Investor Protection. Working Group Meeting

Transcription

1 Investor Protection Working Group Meeting

2 Target Market Update Complex/Non-Complex Classification Product Intervention Leveraged Instrument Page 2

3 Target Market Assessment Update on the working assumption Dirk Henkels

4 Target Market Assessment Update Manufacturer SIX Data EEA Manufacturer 1) Target Market Definition 2) Distribution Strategy Distributor Non-EEA Manufacturer 1) Product features key reference data 2) Additional risk data (PRC, Credit Ratings, etc.) 3) Product Documentation Distributor 1) Define granular Target Market 2) Obtain product information 3) Define Target Market Page 4

5 Target Market Assessment Open Issues Target Market Categories 1) Client type 2) Knowledge & Experience 3) Ability to bear losses 4) Risk/Reward Profile 5) Clients Objectives 6) Clients Needs Distribution Strategy Will a standard emerge? Where will the TM be published? How will a change be communicated? Who are the issuers (equities, debt, ETDs)? Page 5

6 Target Market Update on the Working Assumption Product Features positive Target Market (MF): negative Target Market (MF): Based on ESMA/2016/1436 Consultation Paper as of Product Feature product specific data which is not dependent on the manufacturers target market e.g. risk figure, time to maturity, etc. Positive Target Market the manufacturer intends the product to be used by investors, who match the attributes of the positive target market. Negative Target Market the manufacturer intends the product NOT to be used by investors, who match the attributes of the negative target market. Page 6

7 Target Market Update Type of Clients Investor Protection Topic Product Features positive Target Market (MF): negative Target Market (MF): MF = Manufacturer possible selection TM by MF field definition # 1 Target Market Description 1.1 Targeted type of clients example: example: retail Y multi list professional Y multi list (eligible counterparty) multi list Predefined list No product feature, no calculation by SIX Multiple selection possible Page 7

8 Target Market Update Knowledge and Experience Investor Protection Topic Product Features positive Target Market (MF): negative Target Market (MF): MF = Manufacturer possible selection TM by MF field definition # 1 Target Market Description 1.2 Knowledge & Experience example: example: retail client with basic know how & experience Y multi list retail client with intermediate / informed know how & experience Y multi list retail client with expert know how & experience multi list professional know how & experience Y multi list Predefined list accepted by industry? Otherwise each manufacturer will use his own definition in text form and there will be no standardization. No product feature, no calculation by SIX Multiple selection possible Page 8

9 Target Market Update Ability to Bear Losses Investor Protection Topic Product Features positive Target Market (MF): negative Target Market (MF): MF = Manufacturer possible selection TM by MF field definition # 1 Target Market Description 1.3 Ability to bear losses example: example: fully protected capital (100%), no loss calc SIX / ev. override by MF / single Y multi list partially protected capital (>0%,<100%), partial loss calc SIX / ev. override by MF / single Y multi list not protected capital (0%), total loss calc SIX / ev. override by MF / single multi list loss of more than capital (<0%), potentially additional payments required calc SIX / ev. override by MF / single Y multi list Predefined list Single product feature Calculation by SIX, can be overridden by manufacturer Covers market risk only, credit and liquidity risk not considered Multiple selection for target market possible Page 9

10 Target Market Update Risk Indicators Investor Protection MF = Manufacturer positive negative possible Target Target field Investor Protection Topic Product Features selection MF = Manufacturer Market Market definition positive negative TM by MF (MF): (MF): # possible Target Target field 1 Target Market Description Topic Product Features selection Market Market definition 1.4 Risk / reward profile TM by MF (MF): (MF): # conservative Y multi list 1 Target balanced Market Description multi list 1.4 Risk speculative / reward profile example: Y example: multi list conservative SRI of PRIIPs (only Structured Products / Funds / ETDs / specific Bonds; all for Retail) feed MF / single 6 Y2 multi value list balanced SRRI of UCITS (only Funds; for Retail) feed MF / single 6 2 multi value list speculative PRC aggregated risk by SIX calc SIX / no override by MF / single Y multi n/a value list SRI PRC of Market PRIIPs risk (only by Structured SIX Products / Funds / ETDs / specific Bonds; all for Retail) calc SIX / feed no override MF / single by MF / single 6 2 multi n/a value SRRI PRC Credit of UCITS risk (only by SIX Funds; for Retail) calc SIX / feed no override MF / single by MF / single 6 2 multi n/a value PRC aggregated liquidity risk risk by SIX by SIX calc SIX / no override by MF / single n/a value PRC Market risk by SIX calc SIX / no override by MF / single n/a value PRC Credit risk by SIX calc SIX / no override by MF / single n/a value PRC liquidity risk by SIX calc SIX / no override by MF / single n/a value SRI defined in PRIIPs regulation for specific instruments and provided by manufacturer. SRRI defined in UCITS regulation for specific instruments and provided by manufacturer. PRC defined and calculated by SIX for all instruments, cannot be overridden Page 10

11 Target Market Update Risk / Reward Profile Investor Protection Predefined list accepted by industry? Otherwise each manufacturer will use his own definition in text form and there will be no standardization. Topic No product feature, no calculation by SIX Multiple selection possible Product Features positive Target Market (MF): negative Target Market (MF): MF = Manufacturer possible selection TM by MF field definition # 1 Target Market Description 1.4 Risk / reward profile example: example: conservative Y multi list balanced multi list speculative Y multi list SRI of PRIIPs (only Structured Products / Funds / ETDs / specific Bonds; all for Retail) feed MF / single 6 2 multi value SRRI of UCITS (only Funds; for Retail) feed MF / single 6 2 multi value PRC aggregated risk by SIX calc SIX / no override by MF / single n/a value PRC Market risk by SIX calc SIX / no override by MF / single n/a value PRC Credit risk by SIX calc SIX / no override by MF / single n/a value PRC liquidity risk by SIX calc SIX / no override by MF / single n/a value Page 11

12 Target Market Update Investment Horizon example: example: Predefined list Multiple product feature Calculation by SIX Can be overridden by manufacturer Multiple selection for target market possible Page 12

13 Target Market Update Investment Objectives Investor Protection possible Investor Protection MF = Manufacturer field Topic Product Features selection Market Market definition positive negative TM by MF (MF): (MF): possible # Target Target field Topic Product Features selection 1 Target Market Description Market Market definition TM by MF 1.5 Clients' Investment Objectives (MF): (MF): # short term (<3Y, calc for products with maturity only) calc SIX / ev. override by MF / single Y multi list 1 Target Market Description medium term (3Y-5Y, calc for products with maturity only) calc SIX / ev. override by MF / single 1.5 Clients' Investment Objectives example: example: multi list long term (>5Y, calc for products with maturity only) calc SIX / ev. override by MF / single Y multi list short cash liquidity term (<3Y, supply calc for products with maturity only) calc SIX ev. override by MF single Y multi multi list list medium retirement term provision (3Y-5Y, calc for products with maturity only) calc SIX / ev. override by MF / single Y multi multi list list long capital term preservation (>5Y, calc for products with maturity only) calc SIX / ev. override by MF / single Y Y multi multi list list cash income liquidity supply multi multi list list retirement growth provision Y multi multi list list capital long term preservation growth with greater risk Y Y multi multi list list income multi list growth multi list long term growth with greater risk Y multi list Predefined list accepted by industry? Otherwise each manufacturer will use his own definition in text form and there will be no standardization. No product feature, no calculation by SIX Multiple selection possible positive Target negative Target MF = Manufacturer Page 13

14 Target Market Update - Clients' Needs Investor Protection Topic Product Features positive Target Market (MF): negative Target Market (MF): MF = Manufacturer possible selection TM by MF field definition # 1 Target Market Description 1.6 Clients' needs example: example: strategy (green, ethical, religious, etc.) feed MF / multi multi text geographical (country, region, etc.) feed MF / multi multi text tax (tax saving, type of income, etc.) feed MF / multi multi text sector (technology, finance, etc.) feed MF / multi multi text Predefined list of categories accepted by industry? Each manufacturer can use his own definition in text form within each category, there will be no standardization. No product feature, no calculation by SIX Multiple selection possible Page 14

15 Target Market Update Distribution Strategy Investor Protection Topic Product Features positive Target Market (MF): negative Target Market (MF): MF = Manufacturer possible selection TM by MF field definition # 1 Target Market Description 1.7 Distribution Strategy / Channel example: example: execution only (retail) Y multi list advised distribution (retail) Y multi list portfolio management (retail) Y multi list non retail Y multi list Predefined list accepted by industry? Otherwise each manufacturer will use his own definition in text form and there will be no standardization. No product feature, no calculation by SIX Multiple selection possible Page 15

16 Target Market Update Implementation Financial Instrument TM 1 Informed retail investor Long term horizon Not willing to lose 100% of capital TM 2 Expert retail investor Short term horizon Risk tolerance below 5 Growth objective TM3 Basic retail investor Short term horizon Liquidity needs TM n Works only with structured attributes, not with text fields Page 16

17 Complex/Non-complex Classification Update Michael Pifko

18 Main characteristics according to MiFID II article 25 (4) (a) Shares admitted to trading on RM, MTF or equivalent third-country market no embedded derivative Bonds and other securitised debt admitted to trading on RM, MTF or equivalent third-country market no embedded derivative or structure which makes it difficult to understand Money-market instruments no embedded derivative or structure which makes it difficult to understand UCITS only non structured Structured deposits no structure which makes it difficult to understand the risk of return or cost of exiting the product before term; Other non-complex FI s Page 18

19 Main characteristics according to article 57 (DR) No embedded derivative No leverage (potential liability exceeding cost of acquiring the instrument) Regular trading at public prices, validated.. independent of issuer Adequately comprehensive information publicly available no exit charges that have the effect of making the investment illiquid No clause, that could fundamentally alter the nature of risk of the investment or pay out profile Page 19

20 Delegated Regulation article 57 MiFID II article 25(4) (a) Type of FI Delegated Regulation MiFID II Shares (pl. van.) quoted on RM if regular & "fair prices" non complex, including not regularly traded Shares (pl. van.) quoted non RM if regular & "fair prices"??? Bonds (pl. van.) quoted on RM if regular & "fair prices" non complex, including not regularly traded Bonds (pl. van.) quoted non RM if regular & "fair prices"??? Money-market (not quoted)??? no embedded derivative / structure... UCITS (no derivative embedded) if regular & "fair prices" non complex, including not listed Structured deposits probably complex no structure making it difficult.. Other FI s without embedded derivative (non UCITS, ETF etc.) if regular & "fair prices"??? Open points in clarification: example common share not listed on RM etc. Page 20

21 Overview classification SIX based on TKT Non classified can be regarded as «non MiFID eligible» Rule set to be applied on «Conditional»: estimated «non-complex» according to rule set % complex conditional no classification non complex Page 21

22 Classified Complex based on TKT TKT Description E MiFID II MiFID 1 6 Structured instruments complex complex 9 Rest-quota attestation (DE) complex complex A Right, subscrip. right, fraction acc. complex complex K Technical instrument complex complex M Leveraged products complex complex P Futures complex complex R Commodities complex complex V Convertible bond complex complex Z Options (call/put) complex complex Page 22

23 «Conditional»: to be classified as complex or non-complex based on SIX-ruleset (based on all relevant instrument-characteristics) TKT Description MiFID II MiFID 1 0 Bond, compound instr. cons.of several bonds conditional non complex if NO deriv. Char. 1 Share, unit, particip. cert. conditional non complex if tradable & NO deriv. Char. 2 Bank-issued MTN, German savings bond conditional complex 7 Trust-Shares conditional conditional C Trust cert.unit/ fund, invest. foundation units conditional conditional D Trust cert. (co-opertive soc.) conditional non complex if tradable & NO deriv. Char. L FRN, debenture with var. interest rate conditional complex Q Money market instrument (CD/CP) conditional non complex if NO deriv. Char. S Other instruments with cash-flow conditional non complex if tradable & NO deriv. Char. Page 23

24 TKT s not classified ( non MiFID eligible ) TKT Description E MiFID II MiFID 1 Comments 5 Insurance policies no classification non MiFID Only Sammelvaloren at SIX. 8 Interest Rate no classification complex not a fungible FI E Invest.-/deposit-/savings book no classification complex Only Sammelvaloren at SIX. F REPO/Securities Lending and Borrowing no classification complex not a fungible FI H Synthetic instrument no classification not a fungible FI I Forward transactions no classification complex not a fungible FI J Combined transactions no classification complex not a fungible FI N REPO-Basket no classification complex not a fungible FI O ETD Contract specification no classification ---- not a fungible FI X Technical currencies no classification complex not a fungible FI Y Indices no classification complex not a fungible FI Page 24

25 Other TKT s not classified (inactivated TKT s) TKT Description E MiFID II MiFID 1 Comments inactivated per VDF 3 Coupon/Talon complex II/ Other instruments without cash-flow G Dividend-right cert./dividend coupon (inactive) non complex if tradable & NO deriv. Char. T Coins (inactive) non complex U Precious metals (inactive) ---- W Precious metal certificate (inactive) inactivated per VDF II/2016 Page 25

26 Overview rule set SIX Inclusion of relevant attributes (similar to CFI-classification) Conditions (callable, putable etc.) Interest conditions Variable / fix UL s used for fixing of rate Tradeablity Listings (RM, MTF, etc.) Frequency of trading (according to Delegated Regulation) Etc. Page 26

27 Process of classification SIX 1.) Initial classification - Ruleset classifying all relevant & active FI s 2.) Lifecycle - Ruleset triggered by change of relevant attributes 3.) Possibility to override & block automatic ruleset when : - classified by issuer - or other reliable sources (NCAs, ESMA, official documents) Classification will be marked accordingly Page 27

28 Complex classification / Local Flavors (Gold Plating) Italy & Spain non-complex complex very / highly complex classification based on different criteria Detailed analysis required to create an appropriate rule set; to be treated only after implementation of standard solution Denmark Danish mortgage backed securities (MBS) are non-complex all Hedge Fonds are classified as complex implemented under MiFID I, rules will be copied to MiFID II rule set Page 28

29 Product Intervention Requirements Krassimira Kostova

30 Overview Regulation The investor protection elements of MiFIR introduce under Article 40 specific product intervention powers where ESMA and NCA are able to temporarily prohibit or restrict the marketing, distribution or sale of a financial instrument or a type of financial activity or practice Requirement 1) Monitor different sources in different languages for product intervention notifications 2) Identify the instruments impacted by the notifications and indicate the respective restrictions Page 30

31 Example BAFIN On 28 July 2016, (4) BaFin published a draft of its respective product intervention in the form of a General Administrative Act (Allgemeinverfügung). The proposed order would ban issuers, companies and persons from (1) marketing, distributing or selling (2) credit-linked notes (3) to retail investors. Comments on this draft may be submitted up to 2 September The type of client (3) The type of product(s) (2) The type of service (sales, marketing, execution, advisory) (1) The territorial application - DE Validity (time from time to) (?) The General Administrative Act shall be deemed announced on the day following the public announcement. The issuing agency - (4) Others (incl. link to the official notice) - Hearing: General Administrative Act pursuant to section 4b (1) of the German Securities Trading Act (Wertpapierhandelsgesetz WpHG) regarding creditlinked notes Page 31

32 Leveraged Instrument Requirements Krassimira Kostova

33 What is a leveraged instrument? MIFID II AIFMD MIFID II doesn t provide a definition; Art 62 (2) requires frequent reporting to clients holding leveraged instruments. Art. 25 (4) and ESMA s Guidelines on complex debt instruments and structured deposits, (j) Debt instruments with leverage features. This category includes debt instruments structured in such a way that the return or losses to the investor may occur at multiples to the initial investment In Delegated Regulation from , Article 57 (c)..does not involve any actual or potential liability that exceeds the costs of acquiring the instrument Art 4(1)(v) defines leverage as any method by which the AIFM increases the exposure of an AIF it manages whether through borrowing of cash securities, or leverage embedded in derivative positions or by any other means UCITS With UCITS III, the product directive expanded the type of available investments to allow a UCITS to invest in derivatives not only for efficient portfolio management or hedging but for investment purposes as well Page 33

34 SIX Definition of Leveraged Instrument Leverage embedded in a financial instrument is the amount of market (or underlying asset) exposure per unit of committed capital. In other words, an instrument embedded leverage is its percentage change in price for a one percentage change in underlying. It measures the instrument return, profit or loss, relative to the return of the underlying. Page 34

35 How can we apply this definition? Asset class SIX ST Rule ETDs (futures and options) P,Z Leveraged Leveraged structured products M Leveraged Investment Funds 7, C Leveraged only if leveraged field is provided/available Complex debt and structured products 0,L,V,6 Leveraged only if coupon or capital repayment is underlying dependent with participation factor <> 100% Equities (common shares); Money Market Instrument 1, Q Non-leveraged The leveraged instrument flag can be overridden by the issuer Page 35

36 Roadmap J F M A M J J A S O N D Review new structures Freeze structures Software development Testing and implementation VDF Release Target Market/Complex/non-complex /Leverage Corrections/ finetuning Testing and implementation VDF Release Analysis Review new structures Freeze structures Software development Testing and implementation Local Flavors/Product Intervention Page 36

37 Product Costs Krassimira Kostova

38 MIFID II Requirements description examples One-off charges entry costs distribution fee (18,27); IEV (26); front-end load (1) exit costs redemption fee (2); deferred load (15) Product Costs On-going charges All costs related to the transactions all on-going cost and charges related to the management of the financial product that are deducted from the value of the financial instrument all costs and charges that are incurred as a result of the acquisition and disposal of the instruments administration fee (7); shareholder service fee(16) management fee (3); custody fee (13) KIID Ongoing Charges Figure (24) TER Total Expense Ratio (25) transaction fee (processing fee (20)) Incidental Costs (performance fees) performance fee carried interest performance fee (5) Page 38

39 SIX Product Costs Data Fees/Charges Types Administration fee Audit Fee Distribution Fee Entry fees Exit fees IEV Incidental costs Management Fee One-off costs On-going charges Performance fee Redemption Fee Transaction fee... Implementation In existing VDF structures with possible extension of the table values where required The fees and charges will be sourced from the manufacturers and processed straight through No calculation or aggregation or any kind of reformatting by SIX Page 39

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