Download MiFID

Christopher Bond MSI
Senior Adviser to SII on Compliance
Presentation on MiFID to
the Greek Branch of the
Securities & Investment
Institute
28 June 2006
www.sii.org.uk
This [MiFID] proposal is a cornerstone
of the Financial Services Action Plan.
If we want a true internal market in
financial services, with all the
enormous benefits that will bring, we
need investors large and small to be
able to invest across borders easily
and with confidence
Fritz Bolkstein EU Internal Markets Commissioner on MiFID in
November 2002 when the proposal was launched.
The Challenge and Opportunity of MiFID
“
The clear cost of implementation of
MiFID will only prove justified if
firms take the opportunities
generated to raise revenues.
”
(John Tiner’s Speech to the UK Financial Services Authority’s (FSA) MiFID Conference on
15 May 2006.)
MiFID at a Glance
Scope of MiFID increased
e.g. Investment advice
Regulated Markets and
Alternative Trading Systems
e.g. MTFs
MiFID
Conduct of Business e.g. home
country rules
(separate slide)
Internal Organisation e.g.
Conflicts of Interest
(separate slide)
Lamfalussy Process
Framework
Directive
Implementing
Directive/
Regulation
Regulatory
Convergence
Monitoring &
Enforcement
Level 1
Level 2
Level 3
Level 4
MiFID
Directive
Implementing
Measures
FSA Rules
Member
States
From May
2006
Ongoing
April 2004
July 2006
Draft EU Commission Level 2 Directive and Regulation
Who?
Why?
•ISD Firms new activities eg
Advice and additional instruments eg
commodity derivatives, - some
carveouts eg group firms
EU Commission
Level 2
What?
•Internal requirements for Firms eg under
Article 13
•Relations with customers and
counterparties eg under Article 17
•Regulation of exchanges, multilateral
trading facilities (MTFs) and Systematic
Internalizers (broadly OTC market makers)
•Level 1 (High Level Directive)
•Level 2 (More detailed Directive and
Regulation explaining Level 1)
•Level 3 ( EU Commission ensuring
consistent adoption of Directive by
different countries)
•Level 4 (Implementation of MiFID by
each country)
When?
•31 January 2007 – the Transposition Date
for each country finalizing detailed rules
for its Firms
•1 November 2007 – the Implementation
Date for each country to have new Rules
in force. (EU Parliament and ESC to vote on
Level 2 in mid July 2006).
Draft EU Commission Level 2 Documents
Progress since February Draft
June
2006
EU Parliamentary
Committee
examines draft
Level 2 Directive and
Regulation
EU Parliament
votes to approve Level
2 documents
September
2006
ESC votes to
approve
Level 2
documents
EU Commission
approaches Level 3
harmonization of
implementation by
different EU
countries
Review of MiFID
exemptions starts
January
2007
Transposition
Date for each
country to finalize
MiFID
implementation
wording
(Level 4)
November
2007
Start date of
MiFID
The Possible Impact of MiFID
Largest Firms
Absorb extra IT and
Regulatory costs
Save cost of complying
with 26 different
Business requirements
Use market making
to challenge traditional
exchanges
Midsized Firm
Smaller Firm
Struggle to meet extra
IT regulatory costs
Struggle to meet extra
IT regulatory costs
No savings if no
international operations
No savings but less
expenditure than
mid-sized
Decide whether to start/
expand EU cross-border
business to make up
for new competition
Decide whether new
competition likely
to damage retail customer
If decide not to do so,
need to narrow focus
and expand in areas of
strength
If so, change business
model, sell out or join
network
If not, do nothing?
The Possible Impact of MiFID
Larger IT and
Regulatory Costs
Larger Firms absorb
costs and target first
institutional and later
retail customers in
larger EU markets
Smaller firms
reduce
revenues and
profit
Investors receive
better service
and lower costs
Smaller firms narrow
scope of business to
areas of strength, or
merge with larger firms or
networks
Regulatory Impact Analysis
High
Moderate
Low
Client Classification
PA Dealing
Conflicts of Interest
Suitability
Internal Audit
Appropriateness
Best Execution
Outsourcing
Risk Management
Safekeeping Assets
Record Keeping
Client Reporting
Information to Clients
Inducements
Transaction reporting
Client Order
Handling
Marketing
Compliance
Internal Audit
MiFID for Investment Managers – Relations with Customers
Retail Customer Agreements
Permitted
investments
including limits
Method and
frequency of
valuations
Objectives and
permitted levels
of risk
Reporting percentage of
loss
Reporting to Retail Customers
Frequency
eg quarterly
Investment
Management
No prescription on
content or frequency
for professional clients
Best Execution
responsibility
Transaction execution
details
eg venue
Break down of
commission fees and
charges
Information on
corporate actions
MiFID for Brokers – Relations with Customers and Counter Parties
New client
agreement
eg best
execution
New client
classification
eg experts
Order handling
eg exposure of
limit orders to
market
New best
execution test
eg including
transaction costs
Restrictions
on execution
only
eg derivatives
New definition of
investment advice
Pre trade price
transparency
and obligations to
deal on
Systematic
internalisers
New definition of
investment
research
Reporting to
customers
eg execution
venue
Appropriateness
test
Post trade
pan Europe
price
transparency
Which Regulated Firms come under MiFID?
Investment Banks
Multilateral
Trading Facilities
Most Brokers
Many
Commodities
Firms
Funds and Some
Fund Operators
Financial
Advisers without
client assets
Investment
Managers
Regulated Exchanges
Some transmitters
of buy/sell orders
Life
Companies
Corporate
Finance
Authorized
Professional
Firms
NOTE: The country regulator can decide if firms below the line can opt out of MiFID. They are not MiFID
firms but will still be regulated. Some MiFID rules may apply to them e.g. in Conduct of Business
Which Firm Functions are Affected?
Front Office
e.g. Sales, Trading and
Investment Management
e.g. Conduct of Business
HR
Operations
e.g. Training
e.g. trade reporting
Senior Management
MiFID
I.T. Technology
e.g. data collection
Legal
e.g. Client Agreements
Internal Audit
Compliance
e.g. authority
Systems and Controls
Conflicts of Interest
Independence of Risk
Function
Independence of
Compliance Function
MiFID
Independence of
Internal Audit
Internal Organisation
e.g. Operational Risk
Outsourcing
Restrictions
What is the new approach to internal systems and controls?
Current Approach
of SYSC under
Chapter 3 (FSA Rules)
Future Approach
under Article 34 (CAD)
and Article 22 BCD
(together CRD, and
under Article 13 of
MiFID.)
•Establish effective systems and controls
•Periodically review them
•Allocate responsibility to individual managers
•“Material” outsourcing
•Separate front and back office
NB More detail on a few areas such as money
laundering
•Robust Governance
•Internal Controls
•Administration and Accounting
•Sufficient capital for risks, and effective risk
management
•Manage Conflicts of Interest
•Business Continuity
•Outsourcing controls
•SM responsible for internal audit, compliance and risk
MiFID – IT/Operations Perspective
Account opening
eg new client
classifications
Best Execution venue
analysis and
monitoring
Post trade reporting
including new
products
5 year record keeping
– 1year phone
recording
Pre-trade price reporting
for equities from S.I.s
and MTFs
IT/Operations
Instrument data problem
eg ISIN contrast RIC
Order execution and
routing systems
Increased product scope
eg OTC Derivatives
NOTE: The Capital Requirements Directive preparation is at the same time.
Clients
Clients
Professional
Retail
Eligible
Counterparty
References to clients and to professional clients include eligible counterparties
What is Best Execution?
New Factors
under MiFID
Level 1 Article 21
Best Result for client taking into
account:
•Price (including disclosed charges)
•Speed
•Likelihood of execution and settlement
•Size
•Nature of investment and of client
Best Execution
Affects buy side
and sell side
Evidence of
achievement of
Policy
Effectiveness
of Policy
Execution Policy
disclosed to Clients
Applies to new and
existing ISD
instruments
Best Execution
Firms must have
“Execution Policy”
with chosen
execution venues
Applies to agency
and principal
dealing
Duty is owed to
Professional
and Retail Clients
Some Best Execution Questions
• How do investment managers satisfy their duties to
clients if categorized as Eligible Counterparties by
executing firms?
• Can a firm direct all its trades to one execution venue
or dealer?
• What sources of price comparison do you use in
markets without public data e.g. OTC markets?
Do you start, or do you wait for more?
“
The area of where significant change
(to the Level 2 EU Commission MiFID
documents) is likely are now few and
we all need to start preparing for MiFID
now.
”
(John Tiner’s Speech to the FSA’s MiFID Conference on 15 May 2006.)
Start Now!
• GAP Analysis/Implementation plan
• Budget (HR and IT)
• Review client
– classifications
– agreements
– information held
– information provided
• Plan communication with clients
• Review internal policies and procedures