Asset Managers are not subject to MiFID Transaction Reporting obligations

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1 Mr Arthur Docters van Leeuwen Chairman Committee of European Securities Regulators (CESR) Avenue de Friedland F PARIS France Ref In advance by secretariat@cesr.eu Dear Mr Docters van Leeuwen, MiFID TRANSACTION REPORTING REQUIREMENTS As a representative of the European Investment Management industry, EFAMA 1 wishes to express regret for the lack of consultation by CESR on this issue, except for the use of reference data standard codes in Transaction Reporting. 2 In view of upcoming decisions by CESR at Level 3, we summarise our analysis of Transaction Reporting requirements under MiFID in the enclosed Annex and discuss the main points of our position in this letter. Asset Managers are not subject to MiFID Transaction Reporting obligations Art. 25(3) of the Level 1 Directive states that Member States shall require investment firms which execute transactions in any financial instruments admitted to trading on a regulated market to report details of such transactions to the competent authority as quickly as possible, and no later than the close of the following working day. This obligation shall apply whether or not such transactions were carried out on a regulated market. Table 1 in Annex I of the implementing Regulation lists the fields for reporting purposes and under Reporting Firm Identification refers to a unique code to identify the firm which executed the transaction. EFAMA does not believe that asset managers in most cases fall under the obligations of Art. 25(3), as they do not execute transactions when they utilize an intermediary such as a broker. Asset managers are placing orders with other entities for execution, as also 1 EFAMA is the representative association for the European investment management industry. Through its member associations from 19 EU Member States, Liechtenstein, Norway, Switzerland and Turkey, as well as its 42 corporate members, EFAMA represents at mid-2006 about EUR 14 trillion in assets under management, of which EUR 7 trillion through about 46,000 investment funds. For more information, please visit 2 Public Consultation of December 2006 (Ref: CESR/06-648b). 18 Square de Meeûs B-1050 Bruxelles Fax info@efama.org

2 2 Mr A. Docters van Leeuwen recognized by the implementing Directive in the context of MiFID Best Execution requirements (Art. 45(1)). Asset managers provide the service of Portfolio Management. Execution of on behalf of clients is a separate service, provided by firms offering market intermediation in different forms, such as the provision of market liquidity and execution services. This service is provided regardless of the manner in which the asset manager chooses to trade, or the capacity in which he trades: therefore it will be irrelevant whether the asset manager goes directly to a dealer to trade, trades with a broker as principal or agent, deals through a pure agency broker, or trades through a broker s automatic dealing system. The asset manager will always carry out his business on behalf of his underlying client, as part of his portfolio management service. The broker/dealer, by contrast, whatever capacity he acts in, executes orders for the client as his service and, as such, is subject to the transaction reporting requirements. One report is sufficient to achieve MiFID s goal MiFID does not explicitly foresee multiple reports being made, and we believe that a single report is sufficient to fulfil the goal of upholding the integrity of markets. If further investigation is needed on a specific transaction, the competent authority can request at any time information from the asset manager or even inspect its records. Furthermore, multiple reports would cause an enormous amount of data that regulators would need to store but could hardly be in a position to cross-reference, resulting in high costs without any benefit. Contrary to provisions regarding post-trade disclosure, MiFID does not specify which party to the transaction (seller or buyer) is under the obligation to report it, and EFAMA believes it would also be important to clarify this aspect, to avoid multiple reporting also in cases where for example two asset managers are direct counterparties to a transaction. Limitation to liability in case of delegation of transaction reporting Art. 25(5) of the Level 1 Directive states that Member States shall provide for the reports to be made to the competent authority either by the investment firm itself, a third party acting on its behalf or by a trade-matching or reporting system approved by the competent authority or by the regulated market or MTF through whose systems the transaction was completed. In the few cases where asset managers are deemed to be executing orders (see Annex), they will probably want to make arrangements to delegate transaction reporting to a third party (usually an intermediary). It is highly important to clearly define and limit their liability in those circumstances. EFAMA believes that when an asset manager concludes a written agreement with the third party delegating the transaction reporting, and takes reasonable steps to verify compliance by the third party, the asset manager must be deemed to have fulfilled its obligations under MiFID. In practice, intermediaries will be reporting enormous amounts of transactions on a daily basis, and it would be impossible for the asset manager to find and check all transaction

3 3 Mr A. Docters van Leeuwen reports. Should asset managers be unable to rely on the third party with limited liability, they might be forced to set up their own infrastructure. Very high costs for the industry and for investors A duplication of infrastructure would be very costly and could potentially threaten the existence of small firms, without providing any improvement in the quality of reporting. Higher infrastructure costs could also force an increase in portfolio management fees charged to investors. Although we do not have exact figures regarding the costs for the whole industry, we very conservatively estimate set-up costs to be at least EUR per firm, followed by high ongoing fixed costs, hardly linked to transaction volumes. Client identification Art. 13(4) of Implementing Regulation1287/2006 gives Member States the option to require the identification of clients on whose behalf the investment firm has executed that transaction. EFAMA believes that in this case the name/id of the direct client should be reported, that is the name of the asset manager (and not the name of the ultimate account holder), as the asset manager is the client of the firm executing the transaction and, in the case of portfolio management services, it is the entity taking the decision to deal. The competent authorities are free to require further information (also regarding the underlying client) from the asset manager for specific transactions. Cross-border outsourcing solutions CESR guidelines should also provide for clear reporting obligations (in terms of competent authority) and avoid duplication in cases where trading is outsourced cross-border to a specialized entity within a multi-national group. Conclusions CESR s guidelines should provide for the implementation of MiFID s transaction reporting requirements excluding goldplating and unnecessary regulatory burdens, allow for the broadest possible use of the already existing reporting infrastructure (set up by intermediaries), and provide for appropriate liability safeguards for asset managers. Multiple reporting reduces supervisory efficiency and does not provide higher investor protection. On the contrary, investors would benefit from a decrease in costs and workload for supervisors and industry. When it comes to transaction reporting, more is not better. EFAMA believes that reporting should be limited to what is necessary to identify transactions that need to be investigated. In

4 4 Mr A. Docters van Leeuwen those very limited cases regulators can -- and should -- ask for further information from the parties involved in a specific transaction. We remain at your disposal for further clarification and hope very much that CESR will come back to us soon on this matter. Yours sincerely, Steffen Matthias Secretary General Cc: Fabrice Demarigny, CESR Arthur Philippe, CESR

5 Annex Mr Docters van Leeuwen 08/01/2007 Annex: Transaction Reporting under MiFID 1. MiFID does not expressly define what is meant by execute a transaction. However, it is implicit from the way in which the term execute or execution is used in MiFID and the Level 2 Directive, and the general scheme of these directives, that asset managers execute transactions only in very limited circumstances. 2. Executing a transaction" should be interpreted in the light of the fact that MiFID characterises investment firms by reference to the investment service or activity they perform. In this context it is apparent that executing transactions is essentially an activity performed by firms which execute orders on behalf of customers (MiFID Annex 1, Section A(2)) or deal on own account (MiFID Annex I, Section A(3)) that is to say, sell side firms. By contrast, the characteristic activity of asset managers is portfolio management (MiFID Annex I, Section A(4)), which, although it necessarily involves giving effect to decisions to buy and sell, is a distinct activity from "executing transactions". The execution by an asset manager of its investment decisions is an integral part of its service of "portfolio management". 3. In cases where there is an order this basic distinction is clearly brought out by Article 45 of the Level 2 Directive. This Article refers to the asset manager placing orders with other entities for execution. It is only the other entities which perform the execution, the asset manager places orders. A similar distinction is drawn in Article 8 of the Level 2 Regulation (dealing with record-keeping), which refers to firms that transmit orders to another person for execution. 4. The fundamental difference between the roles of the asset manager and the sell side is equally determinative in cases where a transaction is executed by the sell side without the asset manager having placed an order. The asset manager goes to the sell side to obtain execution of its decision to deal. The same analysis therefore applies, and it is the sell side firm that executes the transaction. 5. The position is different where the sell side is not involved. Where an asset manager crosses a transaction internally, without putting it through a broker, a transaction has clearly been executed and it can only be the asset manager who has executed it. This is also the case where the asset manager trades directly with another asset manager. 6. Accordingly: -- where an asset manager passes an order to another firm for execution by that firm, that other firm will execute the transaction; -- where an asset manager accepts a quote from a dealer either directly or by means of an automatic dealing system (that is, trading with the dealer through the system), the dealer will execute the transaction;

6 Annex Mr Docters van Leeuwen 08/01/ where an asset manager crosses a transaction, without putting it through a broker, the manager itself will execute the transaction; -- where an asset manager deals directly with another asset manager, the manager itself will execute the transaction. * * *