MiFID A general overview

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MiFID A general overview

• Brussels, 7 November 2008

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Background

• EU financial markets No integration until the
  80s
• The 1992 Internal Market initiative ?in the
  securities sector the Investment Services
  Directive (ISD) .but
• financial markets and their infrastructure
  remained fragmented along national lines
• barriers to cross-border financial services
  persisted
• the financial and economic effort during the
  1990s focused on delivering the euro

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FSAP

• The Financial Services Action Plan (FSAP) in 1999
• to increase growth
• to raise the political profile of financial
  markets
• to remove outstanding barriers to cross-border
  trading
• to create an integrated European capital market

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Lamfalussy approach

• A new legislative approach The Lamfalussy
  approach in 2001
• To allow speedy and better shaped regulation
• Responding to the needs of the markets
• Greater transparency and flexibility

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The Lamfalussy Structure Four-level approach
Level 1 Framework Principles in
Directive/Regulation adopted by Council and
Parliament
Level 2 Implementing rules by COM, advised by
Committee of European Securities Regulators
(CESR) and in accordance with the European
Securities Committee (ESC). Oversight by EP
Level 3 Strengthened co-operation between
national securities regulators to improve
implementation and ensure convergent application
(CESR)
Level 4 Strengthened Enforcement of Community
Law (Commission)
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M i F I D

• Replaces Investment Services Directive
• Level 1 - Directive 2004/39/EC
• Level 2
• Commission Directive 2006/73/EC
• Commission Regulation (EC) No 1287/2006

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MiFID Regulatory philosophy

• Comprehensive regulatory regime governing
  financial trading and intermediation in the EEA
• Principles-based approach
• Limit gold-plating to enable the passport to
  function well
• Where possible use Regulation
• High level of investor protection
• Rules calibrated to firm, client characteristics
• Strengthen enforcement and supervisory
  cooperation
• Increase competition between trading venues and
  IFs

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Investment services and activities

• Broader scope
•  New  investment services and activities
  (investment advice multilateral trading
  facilities)
•  New  financial instruments (commodity
  derivatives)

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 Passport 

• Establishment of a branch home supervision
  except for specific aspects (such as rules of
  conduct)
• Freedom to provide investment services and
  activities in countries other than the home MS

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Organisational requirements

• IFs shall have sound administrative and
  accounting procedures, internal control
  mechanisms, effective procedures for risk
  assessment, and effective control and safeguard
  arrangements for information processing systems.
  Clients assets. Compliance, internal audit and
  risk management functions.

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Conflicts of interest

• The Directive deals with conflicts of interest
  (CoI) when providing investment services
• Firms must have an effective CoI policy
  appropriate to the nature, scale and complexity
  of their business in order to identify
  circumstances which may give rise to a CoI
  entailing a material risk of damage to the
  interests of clients and specify measures adopted
  to manage such conflicts. Policy is subject to
  disclosure in general terms and in more detail if
  client requests. Disclosure of particular
  conflicts is required if the measures are not
  sufficient to ensure, with reasonable confidence,
  that risks of damage to client interests will be
  prevented.

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Investor protection

• Client categorisation (calibration)
• Conduct of business rules
• Obligation to act in clients best interest
• Information requirements
• Suitability and appropriateness test
• Best execution obligation
• Reporting obligations

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Client classification

• Professional clients includes funds, regulated
  entities, large undertakings
• Retail clients everybody else
• Eligible counterparties a sub-category of
  professional client
• Conduct of business rules disapplied
• But not organisation rules including conflict of
  interest protections
• Significant freedom to opt up or down the
  categories by agreement

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Information requirements

• Information to be fair, clear and not misleading
• Appropriate information about services and
  investments to enable understanding of specific
  risks

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Suitability and appropriateness

• When providing investment advice and portfolio
  management sufficient info collected to ensure
  that products and services are suitable to the
  clients knowledge and experience, financial
  situation and investment objectives
• Products and services sold through other means
  must be appropriate to the clients knowledge
  and experience or a risk warning must be given
• Execution-only basis (no appropriateness
  filter) only available for non-complex
  products

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Abolishment of the concentration rule

• ISD allowed MS to require firms the routing of
  client orders to regulated markets
• MiFID establishes competition and a level-playing
  field among execution venues Regulated Markets,
  MTFs, and Systematic internalisers
• Condition increased pre - and post trade
  transparency requirements and best execution
  obligation

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Best execution

• Best execution
• Obligation to obtain best overall deal for
  clients in light of criteria set out in firms
  execution policy
• Policy to be established and regularly updated
  Includes the venues where best conditions are
  offered.
• For retail clients, price is accorded the
  greatest weight
• Application to different investment services

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Transparency

• Market transparency regime
• Pre- and post-trade regime
• Covers all execution venues including
  internalisers
• But only covers shares admitted to trading on a
  regulated market
• Transaction reporting regime
• Covers all securities and derivative contracts
  that are admitted to trading on a regulated
  market, even if OTC

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Transaction reporting

• Obligation to report transactions to the
  competent authorities
• Investment firms must report details of
  transactions in any financial instrument admitted
  to trading on a regulated market to their
  competent authority
• Details of the reporting requirements set at
  Level 2
• Competent authorities to share data among them in
  order to ensure adequate supervision

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Record-keeping

• An investment firm shall arrange for records to
  be kept of all services and transactions which
  should be sufficient to enable the CA to monitor
  compliance with all requirements (and
  particularly with respect to clients)
• Investment firms should keep at the disposal of
  the CA the relevant data relating to all
  transactions carried out (on own account or on
  behalf of clients)

Sources Art. 13(6) and 25 MiFID
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Record-keeping - 1

• General retention period 5 years
• Medium that allows the storage of information in
  a way accessible for future reference by the
  supervisor. Further conditions
• Ensure ready access and reconstitution of key
  stages of the processing of each transaction
• Corrections to be easily ascertained
• manipulations or alterations should not be
  possible

Sources Art. 51 L2 Directive
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Record-keeping - 2

• List of minimum records
• CESR recommendations
• Recording of telephone conversation or electronic
  communications
• Streamlining of recordkeeping, transaction and
  client reporting (content-harmonisation of
  records/reports)

Art. 40, 41, 51 L2 Dir. - Art. 7, 8, 13 L2 Reg.
CESR 06-552c
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Record-keeping - 3

• MiFID requirements - Types of records (examples)
• Internal organisation (procedures, compliance
  reports, complaints )
• Conflicts of interest (relevant services or
  activities)
• Investor protection (clients details and
  agreements, orders received, clients fund and
  securities, )

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Cooperation and exchange of information

• Market integration and consolidation versus
  national supervisors/national practices and
  fragmentation
• Obligations of competent authorities to
  co-operate
• Obligations of competent authorities to exchange
  information, including transaction reports
• Strengthening Lamfalussy architecture

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Thank you

• (MiFID A general overview)