This article explains some of the

Document Sample
This article explains some of the Powered By Docstoc

Mr Carl Fernandes

                                                                                                    Photo by: Justin Horrocks

                    MiFID: What is it and how
                    Does it Affect us in Asia?
                    Carl Fernandes, Financial Markets Regulation Partner,
                    Linklaters (Hong Kong), explains the significance of
                    the European Commission’s MiFID and its expected
                    impact on Asia.

                            his article explains some of the            development of the single European market in
                            background to the European                  financial services. The FSAP comprises 42
                            Commission’s Markets in Financial           directives in total, addressing a wide variety of
                    Instruments Directive (MiFID), its key objectives   regulatory issues including market conduct (the
                    and the implementation timetable, and attempts      Market Abuse Directive), public offering and
                    to highlight some areas of potential impact for     continuous disclosure requirements for issuers
                    regulated businesses in Asia – hopefully            (the Prospectus and Transparency Directives),
                    dispelling some myths along the way! The UK         regulatory capital requirements for banks and
                    Financial Services Authority (FSA) has stated       securities firms (the Capital Requirements
                    that MiFID will “significantly alter how firms      Directive and the Financial Groups Directive),
                    carrying on investment business organise their      and enhanced anti-money laundering controls
                    systems and controls and how they interact with     (the Third Money Laundering Directive).
                    their customers”.
                                                                        What is MiFID Changing?
                    Part of a Bigger Picture                            I have heard MiFID being referred to as the
                    “MiFID” is the commonly used acronym for The        directive which will, for the first time, enable
                    Markets in Financial Instruments Directive. It      the cross-border provision of financial services
                    is one of the final, and most important,            within Europe. This is not quite correct. The
                    directives to be implemented as part of the         Investment Services Directive (ISD), brought into
                    European Commission’s “Financial Services           force in 1993, provides the current platform for
                    Action Plan” (FSAP), an ambitious regulatory        financial services firms to promote and supply
                    reform programme designed to further the            their services on a pan-European basis. The

32                                                                                                              July/ August 2007
    ISD permits firms to “passport” a licence which          differences and therefore all firms will need
    has been obtained in a European jurisdiction             to reclassify their clients;
    into other European countries i.e. a firm licensed   •   changes to standard terms of business which
    in one country to provide “core investment               will require the repapering of all existing
    services” could then provide those services,             clients;
    either cross-border or via a local establishment,    •   an extension of the suitability obligation so
    to other European countries without requiring            that it applies in respect of advice given to
    an additional licence. Although MiFID will               both retail and professional clients (although
    actually replace the ISD, it is in effect an             the amount of base information that will be
    enhancement to the ISD platform, which is now            required in respect of a professional client
    seen as outdated due to the rapid development            will be significantly less than that required
    of the financial markets since 1993.                     for a retail client);
                                                         •   even when the suitability obligation does
    MiFID enhances the ISD regime by further                 not apply (i.e. the firm is not making a
    promoting the regulatory harmonisation                   recommendation to the client in
    objective through:                                       respect of a transaction) firms will
    • broadening the scope of passportable                   have to assess whether a
      activities; and                                        transaction is “appropriate” for a
    • attempting to introduce a single European              client, unless it is an execution-
      rulebook governing how investment firms                only transaction in a “non-
      are required to conduct their activities once          complex” instrument (e.g. listed
      they are licensed.                                     shares);
                                                         •   the requirement to provide best
    The way in which the latter change is achieved           execution will have a broader
    is through the implementation of “Level 2”               meaning than merely executing
    legislation which sets out detailed rules                a transaction for a client at the best available
    underpinning the high-level principles set out           price, and will apply when a firm deals for
    in the main directive. Each European country             both retail and professional clients (with no
    is required to implement these rules through             opt-out);
    detailed changes to their local rulebooks.           •   firms will be required to put in place an order
    However, in doing so they must keep in mind              execution policy, which is consented to by
    that MiFID is a “maximal” directive which means          clients, detailing how they execute clients
    that European countries cannot choose to apply           orders and, in particular, achieve best
    any higher standards to matters dealt with               execution.
    under MiFID nor, of course, can they choose to
    implement lower standards. In practice there         Timetable for Implementation
    will be differences between how the various          The original implementation date for MiFID was
    European regulators choose to interpret MiFID        April 2006, two years after the directive itself was
    and therefore a truly single rulebook is             passed. However, in the course of formulating
    probably still some way off.                         the more detailed “Level 2” measures, it became
                                                         clear to the European Commission and all
    New Conduct of Business                              relevant European securities regulators that this
    Requirements                                         was an ambitious implementation schedule
    The new conduct rules are underpinned by the         given how wide-ranging the reforms were.
    general principle that firms are required to “act    Accordingly, following two official
    honestly, fairly and professionally in               postponements, the official implementation date
    accordance with the best interests” of their         is now 1 November 2007. Each local regulator
    clients. Some of the key features of the new         should now be putting the finishing touches to its
    regime include:                                      revised rules, and the legal and compliance units
    • a new three tier client categorisation system      of investment firms should have well advanced
       under which all clients will be classified as     plans for ensuring compliance with the new
       either retail clients, professional clients or    regime from 1 November 2007.
       eligible counterparties. For UK-based firms,
       there are similarities between these new          Impact on Firms in Asia
       categories and the current categories (i.e.       For investment firms which have purely an
       market counterparties, intermediate               Asian presence and focus, MiFID is unlikely to
       customers and private customers).                 have much of an impact at all. However, for
       However, there are some notable                   international firms, some thought needs to be

July/ August 2007                                                                                               33
               given as to how changes in the regulatory                affiliate may need to classify the client
     Feature   regime affecting a European affiliate may have           according to the new three tier system under
               an impact on business done in Asia. The                  MiFID, which may conflict with the client
               following two circumstances immediately come             classification process which applies in its
               to mind as being examples where some of the              home jurisdiction.
               new compliance requirements outlined above
               may have an impact:                                    In addition to these circumstances, there may
               • provision of services by an Asian entity to          be other consequential changes to the
                   a European affiliate for the benefit of the        regulatory regimes of European jurisdictions
                   European firm’s clients e.g. executing             which have a broader impact. For example,
                   transactions on an Asian exchange. In order        the FSA is reviewing its entire financial
                   to ensure that the European firm continues         promotions regime as part of the revisions
                   to comply with the obligations it owes to its      which are required by MiFID. Accordingly,
                   clients under MiFID, it may need to ensure         Asian firms which make financial promotions
                   that the Asian affiliate provides the delegated    into the UK will need to comply with the new
                   services in a manner which is compliant with       requirements.
                                    MiFID (e.g. the Asian affiliate
                                    must execute trades in a          Preparation Required?
                                    manner which is compliant         As MiFID does not contain any transitional
                                    with the European affiliate’s     provisions, European firms have generally
                                    best execution policy and         been working for sometime on reviewing and
                                    issue transaction                 re-drafting existing policies, procedures and
                                    confirmations which comply        documentation in order to ensure that these
                                    with MiFID requirements).         are all ready for 1 November 2007.
                                    Furthermore, the delegation
                                    of services by a European         To the extent they have not already, firms in
                                    investment firm to an Asian       Asia, in conjunction with their colleagues in
                                    affiliate may constitute an       Europe, should be reviewing their existing
                                    “outsourcing” by the              structures in order to asses whether they or
                                    European firm. Where an           their clients will be affected by the changes
                                    outsourcing is determined         being brought about by MiFID. Where clients
                                    to be “critical or important”     are affected, firms should ascertain what
                                    then MiFID imposes certain        information they may be required to obtain
                   requirements even where the company                from, or provide to, clients in advance of 1
                   providing the outsourced service is an             November 2007. Where the services provided
                   affiliate; and                                     by an Asian affiliate are affected, a discussion
               • provision of services by a European affiliate        should be held with the relevant European firm
                   to clients in Asia e.g. a firm in Hong Kong        to determine the way in which those services
                   has an advisory relationship with a client,        may need to be changed and any agreement
                   but the client’s account is carried by an          amended as necessary.
                   affiliate in Europe. Given that the client will
                   have a direct relationship with the European       Whilst the impact of MiFID on firms in Asia may
                   firm, that relationship will largely be            not necessarily be significant, to the extent any
                   governed by MiFID requirements. This will          action is required, there is now only four months
                   also have an impact on the Asian affiliate to      to implementation and firms should move
                   the extent that it is involved in the account      quickly to ensure that they are in a position to
                   opening process. For example, the Asian            meet the 1 November 2007 deadline.

                 What is Core Investment Services?
                 The “core investment services” under the ISD are: receptions and transmission of orders,
                 dealing on own account, dealing as agent, discretionary investment management, underwriting
                 and placing of issues of investment.

                 MiFID introduces the new core investment services of providing investment advice and
                 operation of a multilateral trading facility (MTF). In addition, there is a new ancillary service of
                 providing investment research and the range of instruments to which the directive applies is
                 expanded to include commodity derivatives.

34                                                                                                         July/ August 2007
July/ August 2007   35

36             July/ August 2007

Shared By: