However, conducting business on a cross-border basis was still not easy. The Financial Services Action Plan was an attempt to bring together around 50 directives in a single, coherent package. Both have onerous obligations to maintain their status, and both have relatively tight timelines by which information must be disseminated. Firms are already required to keep records for a variety of different purposes, from money laundering to tax. MiFID II will severely restrict those exemptions and will have a significant impact on firms that currently rely on them. MiFID will replace the Investment Services Directive (ISD). Third, as well as implementing the requirement set out in MiFID, FSA is also grappling with implementing the Capital Requirements Directive (see section 5 below). For fi rms in wholesale markets, FSA intends to retain its rules on the use of dealing commission. The range of activities that gave rise to passporting rights was also limited - for example, fi nancial advisers could not get a licence as advice was not covered as a core ISD activity. FSAs existing CASS rules governing client money and assets will be largely replaced by the MiFID requirements, which FSA, in its Consultation Paper 06/14 entitled Implementing MiFID for Firms and Markets, describes as being broadly equivalent. (This requirement is likely to be problematic - are any fi nancial products understood by the average member of the public? Therefore, in future, most business will be subject to the regulation by the Home Member State. Treasury has committed to adopting the bulk of the Quality of Advice Review Recommendations, published its second consultation paper on climate disclosure and has announced its intention to uplift Superannuation Performance Testing. PDF MiFID II: the time to act is now - KPMG In addition, there must be a level of liquidity in any instrument before it can be considered non-complex, and the liability of the client must be limited to the cost of acquiring the instrument itself. However, there are some important differences. There is no doubt that the Commission intends MiFID to be the last word in the areas that it covers. COBS 16 Annex 1R - FCA Handbook However, fi rms should not be fooled into thinking that this alone would be suffi cient to show FSA that they took reasonable steps to achieve compliance. What are fi rms intended to read into this development? Key requirements of firms | FCA - Financial Conduct Authority A number of trading venue and trading-related requirements have been extended to include a wider range of equity and non-equity products. MiFID introduces a new investment activity of operating a multilateral trading facility, or MTF for short. In particular, Member States have retained some discretion over whether particular categories of person can be categorised as an EC. The fact that, in practice, such a fund manager would withdraw business from any broker/dealer who is not providing the right price does not affect either fi rms regulatory responsibilities. MiFID contains broadly similar requirements, although there is one important distinction in that, under MiFID, payments of fees or commission or the provision of non-monetary benefi ts must be designed to enhance the quality of the relevant service to the client. MiFID becomes operative, for the first time there will be European-wide requirements covering investment advice, operation of multilateral tradin g facilities and services related to commodity . MiFID makes a number of important changes to this existing regime (which had themselves been anticipated by FSA in its October 2002 Consultation Paper 154). In order to complete the process, and as part of the broader case for action across the fi nancial services sector (set out in the Financial Services Action Plan announced at the EUs Lisbon European Council in 1999), the Commission put forward a proposal to revise ISD in order to combat two key fl aws. The Implementing Regulation does use the same language as MiFID itself in stating that fi rms will not be acting on an organised, frequent and systematic basis where their activity is performed on an ad-hoc and irregular basis with wholesale counterparties as part of a business relationship characterised by dealing above standard market size (on which more below) and where the transactions are carried on outside any systems are habitually used to systematically internalise. Under MiFID I, further detailed provisions are set out at Article 39 of the MiFID For example, a bank may receive information in relation to bank lending which would not be known to a different division of the fi rm entering into a fi nancial transaction with that client. controls on algorithmic and high-frequency trading. It not only covers virtually all aspects of financial investment and trading but also covers virtually all financial professionals within the EU. In some ways, the defi nition is similar to that used in MAD. The fact that past performance is not a reliable indication of future results should be made clear. Firms with equity trading business will need to document very carefully either why they do not think they are a Systematic Internaliser, or document how they will comply with the onerous obligations applying to such fi rms. While under MiFID pre-trade transparency applied to just shares admitted to trading on a RM, MiFIR extends it to: Transparency requirements will be calibrated for different types of instruments and different types of trading, such as central order book, quote driven, hybrid and periodic auction trading systems. At a high-level, whilst all FSA rules apply to retail clients, rule application is very limited in professional market - Intermediate Customers can opt out of protections such as client money and best execution. Of course, the project of creating a single European rulebook covering investment business was never going to be easy. MiFID is an attempt to deal with these two issues. There are four key timing aspects to MiFID: First, FSA was required to publish, in draft, its new rules by 1 November 2006, to be followed by a three month consultation process. The result is to make changes to FSAs rules even more wide-ranging that MiFID alone had intended. Markets in Financial Instruments Directive (MiFID) Definition What are our record keeping policies? However, one perceived benefi t of concentrated market environments related to best execution - requiring fi rms to consider different price venues is more problematic than having all trading undertaken on, or by reference to the price of, one exchange. There are 3 types of trading venues: regulated markets, multilateral trading facilities and organised trading facilities. ARMs are designed to enable investment firms to report data to the competent authorities whereas APAs will make public post-trade transparency information required to be provided by investment firms, including SIs. A fi rm is only caught by MiFID if it provides core services and activities in relation to the identifi ed instruments (for example, dealing on own account in transferable securities). The Nabarro Nathanson MiFID Opinion will provide justifi cation for a fi rm having taken reasonable steps to achieve compliance. This is a lesser test than suitability but nevertheless will require changes to existing procedures. The existing UK regime applies to both written communications (non-real time fi nancial promotions) and oral promotions (real-time). A revised version of the originalMiFID, MiFID II rolled out on Jan. 3, 2018, more than six years after the European Commission, the EU's executive branch, adopted a legislative proposal for it. Firms must ensure that instruments belonging to a client are not used by the fi rm without the clients consent. What are the investment objectives of the client? Currency risks must be stated. depository receipts and exchange traded funds; certificates and other similar financial instruments admitted to trading on a trading venue; bonds and structured finance products admitted to trading on a RM or for which a prospectus has been published; and. The Markets in Financial Instruments Directive (MiFID) is one of the cornerstones of EU financial services law setting out which investment services and activities should be licensed across the EU and the organisational and conduct standards that those providing such services should comply with. Appendix 4.4 contains the information required to assess appropriateness for Retail Clients. MiFID upgrades investment advice from an ancillary to a core investment service. FSA has been making it clear for some time (in particular in its November 2005 Dear Director letter) that planning for MiFID implementation needs to start as soon as possible and, in particular, well in advance of the fi nal nine months preparation period. Dealing on account is also not necessarily a straight-forward concept. All derivatives contracts are effected by MiFID II and led to increased reporting requirements for trading participants. A summary of the MiFID implementing regulation requirements is set out in Appendix 4.10. Suzanne is a content marketer, writer, and fact-checker. The work of MiFID Connect, a group of trade associations, in supplementing these rules with industry. Requirements - General When considering the following sections, firms must always consider if the omission of any relevant fact will result in the information being insufficient, unclear, unfair or misleading. MiFID distinguishes between the requirements that apply to different types of business. Clearly, when a fi rm undertakes business from its head offi ce with clients in the same jurisdiction, then local rules apply. FSA has had rules to this effect for some time, and MiFID contains anti-inducement requirements that cover the same ground. So do institutional and retail investors. That is because, when providing investment advice or portfolio management, a fi rm that does not obtain the necessary information required cannot provide services or deal in instruments with that client. 4.4 KNOW YOUR CUSTOMER; SUITABILITY AND APPROPRIATENESS; AND EXECUTION-ONLY BUSINESS. In a change from recent financial services directives (e.g. One service which Nabarro Nathanson intends to provide is that of a Nabarro Nathanson MiFID Opinion. MiFID II | Market structure - HSBC MiFID forms a central element of the EUs highly ambitious Financial Services Action Plan. a regulated market (RM), multilateral trading facility (MTF) or organised trading facility (OTF)). The position remains far from clear. The marketing of collective investment schemes is restricted in a way not contemplated by MiFID. In the past, general marketing might have been considered suffi cient to prevent business from being classifi ed as execution-only. The Implementing Directive makes it clear that a function is only critical or important if a defect or failure in its performance would materially impair the continuing compliance of a fi rm or its fi nancial performance, or the soundness or the continuity of its services. If a fi rm is a Systematic Internaliser as defi ned above, it has certain obligations. Where dealing with retails clients, the fi rm must, on a six monthly basis (unless either three months or twelve months is agreed) provide the following information: Name of the investment fi rm; Name of the retail clients account; Statement of the contents of the account, including market value of each instrument and cash balance; If you would like to learn how Lexology can drive your content marketing strategy forward, please email [emailprotected]. 27 of MiFID II Art. Certain activities such as securities financing transactions and portfolio compressions aren't considered transactions for reporting purposes. Under MiFID I, firms are subject to the following recordkeeping requirements: Firms must keep records of: (a) every client order and (b) every decision to deal taken in the course of providing the service of portfolio management.1 Firms must keep records of transactions. What is the source and extent of the clients regular income? FSA has also stated that it will look to three factors: the nature of the client relationship; whether a fi rm is executing an order; and whether it is providing a service, in determining whether best execution applies. One of the challenges facing fi rms is how to tie together all of the different requirements set out in the different levels of the legislation. But who will actually be Systematic Internalisers? Where a firm is dealing with a Professional Client, it can presume that the client has necessary level of experience and knowledge, but still needs to understand the investment objectives of the client and that they are fi nancially able to bear the investment risks. The Commission has consistently reinforced this position by saying that it does not expect to see Member States gold plating MiFID. In some cases, this manifested itself with a proliferation of local branches; in others, in a retrenchment to a single base (often London) from which business could be conducted on a pan-European basis. Application to all firms, not just those carrying on MiFID business In seeking to avoid two CASS rulebooks, the FCA has indicated that it will apply the MiFID II requirements to all firms. Indeed, in some areas, guidance on FSAs MiFID implementing requirements is being outsourced to industry groups such as MiFID Connect (a grouping of the major financial services trade associations), who can be more flexible and interpretive in their approach than can FSA. ESMA is expected to provide advice on the delegated acts to the Commission by the end of 2014 and drafts of the technical standards by the middle of 2015. PDF MiFID II COMMODITIES POSITION REPORTING - Socit Gnrale However, they also assume a working knowledge of fi nancial instruments on the part of Intermediate Customers, who consequently get much less protection. For example . FSAs ability to gold-plate this measure is severely restricted by the Directive itself - such measures are only supposed to relate to matters of a UK-specifi c nature, or changes following the implementation of MiFID, and must be presented to CESR. This guide is intended to help Legal and Compliance Offi cers to do just that. One argument might be that, as MiFID is maximal in nature, the FSA cannot introduce any restriction upon real-time fi nancial promotions. Once a fi rm has classifi ed its clients, it needs to gather information about that client. The quantitative criteria is that the client satisfi es at least two of the following: FSA is being asked to give clear advice on how the above criteria might work where no such quantitative data is likely to exist. Therefore, in order to carry out business on a pan-European basis, fi rms still needed to comply with local laws that differed in their scope and application. The Commission seems to think that there is no reason why a fi nancial product ought not to be promoted to any investor, provided that there is a sensible burden in demonstrating the suitability and appropriateness of the investment placed upon the investment fi rm. For some fi rms, it is clear that IT costs may be substantial; management time may have been, and may continue to be, eaten up by MiFID preparation; and some business will be fundamentally altered following MiFIDs implementation. MiFID II places restrictions on inducements paid to investment firms or financial advisors by any third party in relation to services provided to clients. Our approach is to follow a client life-cycle, from the moment that a fi rm fi rst starts to promote its services to a potential client, through client take-on processes, to the rules that apply when the fi rm actually does business with a client. Whilst very few of these rules cover areas which will be unfamiliar to FSAregulated fi rms, they do substantively change the majority of the existing conduct of business requirements. Through our General Education curriculum, multi-level assessment, and accreditations, Mid ensures a learning experience that is both broad and deep. The other instruments caught by MiFID that were not caught by ISD are already subject to regulation in the UK. However, once an initial gap analysis has been undertaken, fi rms should then be able to identify key areas of change; get management and business by-into proposed action points; and proceed to implement those changes. This is the second step in our client lifecycle. This may make it more diffi cult for new clients to be upgraded, although existing clients who have been upgraded to Intermediate Customer status can be grandfathered as a Professional Client; On occasions, MiFID requires notifi cations to be sent to clients highlighting their categorisation status and its implications; Clients may only be treated as Eligible Counterparties in relation to order execution and transmission. The implementing measures that will supplement MiFID II and MiFIR will take the form of delegated acts and technical standards. Section 1 MiFID - an executive summary 1.1 BACKGROUND MiFID will replace the Investment Services Directive ("ISD"). There are a number of means to conduct business to avoid being caught by the requirement. ISD currently gives certain FSAregulated fi rms so-called passporting rights - that is, the right to conduct business throughout the EU on the basis of a single licence granted by the FSA. The introduction of mutual recognition based upon minimum standards was a great step forward at the time, but suffered from the diffi culties discussed in Section 1 above. 1 1 Regulation (EU) No 648/2012. FSA intends to retain its rules requiring fi rms to provide retail clients investing in particular products to be provided with a Reason Why Letter. Downgrading disclosure to an option of last resort is different to FSAs, and the English common laws position and will require existing processes to be reassessed. Firms active in these markets will need to identify the type of business currently undertaken, and consider whether or not they need to vary their existing Scope of Permission (see Section 3.4 below), and whether a passport is available which might assist them to carry out business on a cross-border basis. pre- and post-trade transparency requirements. CESR had originally argued that further guidance was required, but the Commission disagreed, and FSA has taken this to its logical conclusion by stating that it will no longer require Terms of Business to be agreed between Professional Customers. This cannot have been how the Commission envisaged at the outset things would be. Regulation on Markets in Financial Instruments and amending Regulation 648/2012. So far, we have reviewed the background to MiFID and identifi ed the key changes to the perimeter, and the conduct of business rules, that MiFID will entail. In this way, we hope to highlight the key changes in a manner that makes sense to fi rms thinking about how they deal with their clients - our analysis does not follow the layout of the legislation. FSA has given some guidance on the tricky areas not directly covered by MiFID. Firms must introduce procedures to minimise the risk of loss to client assets. Procedures to control flows of information; Separate supervision of persons carrying out separate functions for clients whose interests may conflict; Removal of direct links between remuneration of persons engaged in one activity and remuneration of other persons where the interests of their clients conflict; Measures to limit persons from exercising inappropriate infl uence over the way any other person carries out their business; Measures to prevent or control the simultaneous or sequential involvement of a person in different activities where the interest of clients may differ. However, the passport currently does not give fi rms the right to ignore local laws. In assessing whether a conflict exists, firms must take into account the following factors: The policy must identify, with reference to specifi c investment services and activities, circumstances that may give rise to a confl ict and specify the procedures to be followed to manage the confl ict. The Lamfalussy Process works on the basis of a number of levels: As a consequence, in order to assess their obligations under MiFIDfirms will need to consider four different tiers of legislation: MiFID - this contains the core measures (in a way that is very broadly analogous to FSMA); The MiFID Implementing Directive and Regulation - there are two implementing measures. The primary goal of MiFID II is to keep financial markets strong, fair . We also reference original research from other reputable publishers where appropriate. Firms are required to take into account the factors set out in Appendix 4.13. Transaction Reporting Under MiFID II - CME Group FSA currently imposes detailed requirements relating to Terms of Business in COB 4.2, which apply both to Private Customers and Intermediate Customers. In our view, fi rms are likely to take every step possible to avoid being defi ned as a Systematic Internaliser, and some major players may yet avoid doing so. United States | We do not expect FSA to take such a broad view. The months of June and July have seen a flurry of regulatory developments. Firms must get an external audit report at least annually to confi rm compliance with these standards. Firms will need to review their existing processes to make sure that, in the future, they can comply with requirements relating to categorisation. The Implementing Regulation contains (not particularly illuminating) guidance on the meaning of organised frequent and systematic. Is a contemporaneous note equivalent? Regulation of markets in financial instruments | FCA Art. FSAs defi nitions of what constitute limit and market orders is helpful to fi rms. These are discussed in more detail in Section 2.3 above. There are a number of elements to this defi nition. Is It a Win For SEC Chair Gensler? What is the clients fi nancial situation and can they bear the risks of the investment? The fi rst is not to deal as a risktaking principal below standard market size. Anything labelled as investment research will fall within the investment research requirements (which, as we will see, will mean that the current distinction between objective and non-objective research is no longer sustainable - firms will not be able to call a product research and merely note that it has not been produced in an objective manner, it will need instead to be identifi ed as a marketing communication). "Questions and Answers on MiFID II and MiFIR Investor Protection and Intermediaries Topics." of MiFID II, with a focus on OTF trading in bonds and derivatives. Systematic Internalisers. The Financial Services Action Plan was an attempt to co-ordinate action to produce a single market. August 17, 2023. The Commission clearly do not agree. 4.3 CLIENT DOCUMENTATION (TERMS OF BUSINESS). MiFID II | Transparency and reporting obligations | Global law firm Under the new rules, the trading volume of a stock in a dark pool is limited to 8% over 12 months. The onset of the subsequent global financial crisis exposed some weaknesses in its provisions. However, suffi ce to say that fi rms not currently operating an ATS should take comfort that they will not in future be considered to be operating an MTF, and in particular that attempting on an ad-hoc basis to match client orders as a trading effi ciency mechanism will not amount to the more systematic operation of holding oneself out as being a market venue which would be caught by the MTF defi nition. The UK MiFID framework sets requirements for trading venues in a number of broad areas including: organisational requirements. FSAs guidance is that there is a distinction between matched back-to-back trading (which does not amount to dealing on own account) and trading resulting in an unmatched position, with subsequent action to hedge exposure, which does amount to dealing on own account. The disclosure has to beboth as % and as given value. ", European Securities and Market Authority. For example, when acting in a risktaking capacity, a fi rm might need to make it clear to its client that it was the counterparty to the transaction, rather than acting in a riskless principal capacity on the clients behalf. Certain directives, such as the Market Abuse Directive, agreed common offences would apply throughout the EU, but allowed national governments the option to continue to prohibit other activities - in other words, to gold plate MAD. The UK is expected to be ready on time. This is part of FSAs policy to move towards principles-based regulation. However, for many businesses, the key burden of MiFID is in relation to changes to existing processes and procedures. Finally, CTPs collect post-trade transparency information in relation to all instrument types and from both platforms and investment firms, consolidate it into a continuous electronic data stream and make it available to the market. The instrument must have been awarded the highest available credit rating by each relevant agency. A gap analysis will not be an easy task - it may require expert outside assistance as it is often diffi cult to add together the requirement of MiFID itself, the relevant Implementing Measure, FSAs guidance, and the important work being undertaken by MiFID Connect.
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