Frequently asked questions about the MiFID directive by jackshepherd

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									                                                                                                       FAQs

                                                                                          21 November 2007




MiFID, the Markets in Financial Instruments Directive, entered into force on 1 November 2007.

Transposed into domestic law by the Act of 13 July 2007, it is undoubtedly encountering great interest on
the part of investors, but also raises a number of questions which we will try to answer in this “Frequently
asked questions” document.




Frequently asked questions about the MiFID directive

1. What are the origins of MiFID?

2. What are the aims of MiFID?

3. How can these aims be achieved?

4. What products and services are concerned?

5. Client categorization

6. What are the benefits for “private individuals” and “small investors”?

7. What does the term “best execution” mean?

8. Know your customer and questionnaire

9. What about products acquired before the entry into force of MiFID?

10. Where can I find out more?




1.   What are the origins of MiFID?

In 1999, the European Commission decided to enhance the dynamism of the European Economic Area
and put in place a list of measures designed to make Europe the world’s most competitive economic zone;
they include measures relating to information technologies and an extensive financial chapter. This
strategy, known as the “Lisbon agenda”, comprises a substantial section on the “Financial Services Action
Plan” (FSAP); this proposes key measures relating more specifically to the provision of investment services
and the organisation of the financial markets.
MiFID is the cornerstone of this plan.

MiFID Directive 2004/39/EC is replacing the Investment Services Directive (ISD) which dated back to 1993.

It is applicable to the EU 27 (the European Union), together with Iceland, Norway and Liechtenstein.
       2.   What are the aims of MiFID?

       a. To strengthen competition on the financial markets by permitting the emergence, alongside traditional
       stock exchanges, of MTFs (multilateral trading systems), which are alternative trading hubs working in a
       similar way to existing stock exchanges, while MiFID introduces the notion of “systematic internalisers”, i.e.
       banks or investment companies which will be able, provided that certain conditions are satisfied, to execute
       the orders of their customers instead of a stock exchange;


       b. To improve investor protection through a whole series of “know your customer” (KYC) measures
       requiring stringent rules of conduct (see question 8) and good internal organisation of the financial
       institutions;


       c. To provide “improved” information for customers about the nature of the services and products, the
       duration of the investment, the costs and commissions involved;


       d. To encourage cross border transactions by enabling more services and products to be supplied from one
       Member State to another on the basis of a European passport, either directly or in the form of a branch
       establishment in the host country;


       e. To guarantee and enhance transparency of the financial markets;


       f. To propose rules of conduct and more stringent and uniform market supervision.


       3.   How can these aims to be achieved?

  a.   Know your customer “KYC” (obligation to use appropriate means)
  b.   Improve the exchange of information to and from the customer
  c.   Trust investors
  d.   Opt for greater transparency


       4.   What products and services are concerned?

       MiFID applies to all financial instruments (defined in its Annex 1.C – L145/41: “List of financial instruments
       under MiFID”)


5. Client categorization

a. Professional customers: approved or regulated entities with extensive experience, i.e. which benefit from a
      knowledge of the product and are qualified to take certain decisions (Annex II, MiFID Directive)

b. Eligible counterparties: financial institutions, insurance companies, UCITs, pension funds (Art.24 III, MiFID
       Directive)

c. Private individuals: this category covers all other customers, i.e. private customers and SMEs; these are non-
      professionals and therefore uninitiated

       The degree of protection varies according to this classification. The aim pursued by the European
       Commission is as follows: “The less experience the investor has, the greater will be his need for protection.
       Private customers will therefore enjoy greater protection than professional or eligible clients”.
6. What are the benefits for “private individuals” and “small investors”?

a.   A wider choice of service providers
b.   More stringent rules
c.   Better quality of the services and products on offer
d.   A wider range of services and products
e.   Better traceability of the transaction
f.   A much higher level of protection
g.   An appropriate customised service
h.   A guarantee of benefiting from “best execution” (see question 7)


7. What does the term “best execution” mean?

        Every financial institution which executes an order for the benefit of its customers is required to take all
        “reasonable” measures to enable the customer to obtain the best results in terms of execution of his orders
        at lowest cost : the most advantageous charges and assured rapidity of execution.

        A regular review is also required by default.


8. Know your customer and questionnaire

        Financial institutions have a duty to obtain information about the situation of a particular customer in order
        to make sure that the service or products on offer are appropriate to his specific situation.

        To that end, the directive requires a wide range of information to be gathered and forwarded from the
        customer to the bank and from the bank to the customer, i.e.:

a.   Classification of the customer on the basis of his financial knowledge and expertise
b.   “Know your customer”: identity, profession, income
c.   Nature, volume and frequency of the transactions
d.   “Inform your customer”: give precise and accurate information (about the products and services and
         procedures)
e.   Identification of the customer’s aims
f.   Desired availability or liquidity
g.   Amount of his assets
h.   Risk assessment
i.   Methods of payment

        This evaluation is effected in the interest of the customer to enable him to benefit from a “customised”
        service and appropriate protection. The information gathered must cover three particular areas:

     - Financial resources;
     - The customer’s aims;
     - The customer’s financial knowledge

        If this information is not provided, the bank or other investment companies may decline to provide a
        particular service.


        9.   What about products acquired before the entry into force of MiFID?

        Existing customers, who already had a relationship with their bank prior to the entry into force of MiFID,
        may be regarded as meeting the criteria giving access to such products or services already used (insofar
        as the bank is in possession of the information needed to define the profile of those clients). Ideally, the
        customer should talk to his bank and make sure that his investment profile is still coherent following the
        entry into force of MiFID.
    10. Where can I find out more?

    We have set out below the different legal references at both European and Luxembourg level.

•   At community level

•   At European level:

    - CESR's Level 3 Guidelines and recommendations on Publication and Consolidation of markets data
    - Recommendations - Inducements under MiFID
    - Guidelines on MiFID transaction reporting
    - Protocol on MiFID Passport Notifications
    - Q&A on Best execution
    - Recommendations - The passport under MiFID

•   At Luxembourg level:

- Law of 13 July 2007 on markets for financial instruments
- Information on the obligation to declare transactions involving financial instruments in virtue of Article 28 of the
      law of 13 July 2007 on markets for financial instruments
- Technical procedures concerning the obligation to declare transactions involving financial instruments in virtue
      of Article 28 of the law of 13 July 2007 relating to markets for financial instruments
- Rules of conduct concerning the financial sector
- Grand Ducal regulation of 13 July 2007 on the keeping of an official listing for financial instruments
- Grand Ducal regulation of 13 July 2007 on the organisational requirements and rules
      of conduct in the financial sector and transposing Directive 2006/73/EC




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