Pan-European MiFID Bulletin by banger18


                                       the Markets
                                       in Financial

                                       This bulletin directs investment firms’   What does MiFID do?
                                       attention to the key business issues     MiFID is a complete rewrite of the
                                       which they should be considering.        Investment Services Directive (ISD).
                                                                                In areas already covered by the ISD,
                                                                                it introduces greater detail, clarity
                                                                                and prescription. It places greater
Who does it impact?                                                             emphasis on home state supervision.
The table below shows the key impacted areas.                                   It also covers new areas of business,
                                                                                so derivatives of all forms, including
Business                              Highest impact areas                      commodity derivatives and contracts
                                                                                for difference, are included. Investment
                                      Pre-trade transparency, client            advice, previously an ancillary activity
Investment banks/broker dealers
                                      classification                             under ISD, becomes a core activity.
                                      Client classification, best execution,     The Directive is intended to have
Portfolio managers                                                              substantial pro-competition effects
                                                                                in all EU financial markets, although
Stockbrokers                          Best execution                            the greatest impact is likely in the
                                                                                equity markets where we could see
Private banks                         Client information, suitability           significant structural changes. The
                                                                                new Directive thus has a substantial
                                                                                and pervasive effect on all financial
Futures & options firms                Best execution, investment advice         businesses: even those regulated
                                                                                as credit institutions or insurance
                                      Best execution, organisational            companies may find it impacts
Commodity derivatives traders
                                      requirements                              significant parts of their business too.
Key impacts                                 systematic basis in liquid shares,         However, best execution is required
                                            they will be defined as ‘systematic         by the Directive.
The European dimension:                     internalisers’. In future, they will be
There is a shift in many areas of MiFID     subject to the same pre- and post-         Client agreements
from host state to home state rules:        trade transparency requirements            The Directive is prescriptive in this
provision of services cross border          for orders of standard market size         area. Agreements will have to include
become exclusively the remit of the         or below as exchanges and multi-           details of best execution policy. It is
home supervisor. The activities of the      lateral trading facilities (MTF). Though   likely all agreements will have to be
whole group should be mapped to             only required to accept orders from        reviewed; it may be possible to amend
MiFID. This will often not follow the       their clients, they must achieve best      current agreements via side letters.
legal entity structure, but business        execution for these clients and they
processes.                                  may not unreasonably restrict the          Client classification
                                            clients they accept. Thus, current         The Directive defines three classes of
Rules heralding MiFID have been             internal crosses will be disclosed to      client – retail, professional and eligible
introduced throughout Europe since          the market in the future, aiding price     counterparty – for which there will
the implementation of the ISD, for          formation.                                 be different levels of protection, and
example in terms of compliance                                                         cost. The opportunity for clients to
functions. MiFID’s regulatory impact        Systematic internalisers have several      opt in or out of different categories
will vary from Member State to              options:                                   for specific types of transaction, or
Member State. Subtle changes,                                                          even for specific transactions, poses
however, could be more demanding            • incur the expense of retaining this      significant challenges for information
from a business process perspective           new status,                              systems. Investment firms may wish to
than significant ones.                       • refuse to deal at or below market        re-segment their client base and map
                                              size,                                    clients to their services differently.
Exchanges and markets:                      • put all orders through the market, or
MiFID abolishes the concentration           • establish themselves as a                This part of the Directive has a
rule, so national authorities can no          Multilateral Trading Facility.           grandfathering clause, but its effect is
longer require firms to route equity                                                    not clear and may end up being less
orders only to stock exchanges              A key consideration, apart from the        helpful than at first appears.
(in particular home exchanges).             costs associated with each option,
The original argument for the               will be the scale of benefits in            Governance
concentration rule was that it aided        attracting order flow and liquidity.        MiFID sets out requirements for
price formation and discovery, and                                                     internal audit, compliance functions
helped build pools of liquidity – both      Best execution                             and the management of risk,
of which are vital to achieving best        MiFID both extends the scope of best       safeguarding client assets and
execution for clients.                      execution to all assets covered by the     managing conflicts of interest. For
                                            Directive, and the range of clients and    example, compliance officers will
To redress the balance with the             market participants who are entitled       need to be appointed to ‘permanent
removal of the concentration rule,          to best execution. There are carve-        and independent’ compliance
MiFID establishes new, detailed             outs for particular types of firms, and     functions to oversee adherence to
rules for pre-trade and post-               clients can forego best execution.         MiFID rules. Conflicts management
trade transparency, together with           Best execution will prove problematic      will cover all conflicts arising from
transaction reporting rules. The            for the following reasons:                 specific activities, or the interaction
Directive does not stipulate how                                                       between activities: conflicts’ policies
these requirements should be met.           • A best execution policy will have to     must be disclosed to clients.
Firms will need to note the market            be agreed for each asset class for
changes in deciding how to meet               each client;                             Record-keeping
their own obligations. Will liquidity       • Data will have to be captured to         Key requirements are that records
move? Will new trade reporting media          demonstrate that any transaction         should allow the key stages of any
become available?                             met the agreed policy (each              transaction to be reconstructed at
                                              transaction does not have to be          any time and that records should be
Transaction reporting will be, in future,     ‘best execution’ on its own); and        kept for five years (or the duration of
to the home state of the investment         • New market venues/pools of               the client relationship whichever is
firm executing the transaction by the          liquidity will have to be monitored.     longer). These could prove onerous
close of the next business day. The           This landscape may shift over time.      in terms of data storage and retrieval.
simple addition of market venue codes         There will be increasing use of          Explicit record-keeping requirements
to post-trade and transaction reports         performance metrics.                     are set out in a number of areas
may be difficult for legacy systems.                                                    - transaction data, client data, client
                                            In addition, although best execution       agreements, client reports etc.- but
Systematic internalisers                    is a well-known concept in liquid          there are also implicit requirements
In countries without the concentration      equities it is unfamiliar, and difficult    around policies.
rule, large firms regularly execute          to define, in other asset classes.
client orders in shares on own              For many - bonds, OTCs, etc.               Client information/suitability
account rather than on an exchange.         - achievement of best execution            The Directive sets out the information
If they do this on a regular and            can range from difficult to doubtful.       to be taken into account when
judging the suitability of an asset or
product for a client. It also sets out                       Figure 1: High level indicative MiFID timeline
the way judgements should be made.
                                             April 2004                                 MiFID Level 1
In particular, suitability must take into
account the overall financial capacity
of a client, including cash and debt,        February 2006                              Draft Level 2
and must pay attention to the current
asset allocation i.e. a product which                                             4 months
is suitable on one occasion may not
be so on the one hundredth purchase
                                             June/July 2006                             Final Level 2
as the portfolio has become too
                                             October 2006                           MiFID Transportation
In addition, the Directive introduces
the concept of ‘appropriateness’.
                                             January 2007                          Implementation of CRD
If providing non-advisory services i.e.
reception and transmission of orders,
firms have to satisfy themselves that                                                Application of MiFID
                                             May 2007
the client has the knowledge and                                                        Level 1 & 2
experience necessary to understand
the risks of the product or service          November 2007                        Implementation of MiFID

Execution-only services can be              2 text was published in February            Action points to consider
provided for non-complex products           2006 and should be adopted by the
if the client has specifically               summer. Further changes may appear          • The available texts are in sufficient
requested it. In this case, there           before then.                                  detail and stable enough to allow
is no appropriateness judgement                                                           project plans to be drawn up even
and the client has to be told that.         Regulators around Europe                      though the final text is not yet
‘Non-complex’ means, broadly,               are beginning to consult on                   available.
listed shares, UCITS, money market          implementation of the Directive but         • The main aim at this stage should
instruments etc.                            the timetable is extremely tight.             be to assess the impact on policies,
                                                                                          processes, organisation and
Inducements                                 Some regulators will find transposition        systems so that the work required
The Directive says that inducements         particularly difficult. Many Level 2           to undertake the changes can be
are allowed only if they are not            market-related rules are set in the           planned well in advance to ensure
detrimental to the interests of the         form of an EU Regulation. Once                appropriate resources will be
clients. It clarifies that, in the area      adopted, it becomes automatically             available when necessary. Although
of advice, commission may be paid           binding – regulators cannot alter a           the end date is November 2007 any
if the objectivity of advice is not         word. Other parts of Level 2 are set          systems changes will need to allow
jeopardised. Proving lack of bias           out as a Directive which requires             for testing and parallel running.
may introduce a difficult concept            transposition into national law.            • MiFID is a business issue. A senior
to the already problematic areas                                                          executive should ‘own’ the project
of commission unbundling in the             MiFID though is ‘maximum                      and should ensure that all relevant
wholesale markets, and personal             harmonisation’, aiming to prevent             business units, as well as support
advice in the retail.                       ‘gold plating’ or ‘super-equivalence’         functions, are involved.
                                            in EU Member States. The ability of         • For some firms, investment banks
Outsourcing                                 regulators to retain or add additional        and private banks in particular,
The outsourcing requirements follow         requirements is tightly curtailed by          substantial strategic change to their
international good practice standards       Article 4 of the Level 2 Directive. If        business models may be possible
but outsourcing to a non-EEA entity         this article remains, regulators will         or necessary to gain strategic
will require special steps to be taken.     have little flexibility in transition.         advantage.
                                            They might only plead retention of          • Expert project management is vital
                                            any additional rules with Brussels            given the pervasiveness of MiFID
Where are we now?                           on the grounds of specific risks to            across businesses.
                                            investor protection or to market            • The actions of related third
The Framework Directive (Directive          integrity in their jurisdiction which are     parties will have to be constantly
2004/39/EC) became law almost               not fully addressed by the directive.         monitored. Changes in practice
two years ago and is due to be                                                            outside the firm may force
implemented by 1 November 2007.                                                           reconsideration of current plans.
It is a new style ‘Lamfalussy’ Directive                                                • Mapping the total business to
where technical detail is added to the                                                    MiFID is crucial, particularly if there
framework through further legislation                                                     is a European or global element.
at ‘Level 2’. The proposed Level

For further information on MiFID and its impact on your business, please contact:

 Pan-Europe       Charles Ilako                                     +32 2 710 7121
                  Wendy Reed                                               +32 2 710 7245
 Austria          Andrea Cerne-Stark                           +43 1 501 88 1720
                  Doris Wohlschlägl-Aschberger                        +43 1 501 88 3643
 Belgium          Denis Caprasse                                       +32 2 710 7216
                  Karin Maquet                                           +32 2 710 7232
 Czech Republic   Paul Cunningham                                 +420 251 152 012
 Denmark          Henrik Axelsen                                                  +45 39 45 99 80
                  Michael Jacobsen                                                +45 39 45 92 69
 Finland          Janne Aaltonen                                    +358 9 2280 1733
                  Henrik Stolpe                                      +358 9 2280 1465
 France           Guy Flury                                              +33 1 56 57 88 76
                  Ludivine Gimet                                   +33 1 56 57 75 65
                  Marc Ripault                                       +33 1 56 57 12 86
                  Damien Gourio                                     +33 1 56 57 51 71
 Germany          Martina Rangol                                   +49 69 9585 2280
                  Stefan Beiersdorfer                         +49 40 6378 1738
                  Marc Grohall                                       +49 69 9585 1400
 Greece           Emil Yiannopoulos                             +30 210 6874 640
 Hungary          David Wake                                           +36 1 461 9514
                  Marc-Tell Madl                        +36 1 461 9721
 Ireland          Ken Owens                                             +353 1 704 8542
                  Tanya Murray-McCarroll                           +353 1 704 8693
 Italy            Giacomo Neri                                       +39 2 66720 567
                  Giuseppe Pisani                                 +39 2 66720 567
                  Mauro Panebianco                               +39 2 66720 568
                  Alessandro Di Lorenzo                   +39 2 66720 571
 Luxembourg       Olivier de Vinck                               +352 49 48 48 26 15
                  Emmanuelle Henniaux                         +352 49 48 48 25 49
 Netherlands      Martin Eleveld                                   +31 20 568 4317
                  Ger Roeleven                                       +31 10 407 6450
 Norway           Lawrence Wintermeyer                       +47 95 26 07 25
 Poland           Antoni F Reczek                                 +48 22 523 4340
                  Lukasz Bystrzynski                           +48 22 523 4228
 Portugal         José Bernardo                                     +351 213 599 230
                  Isabel Rodrigues                               +351 213 599 339
 Spain            Gemma Moral                              +34 91 5684467
                  Enrique Fernández       +34 91 5684467
                  José Luis López Rodríguez                           +34 91 5684445
                  José Luis Castro López                          +34 91 5684445
 Sweden           André Wallenberg                               +46 8 555 341 62
                  Cecilia Enander                                 +46 8 555 335 42
                  Sussanne Sundvall                             +46 8 555 332 73
 Switzerland      Patrick Meyer                                   +41 58 792 25 54
 UK               Philip Warland                                   +44 20 7212 6345
                  Graham O’Connell                              +44 20 7212 3549
                  Andrew Gray                                               +44 20 7804 3431
                  Stuart Crotaz                                     +44 20 7213 8576
                  James Chrispin                                   +44 20 7804 2327
                  Matthew Oswald                                 +44 20 7804 4230

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