange, in organised trading facilities or over-the-counter, debt securities (bonds, notes, MTNs, certificates of deposit and so on) tend to trade only over-the-counter. They are not traded on exchange, and (while in bearer form) tend not to be traded in the secondary market nearly as often.
A given issuer tends to issue only one type of share (okay, maybe two - ordinary shares and preference shares). All of its ordinary shares are the same and are interchangeable (technically, they’re “fungible” with each other), meaning the same security is common across all venues in the market. That’s what gets listed, and it is (relatively) liquid.
By contrast, debt securitiess come in all kinds of shares and sizes. The same issuer might issue hundreds of different series with different economic characteristics, maturities and yields and features. Bonds of one series are not fungible with bonds of other series. Hence a given bond is generally far less liquid than an ordinary share of the same issuer. This, there are more issuers, and issues of bonds with different characteristics, which makes it difficult for bonds to be traded on exchanges. Another reason why bonds are traded over the counter is the difficulty in listing current prices.