MiFID: The Practical Aspects. Tuesday 6 June 2006

Transcription

1 MiFID: The Practical Aspects Tuesday 6 June 2006

2 Agenda - am Chaired by Clive Shelton PIMA Deputy Chairman 9.30 Chairman s Introduction: Clive Shelton 9.40 Regulatory Issues: 9.40: Level 2 Final Measures: Diego Escanero (Senior Officer for Investment Firms CESR) 10.10: UK perspective on issues integrating EU directive: Ric Garvey (Institutional Business Policy team, FSA) 10.40: MiFID: The practical aspects: Stephen Hanks (Financial Services Strategy Team, HM Treasury) Break Key Themes risks & actions 11.25: Client Classification - Philip Painter (Associate Director Etheios) 11.55: Outsourcing - Anthony Epstein (Senior consultant FMConsult) 12.25: Panel session Lunch

3 Agenda - pm Chaired by Clive Shelton PIMA Deputy Chairman Key Themes risks & actions 14.00: Senior management arrangements & controls Mervyn Taylor (Senior Manager RSM Robson Rhodes LLP) 14.25: Transparency & Reporting Richard Young (Market Reform Manager, Securities Markets SWIFT) 14.50: Best execution: Roger Turner (Partner PricewaterhouseCooper) 15.15: Panel session Break Practitioners experiences 16.00: Mellon International: Kevin Tolan (Head of Corporate Compliance) Overview 16.20: Oliver Lodge (Kinetic Partners) Chairman s summary and close

4 Key practicalities of the Markets in Financial Instruments Directive Diego Escanero Senior Officer for Investment Firms CESR

5 Introduction EU Context MiFID is part of the FSAP Importance for Firms Replaces ISD New standards organisational controls conduct of business market aspects Broader scope of passportable business

6 Organisational Requirements Conflicts of Interest Outsourcing Internal risk management systems, resources, procedures and compliance Record keeping

7 Conduct of Business main aspects Client Classification Suitability and Appropriateness Best Execution

8 Markets aspects and other policy changes Pre- and post-trade trade transparency Other COB and Markets aspects of MiFID

9 Timing Likely MiFID key dates: - Transposition: 31 January Implementation: 1 November 2007

10 Summary New business opportunities for wholesale firms with passport extension and greater European regulatory harmonisation Important that firms start preparing now for MiFID changes

11 Joint Implementation Plan FSA & HM Treasury joint initiative Outlines approach to implementation Detailed consultation programme Close involvement with industry MiFID Connect Bilateral discussions with firms

12 Key Messages - SYSC CP : implementation of organisational requirements of MiFID and CRD - Common Platform : Unified set of requirements - For Firms with good management oversight and / internal controls, impact will be small

13 Implementation of MiFID / CRD 3 options (1) Current regime amended (2) Copy out both directives : 2 parallel sets of requirements (3) Third Way : Common Platform : - Unified standards, based on copy-out - Unless CBA not supportive - Proportionate - Consistent with Better Regulation

14 Components of the common platform General organisational (eg governance, business continuity, accounting and audit) Employees and agents; Compliance; Risk control; Outsourcing; Record keeping; and Conflicts of interest.

15 Transitional Choices for Firms subject to CRD Switch to Common Platform : between 1 Jan and 1 Nov 2007 Before switch : CRD and existing SYSC After switch : Common Platform Switching early : only one change of standards Switching after 1 January : two changes

16 Next Steps and Timelines Nov Oct Sep Aug July June May Apr Mar Feb Jan Dec Nov Oct Sep Aug July June May Apr Mar Feb Jan May Aug Q4 Nov SYSC CP Published Aug 06 Consultation Period Closed Feedback Statement Published 1 Jan 2007 Make rules 31 Jan 2007 MiFID Transpositio n Date 1 Nov 2007 MiFID Implementation Date

17 Article 21 Principle Investment firms must take "all reasonable steps" to obtain the best possible result when executing client orders

18 Three main chapters of Best Execution DP Execution arrangements and policy Dealer markets Requirement to review and monitor

19 Chain of Execution: Example 1

20 Chain of Execution: Example 2

21 Article 21 Factors Price Costs Speed Likelihood of execution and settlement Size Nature Any other consideration relevant to the execution of the order

22 Options in DP for Dealer markets Article 24 Eligible Counterparty regime no best execution Interpose a broker broker has duty not dealer Benchmark approach

23 Requirement to review At least annually Look beyond current execution arrangements and execution venues Use factors in Art 21(1) and the relative importance assigned to assess venues

24 Requirement to monitor Compliance with firm s execution policy Whether the firm is actually obtaining the best possible result Compare comparable transactions on same venue Compare comparable transactions on other venues in execution policy

25 Next Steps Consultation period runs to August 17 We plan to publish a Feedback Statement Our draft handbook text for best execution will appear in the Reforming COB CP, planned for October 2006 We will make our rules on MiFID by the end of January 07. Firms will have to comply with MiFID by 1 November 07.

26 MiFID The practical aspects Stephen Hanks Financial Services Strategy Team

27 Implementing measures We avoided: Regulation of generic advice Regulation of content of client agreements No distinction between retail and professional clients Notification of all existing clients of their MiFID status Prescriptive approach to suitability and appropriatenes

28 Scope Can we extend the range of firms who can benefit from the article 3 exemption? No exemption is narrowly based Can we exempt products that are not available on a cross-border basis from MiFID? No but considering scope of directive

29 Direct offer business Can we exempt direct-offer business from the appropriateness test? No the directive has no such carve out Existing clients are grandfathered Recital 30 of level 1 exempts sales of noncomplex products made by means that by its very nature is general and addressed to the public or a larger group or category of clients or potential clients

30 Client classification Transitional provision in level 1 the effect of which the FSA will be consulting on shortly Level 2 exempts existing clients from notification of their status under MiFID Obligation to notify clients in a durable medium about rights to change classification

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32 Client Classification: Concrete or Quicksand? Prepared by Philip Painter Associate Director Etheios Group Limited Speaker: The focus of this presentation is to bring some practical thinking to this area of MiFID. June 2006

33 Overview Client classification Pre & Post MiFID With examples What is different? Who is impacted? Why opt up or down? Does client s opting up or down affect me? Client perception & firm perception Conclusion Do we need to be concerned with client classification? Etheios Group Limited 2006

34 Pre and Post MiFID Pre-Nov Post-Nov Market Counterparty counterparty Eligible Intermediary Customer Client Professional Private Customer Retail Client Etheios Group Limited 2006

35 Who is affected? In general, firms affected by the directive include: investment banks; asset managers; private banks/wealth managers; stock brokers and broker dealers; corporate finance firms; many futures and options firms; some commodities firms; and retail banks and building societies with securities and investment product businesses. Etheios Group Limited 2006

36 What is different? New client classification under MiFID consist of two main types: retail and professional clients. Many financial service firms can agree to be treated as Eligible Counterparties. Subject to light-touch regulatory regime Exempt from best execution rules Criteria for classification as retail client are more widely drawn than those for current classification as private customer. More difficult for retail client to opt-up to professional client. Speaker: Whilst there are 3 types of classification, the presentation will focus mainly on retail and professional. Etheios Group Limited 2006

37 Who is a professional client? Answer Annex II of Directive Investment firms Authorised Entities Other authorised or regulated financial institutions Insurance companies Collective investment schemes and management companies of such schemes Pension funds and management of such funds and/ or Large undertakings meeting two of following size requirements on a company basis Balance sheet total EUR Net turnover EUR Own funds EUR Entities mentioned above are professional, however, investment firms must allow these firms to request non-professional treatment and investment firms may agree to provide a higher protection. Investment firms must inform clients, prior to provision of services, that on basis of information available to the firm, the client is deemed to be a professional. Speaker: So who is a professional client? In ANNEX II of first level Directive, a number of criteria are already provided. A professional client is one who possess the experience, knowledge and experience. Etheios Group Limited 2006

38 Firm vs. Client: Who informs Who? ANNEX II - Directive The Firm: The firm must also inform the customer that he can request a variation of the terms of the agreement in order to secure a higher degree of protection. The Client: It is the responsibility of the client, considered to be a professional client, to ask for a higher level of protection when it deems it is unable to properly assess or manage the risks involved. Speaker: At this point in presentation, we move from the relative comfort of concrete toward quicksand. This is the point firms need to understand the limitations of current systems and processes. Etheios Group Limited 2006

39 Retail opting-up to Professional Criteria in ANNEX II - Directive Fitness Test: Assessment of expertise & knowledge Apply to managers and directors or person authorised to carry out transactions on behalf of entity. Two of these criteria must be met: Carried out transaction in significant size, on relevant market, at average frequency of 10 per quarter over previous four quarters. Etheios Group Limited 2006 Financial instrument portfolio, defined as including cash deposits and financial instruments exceeds EUR Works or worked in financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged. Speaker: These are the market tests to allow retail clients to move into the professional criteria.

40 Procedure for Opting-up Defined in ANNEX II - Directive Retail clients waiving the detailed rules of conduct must follow these procedures: The Client must state in writing to the investment firm that they wish to be treated as professional client, either generally or in respect of a specific service or transaction. The Investment firm must give a clear written warning of the protections and investor compensation rights they may lose. The Client must state in writing, in a separate document from the contract, that they are aware of the consequences of losing such protections. Etheios Group Limited 2006

41 How does this re-classification impact other areas of my firm s operations? How does client classification trickle through other areas of my operation? Best Execution Know Your Customer (KYC) Enhanced - Retail Enhanced - Retail Suitability and appropriateness Experience, knowledge, financial objective and financial situation Information to Clients Client Reporting Enhanced- Retail Enhanced - Retail Etheios Group Limited 2006

42 Etheios Group Limited 2006 Example of Information to clients from Directive Article 29(8) from Level 2 If a professional client requests it, an investment firm shall provide that client with any type of information in a durable medium Durable medium any instrument which enables a client to store information, access in future, and ability to retrieve unchanged reproduction of information. (Article 2) Article 31 from Level 2 Member States shall require investment firms to provide clients or potential clients with a general description of the nature and risks of financial instruments, taking into account, in particular, the client s classification as either a retail client or a professional client. That description must explain, in sufficient detail, the nature of the specific type of instrument concerned, as well as the risks particular to that specific type of instrument. Speaker: The definition of durable medium comes from Article 2 of the level 2 technical implementing Directive published in February 2006.

43 Example: Directive specifics for EC s However, where that eligible counterparty expressly requests treatment as a retail client, the provisions in respect of requests of nonprofessional treatment specified in the second, third and fourth sub-paragraphs of Section I of Annex II to Directive 2004/39/EC shall apply. Article 50 L2 Speaker: Examples where an eligible counterparty may opt down to retail/professional client status may arise where orders may be executed outside a regulated market. This can be found in Article 21 (section 3). Etheios Group Limited 2006

44 Opting-Up and Opting Down: Retail Professional Client Opting-Up Less protection Wider scope for investing in financial instruments Less consideration from financial services firm Opting-Down Client More protection Less scope for investing in financial instruments Complete consideration from financial services firm Firm Firm Less paperwork Less consideration given to client More extensive investment advice and investing More paperwork Complete consideration required for client Constrained on financial instruments and advice given to clients Etheios Group Limited 2006

45 Does client s opting up or down affect my operations? Client Perception: My investment firm allows me to gain more protection by opting down, but also enables me to opt-up for gaining greater diversity in the financial markets. Firm Perception: This is going to be significant work to give client s the ability to change classification on a transaction-by-transaction basis. System changes Documentation changes Etheios Group Limited 2006

46 Conclusion To fully come to grasp with other areas of MiFID compliance, each firm should understand the new client classification requirements. IT systems need to be updated to recognise classification and opting-up or opting-down as well as accommodate the enhanced record keeping requirements. Best execution is tailored to retail or professional classifications. Client reporting tailored to retail or professional classifications. Speaker: In conclusion, I will allow you to make up your minds if the whole issue of client classifications are concrete or quicksand. I would ensure you work on the companies stance in this area as it involves changes to processes and systems and will involve additional work on your KYC rules. Etheios Group Limited 2006

47 Client Classification Responsibilities ANNEX II.2 final remarks Firms must implement appropriate written internal polices and procedures to categorise clients. Professional clients are responsible for informing investment firms about any changes, which could affect their current categorisation. Investment firms who become aware the client not longer fulfils the initial conditions, which made him eligible for professional treatment, must take appropriate action in reclassifying. Responsibility stops with senior management!!! Article 5, 9, 13 Level 1 Directive Speaker: I will leave you with these final remarks, for those in the audience classed as senior management, the buck will stop with you. Etheios Group Limited 2006

48 Contact Details Philip Painter Associate Director Etheios Group Limited Tel: +44 (0) Mob: +44 (0) Etheios Group Limited 2006

49 FMConsult Compliance Solutions MIFID - OUTSOURCE Is the Devil in the Detail? Anthony Epstein Senior Consultant FLEMING MCGILLIVRAY & Co

50 FMConsult Compliance Solutions Page 50

51 WALK THE TALK Common Platform Overview MIFID Outsourcing intentions Challenges Actions FMConsult Compliance Solutions Page 51

52 COMMON PLATFORM CP issued only 2 weeks ago Common Platform - 1st January opportunity Unified Standard for all firms Mifid & non Mifid firms CRD ancillary services Robust governance Clarity of organisation structure & responsibilities for operations Effective risk management process that Identify / manage / monitor / report Existing or Potential risks! Proportionality Nature :Scale :Complexity FMConsult Compliance Solutions Page 52

53 OUTSOURCING - HOOVER OR DYSON - 1 Part of the Implementing Directive NOT Rules Critical operations Avoid undue additional OR Outsource of important operations NOT to Impair materially the quality of IC systems Impair the ability of FSA to monitor your obligations FMConsult Compliance Solutions Page 53

54 OUTSOURCING - HOOVER OR DYSON - 2 Investment service or activity normally undertaken in house What is critical Defect = materiality = authorisation or other regulatory obligations Gauge - where risk resources are focused / good business sense Equivalent responsibility Operations and To your clients as if NOT outsourced Due skill and care Common Standards before and during outsource activity FMConsult Compliance Solutions Page 54

55 OUTSOURCING - HOOVER OR DYSON - 3 Key steps (not new) -11 Service provider must have ability & capacity and any authorisation Effective performance and assessment Properly supervise and adequately manage risks Appropriate & timely remedial action Retention of necessary expertise FMConsult Compliance Solutions Page 55

56 Challenges - 1 Wording & Interpretation Minefield FSA Common Platform EU Implementing Directive CEBS Standards (not formally adopted) Group outsourcing Extent of control Ability to influence Extra documentation Concentration Risk FMConsult Compliance Solutions Page 56

57 Challenges - 2 Concern over Retail Portfolio Management and non EU provider Regulator Agreements Regulatory equivalent standards EU Parliament considerations Necessary expertise maintained Capture all existing arrangements Map to Mifid standards FMConsult Compliance Solutions Page 57

58 STEPS to Meet these Challenges Provided by FMConsult,Anthony PIMA workshop 6th June 2006 Significant Impact Impact Small Impact business organisational requirements Outsourcing model compliance obligations management of conflicts of interest internal systems and controls* record keeping establish scope of what is outsourced map to risk strategy and profile of firm to ensure consistent measure and determine criticality check adequacy of agreements and SLA check governance,organisational & IC effectiveness ascertain culture toward managing 'people' risk confirm that exercise of due skill & care (before & during) ensure Firm & regulator access as required Cross-border, branching and passporting Notes Execution only (Shareshop) G G G G G G G G A R G R R Stockbroker G G G G G G G G A Retail Bank Private Bank Fund Manager - Retail Fund Manager - Private Wealth R A A R A A A A R A A R A A n/a n/a Transfer Agent n/a n/a n/a Agent / IFA /Distributor R R A A A G G G G G G G G A G G G G G G G G covered by UCITS? G G G G G G G G A G G G G G G G G A G G G G G G G G A A A A this is for indication purposes only and does not necessary reflect the views of the consultancy nor that of itd clients * includes outsourcing, risk management and business continuity keep your control environment porportinate in terms of NATURE, SIZE & COMPLEXITY of your business covered by UCITS? G G G G G G G G R Bank acting as distributor of products Bank acting as distributor of products Bank acting as distributor & manufacturer of products Bank acting as distributor & manufacturer of products receiving & remitting orders Depending upon FSA view and scope of business - assumed in scope for scoring 4.1 leads to opportunity to become tied agents to non- UK product manufacturers FMConsult Compliance Solutions Page 58

59 Are these challenges good or bad omens? Levelling the EU playing field Uniformed Consistent Operating Model FSA one size Fits All approach Onus on YOU to implement best practise FMConsult Compliance Solutions Page 59

60 QUESTIONS? FMConsult Compliance Solutions Page 60

61 Contact FMConsult Anthony Epstein or Dallas J McGillivray 12 Arthur Street London EC4R 9AB United Kingdom +44 (0) / +44 (0) aepstein@fmconsult.co.uk dmcgillivray@fmconsult.co.uk / FMConsult Compliance Solutions Page 61

62 Senior Management Arrangements and Controls under MiFID Mervyn Taylor June 2006

63 Impact of MiFID on senior management arrangement and controls Explicit rather than implied requirements. New rules not necessarily how existing rules were interpreted by firms.

64 General Organisational Requirements Broad requirements arising from MiFID are : Robust governance arrangements; Clear organisation structure with documented reporting lines and responsibilities; Effective processes to identify, manage and report risks; Adequate internal controls; Sound administration and accounting procedures; and Adequate safeguards for information processing systems. (Proposed SYSC MiFID Article 13(5))

65 General Organisational Requirements Firm must monitor and regularly evaluate the adequacy and effectiveness of its systems, internal control arrangements and take measures to address any deficiencies. (Proposed SYSC and MiFID Article 5(5)) Specifically that the firm has: documented organisation structure and clear allocation of responsibilities; adequate internal controls; effective internal reporting and communication; procedures and systems to safeguard the security of information.

66 Who is responsible? Senior management/supervisory function. Senior management = senior personnel (persons who effectively run the business including the governing body). Supervisory function = any function that supervises senior personnel i.e. separate supervisory board or non executive committee.

67 Responsibilities of senior personnel SYSC senior personnel and where appropriate the supervisory function are responsible for ensuring the firm complies with MiFID, and in particular must: assess and periodically review the effectiveness of the policies, arrangements and procedures out in place to comply with the firms obligations under MiFID, and take measures to fix deficiencies.

68 Responsibilities of senior personnel SYSC senior personnel and supervisory function must receive on a frequent basis written reports in respect of: the adequacy of the policies and procedures designed to comply with MiFID requirements; the independence and effectiveness of the compliance function; the establishment and maintenance of an independent internal audit function or effective internal control processes if no internal audit function is required; the adequacy of the risk management policies and procedures and the firm s compliance with them; and the independence and effectiveness of the risk management function or effectiveness of processes if no separate function is required.

69 Issues for senior personnel Preparing for MiFID How to assess the adequacy and effectiveness of procedures How to assess adequacy and effectiveness of: Compliance Risk management Internal controls

70 Preparing for MiFID Senior personnel will need to take responsibility for the MiFID implementation project. Commissioning the project; Communication to all staff on role of project; Allocating appropriate staff/external resource with relevant experience of firm s processes systems, project management and regulatory requirements; Agreeing on reporting lines to Board or SMT and allocating direct responsibility to an appropriate senior manager for overall project supervision; Monitor progress; Sign off completion.

71 Assessing policies and procedures Must be done periodically set frequency Are they effective? - do they work and are they followed Are they adequate? appropriate and complete for firm and its activities What s the evidence? compliance monitoring reports and trend analysis/internal audit reports/risk assessments reports/complaints trends reports/litigation/compensation payments/systems failure reports/information on processing problems. To be considered in conjunction. May need to improve information quality to senior personnel to help them make decisions. Needs to be in writing. Senior personnel/supervisory function should document receiving the information, their assessment and rationale for decision. If deficiencies then should have evidence that they have been remedied.

72 Assessing the compliance function Requirements = permanent, effective and act with independence with authority, adequate resources and expertise. Independent = not involved in performance of services or activities they monitor, remuneration should not compromise objectivity (bonus?). Independence requirements proportional to size of firm and nature of activities. If size prevents independent function still needs to be effective. Responsibilities = to advice on requirements, and monitor and assess compliance with MiFID. Reporting to senior personnel.

73 Effective Compliance Is the compliance monitoring programme really risk based and are the risks confirmed? Are the tests appropriate for the area being reviewed, i.e. can conclusions on the state of compliance in the area being monitored? Are significant regulatory problems occurring repeatedly or are major problems picked up by complaints, internal audit or FSA regularly before compliance? Does testing, monitoring reports and feed back from findings indicate staff have good understanding of the business and regulatory requirements? Do the reports identify significant and systemic issues from minor breaches? Is there evidence of recommendations implemented by operational areas? Is there evidence of senior personnel reviewing reports and assessing the firm s compliance with requirements and the effectiveness of the function?

74 Internal Controls and Internal Audit Function Requirement = IA separate and independent from other functions Responsibilities = an audit plan to examine and evaluate adequacy and effectiveness of firms systems and internal controls. Making recommendations and verifying compliance with them, and reporting to senior personnel. Issues Not required to have separate function if not appropriate to size and activities but still required to assess internal controls. If no separate function must assign responsibility to someone to review the internal controls in their area and report to senior personnel. Could amend compliance testing to include reviews of controls but not ideal. Could outsource IA. Effectiveness? risk based/identified key processes and controls/reviews key process controls/no major control failures/implemented changes/staff.

75 Risk Management Requirement = implement adequate risk management policies and procedures. Monitor the adequacy and effectiveness of the risk policies and procedures, and the level of compliance with the firm s procedures. Monitor adequacy of steps taken to remedy any deficiencies. Report to senior personnel. Establish an independent risk management function unless not appropriate to the size and complexity of the firm Issues: If no separate function must still establish risk management policies and procedures and ensure they are adequate and effective.

76 Risk management Create policy of the firm s approach to risk management, the level of risk it will accept, how it will be monitored, who is responsible, to who reports will be made and frequency, and how often risk will be reassessed Document all significant risk the business will face, and the controls in place to mitigate the impact of the risk Assess the likelihood of a significant risk impacting the business Decide what additional mitigation action can be taken to reduce risks Allocate responsibility to business areas and ensure they build risk requirements into procedures Create monitoring plan to monitor adherence to policy and procedures Create reporting line to senior personnel Document assessment of risk policies and procedures by senior personnel.

77 Who should assess? Self assessment; Assessment by rest of firm; External evaluation.

78 MiFID: Trade Data Reporting and Transaction Reporting Richard Young Market Reform Manager - SWIFT Slide 78

79 v1.ppt Slide 79 MiFID: Who will be impacted? 73 articles affecting: Corporate issuers all states in EU/EEA all participants involved in trading financial instruments all participants dealing in advisory services all financial instrument classes except FX Investment advisors Investment managers Global custodians Information providers ETC service providers Global clearers Stock exchanges Brokerdealers ICSDs Directly Impacted by MIFID Local Custodians CSDs Clearers + Reference data providers

80 v1.ppt Slide 80 MiFID: What Market changes will result? Greater opportunity for firms to operate on a pan-european basis Greater quote transparency Pan-European approach to investor protection and client classification More channels for Pre & Post Trade data flow; Quote and Price reporting Transaction reporting

81 Trade Data Reporting Slide 81

82 v1.ppt Slide 82 Trade Data Reporting Article 27: Pre-trade reporting Article 27: Obligation to make public firm quotes require systematic internalisers in shares to publish a firm quote in those shares admitted to trading on a regulated market Systematic internalisers shall make public their quotes on a regular and continuous basis during normal trading hours The quote shall be made public in a manner which is easily accessible to other market participants on a reasonable commercial basis Possibilities: via a regulated market via a third party via proprietary arrangements

83 v1.ppt Slide 83 Trade Data Reporting Articles 29 and 44: Pre-trade reporting Articles 29 and 44: Pre-trade transparency requirements for MTFs and regulated markets regulated markets to make public current bid and offer prices and the depth of trading interest at those prices information to be made available to the public on reasonable commercial terms and on a continuous basis during normal trading hours

84 v1.ppt Slide 84 Trade Data Reporting Articles 28: Post-trade reporting Article 28: Post-trade disclosure by investment firms require investment firms, which conclude transactions in shares admitted to trading on a regulated market outside a regulated market or MTF, to make public the volume and price of those transactions and the time at which they were concluded This information shall be made public as close to real-time as possible, on a reasonable commercial basis, and in a manner which is easily accessible to other market participants Possibilities: via a regulated market, via a third party or via proprietary arrangements

85 v1.ppt Slide 85 Trade Data Reporting Articles 30 and 45: Post-trade reporting Article 30 and 45: Post-trade transparency requirements for MTFs and regulated markets make public the price, volume and time of the transactions executed under its system details of all such transactions be made public, on a reasonable commercial basis, as close to real-time as possible

86 v1.ppt Slide 86 Trade Data Reporting Articles 27/28/29/30: Some issues How to get a complete market overview? How to publish quotes and prices? Data standard(s) Standardising of securities identifiers on reasonable commercial terms

87 v1.ppt Slide 87 Trade Data Reporting - Articles 27/28/29/30: How to get a complete market overview? Repeal of Concentration Rule = more trading venues Publication routes for pre and post data may be different Any single data vendor or exchange is unlikely to be able to provide all of this information to investment firms and asset managers Investment firms and asset managers will have to: choose a suitable venue for its valuation reference price either buy data from multiple vendors implications for IT systems, budgets and integration or have an incomplete view of the market implications for competitiveness, profitability and compliance

88 v1.ppt Slide 88 Trade Data Reporting - Articles 27/28/29/30: How to publish quotes and prices? Data vendors do not presently collect off-exchange equity prices from investment firms Electronic exchanges do not have systems in place to collect quotes and prices for off-exchange trades of shares that they admit for trading Electronic exchanges do not have systems in place to collect quotes and prices for off-exchange trades of shares that they do not admit for trading Investment firms do not have systems in place to publish their quotes and prices Deadline for compliance for all investment firms in the EU is 31 October 2007 Publication routes for pre and post data may be different

89 Trade Data Reporting Proposed post-trade data publishing model transaction reports Competent Authority Investment Firm transaction reports trade reports trade reports Inv. Firm DA Data Aggregator Data Aggregator trade reports optional publication Data Distributor Data Distributor Data Distributor Data Consumer Data Consumer Data Consumer 2006 Real-time Market Data Subject Group, MiFID JWG v1.ppt Slide 89

90 v1.ppt Slide 90 Trade Data Reporting Articles 27/28/29/30: Data standard(s) What data standard(s) should the industry adopt? ISO 15022/20222, MDDL, FISDMessage, FIX Protocol, TWIST, FpML, ISIN ISO 6166, WG11 Data Model ISO 19312, MIC- ISO10383, BIC- ISO 9362, IBEI , Instrument Classification ISO Today each regulated market primarily uses its own proprietary format CESR (Committee of European Securities Regulators) has recently initiated a stock taking exercise on the standards that are used and available. SWIFT is co-operating with this exercise in respect of ISO15022 and 20022

91 v1.ppt Slide 91 Trade Data Reporting Articles 27/28/29/30: Standardising of security identifiers CESR Should the identifier of a security be harmonised and if so to what extent? What should be the applicable standard (ISIN code, other)? MiFID Reference Data Subject Group has a draft paper on the Unique Instrument Identifier (UII): Recommendation is to go for ISIN [ISO 6166] plus Market Identifier Code [ISO 10383] of the Place of Listing, Quote or Trade plus ticker [now called Local Market Identifier]

92 v1.ppt Slide 92 Trade Data Reporting Articles 27/28/29/30: on reasonable commercial terms Investment firms will incur costs in order to comply with MiFID Some of these will be IT costs Investment firms are allowed to make their quotes and prices available on a reasonable commercial basis Is this a potential new revenue stream? Could it be used to offset related IT costs? How much will you have to pay to receive similar data from your competitors?

93 v1.ppt Slide 93 Trade Data Reporting How can SWIFT Help? Reference data standards for instrument identification, firm identification, client identification etc. Ensure ISO standards; 15022/20022 (for which SWIFT is responsible) and which could be used for Transaction Reporting are MIFID compliant Possibility to offer SWIFT as a messaging option for some trade reporting

94 MiFID Transaction Reporting Slide 94

95 v1.ppt Slide 95 MiFID Transaction Reporting Under Article 25 of MiFID investment firms which execute transactions in any financial instrument admitted to trading on a regulated market, must report details of such transactions to the CA by the close of the following working day. The reporting is done to the CA of the home member state of the investment firm. This may not necessarily be the CA of the market where the financial instrument is most liquid.

96 v1.ppt Slide 96 MiFID Transaction Reporting Reporting Channels Reports of transactions in financial instruments must be made (normally) in electronic form. The electronic method chosen to report to the CA must satisfy the following conditions: It must ensure the security and confidentiality of the data reported It must incorporate mechanisms for identifying and correcting errors in a transaction report It must incorporate mechanisms for authenticating the source of the transaction report It must be capable of timely recovery in the event of failure It must be capable of reporting within the timeframe required and be capable of handling the format required

97 v1.ppt Slide 97 MiFID Transaction Reporting Information Requirements Reporting Firm Identification; trading day; trading time; b/s indicator; trading capacity; instrument identification; instrument security code type; underlying instrument identification; underlying instrument identification code type; instrument type; maturity date; derivative type; put/call; strike price; price multiplier; unit price; price notification; quantity; quantity notation; counterparty; venue identification; transaction reference number; cancellation flag. Underlying client may also have to identified (at discretion of member states)

98 v1.ppt Slide 98 MiFID Transaction Reporting Exchange of Information between CAs Home state transaction reporting under MiFID means that the CAs have to exchange information e.g. FSA and BaFIN would need to exchange information on a German equity traded in London and reported to FSA. CAs must establish arrangements for this reporting. Under Level 2 drafts they have been given until November 2006 to report back to the EU Securities Committee on the design of the arrangements to be established.

99 v1.ppt Slide 99 MiFID Transaction Reporting Exchange of Information to and between CAs Asset Manager Country A Investment Bank Country B Regulated Market where traded stock is most liquid Trading Regulatory Reporting - Flow 1 Regulator Country A Regulatory Reporting -Flow 2 Regulator Country B

100 v1.ppt Slide 100 MiFID Transaction Reporting How can SWIFT Help? Regulators admitted as SWIFT participant category Possible use of SWIFT for regulatory reporting Copy mechanisms Reference data standards for instrument identification, firm identification, client identification etc. Ensure ISO standards; 15022/20022 (for which SWIFT is responsible) and which could be used for Transaction Reporting are MIFID compliant

101 MiFID SYMPOSIUM : The Practical Aspects Best Execution: key themes, risks and actions Roger Turner Partner, Financial Services Regulatory Practice 6 June 2006 PricewaterhouseCoopers LLP

102 Agenda Background Key Elements of the new regime Challenges for industry PricewaterhouseCoopers LLP

103 Background Best Execution has always been a topic of much debate FSA Rules to date are relatively simple in construct, i.e. COB requires a firm to in essence establish the best price for the customer order in question. There is no requirement to search for competing sources of liquidity to identify better prices. FSA accepts that if trading through SETS then the mere fact of so doing equals best execution. For non-sets securities, or where the firm decides not to use SETS that the firm takes care to ensure that it achieves an equivalent execution. PricewaterhouseCoopers LLP 6 June 2006

104 Background So what is the practice today?? Firms split between analysing execution performance by their fund managers. - Some monitor trading by day, some by month, some by quarter and some not at all. Indeed the precursor to DP 06/3, CP 154 some suggested that undertaking sampling as the preferred methodology should not be mandated by FSA. Much of current best execution compliance is only involved in the review of exchange traded, volume weighted average, assessment on a periodic sample basis of non-representative transactions by the investment manager. Almost zero attention paid to OTC transactions, investigation of alternative pools of liquidity or consideration of real time compliance. Generic stance is why would the portfolio manager seek to achieve anything else than the best price for their clients? PricewaterhouseCoopers LLP 6 June 2006

105 Background So what is the practice today?? Many larger firms have introduced central dealing teams to separate the role of buy sell from buy now or wait recognising that deal size, instrument and market conditions will manifestly effect the ability to trade in the clients best interest. FSA recognises in Rule that there may be circumstances when achieving best price on a specific order may not be in the client s overall interest. Greatest weight is given to the broker approval meetings/committees. Compliance is hard pressed to provide any compelling argument against that emanating from the broker approval committee. Experience over some 12 years suggests that compliance monitor that which is easy to do so and not that which is hardest. Best execution is, on exchange traded securities easy to monitor but for the most part fails to indicate any problems. From an FSA risk based approach to compliance monitoring, compliance officers would be spared from the need to monitor this at all!! In the last 14 years, not a single firm has been taken to task for not providing best execution for its clients. PricewaterhouseCoopers LLP 6 June 2006

106 Section two Background Key Elements of the new regime Challenges for industry PricewaterhouseCoopers LLP

107 Key elements of the new regime Key elements: So what s changed? It is difficult to miss the substance of the debate. In the Level 2 draft of 6 Feb 2006, the Commission states at paragraph 7.7 of the background text to the draft directive: - Best Execution obligations, set out in Article 21 of the level 1 Directive are central to the structure and logic of the Directive. They not only form a fundamental element of investor protection, but are also necessary to mitigate possible problems associated with market fragmentation. Article 21 (1) states that when executing client orders, investment firms must take all reasonable steps to obtain the best possible result for the client. PricewaterhouseCoopers LLP 6 June 2006

108 Key elements of the new regime Key elements: So what s changed? And this concept has been further defined into necessitating firms to formally adopt a three stage process in the establishment of its best execution policy. Firms must: One, determine those factors to include in determining which should be given priority in identifying and confirming whether best execution is achieved: Price Costs Size Speed Likelihood of execution Likelihood of settlement Nature of the order Others PricewaterhouseCoopers LLP 6 June 2006

109 Key elements of the new regime Key elements: So what s changed? Two, firms must review available execution venues (thus migrating away from current FSA Rules that do not require a market search) and this must be on a proactive, regular basis and must also ensure firms avail themselves of market data sources that offer compare and contrast facilities. Three, orders on an order by order basis must be routed to the appropriate venue. In consequence there is a substantial compliance risk that operating for a wide range of customer types will necessitate differential order routing programmes to be implemented otherwise the firm may fail test three. The FSA DP also provides a whole chapter to the review and monitoring of a firm s best execution arrangements. It is explicit that this will necessitate firm s to introduce a formal best execution committee, with an agreed terms of reference that regularly (this would seem to be at most annually but in practice will need to be quarterly) reviews the execution quality of its transactions, that reviews exceptions to the firms agreed and monitored policy and that receives and approves, on a real time basis, exceptions from the adopted policy. PricewaterhouseCoopers LLP 6 June 2006

110 Key elements of the new regime Key elements: So what s changed? The silver lining as these measures are framed as a directive rather than a regulation is that FSA may elect to provide more definitive guidance to the requirements and its expectations than if it was merely cutting and pasting as it would have to if these requirements were drafted as a regulation. Given the cornerstone of MiFID to which the best execution requirements relate, the fact that MiFID only introduces transparency on pre-and post trade equity trading on regulated markets, MTFS and EEA Member States OTCs should not be treated as a that s it requirement. If you can review, compare and contrast a firm must do so since there is still the overriding requirement to act with due skill care and diligence when implementing a customer order. PricewaterhouseCoopers LLP 6 June 2006

111 Section three Background Key Elements of the new regime Challenges for industry PricewaterhouseCoopers LLP

112 Industry Challenges All must respond to the DP. Essential that FSA ensures that there is a consistent interpretation of the measures by all member states otherwise firms will have an impossible home/host state position. Root and branch review of order execution policy by all elements of the firm Comparison with DP requirements as to the monitoring and review of execution venue and ability to compare and contrast. How to deal with real time review of execution venue exceptions? If found to be outside internal standards what arrangements exist to correct the transaction. FSA seems to demand that firms purchase data vendor solutions to assist in best execution determination. Have firms that operate in discrete markets, illiquid securities, or OTC arrangements that provide client beneficial services (e.g. small size, large size, bundled transactions, specific research, market access etc etc) through various venues ensured that their views are properly communicated to the FSA DP? PricewaterhouseCoopers LLP 6 June 2006

113 Industry Challenges The revised rules are not generic. The FSA has postulated specific scenarios that will necessitate firms devising concrete processes for undertaking a variety of client transactions and that will be expected to differ by client and by transaction. We are not convinced that a generic policy will stand the test. There is much language that reinforces the requirement to review policy by client and by transaction. While portfolio managers are able to delegate to brokers execution, there is still the obligation to ensure that the delegate is overseen. This must therefore translate into the obligation to review the delegatees written best execution policy, its execution performance against internally agreed markets and to subdivide all the costs of the execution. The inference here is that firms will be expected to change brokers, vendors and exchanges as and when market conditions/ competitive conditions dictate. While this is almost automatic for most firms, the MiFID rules will require all firms to formally document and regularly revise their reasons why letters to clients as to selection of dealing venue. PricewaterhouseCoopers LLP 6 June 2006

114 Summary Best execution historically a non-issue for firms. Simple to monitor by VWAP, otherwise ignore the question. FSA supervisors similarly unmoved by OTC considerations, non-exchange traded equities. FSA also recognises that minimal incentive for fund managers to not achieve best execution. MiFID fundamentally challenges the above. Firms (not regulators) must show that they achieve best execution. All investments subject to the best execution proof. PricewaterhouseCoopers LLP 6 June 2006

115 Summary Dealers are placed in an almost impossible position and fund managers will have to react to their changes in operational arrangements. Central dealing desks must be a key plank in the response to the DP. FSA s submission as to the market practice must be proven, assertions as to availability of trade transparency and liquidity need to be countered by market to enable FSA to provide carve outs where necessary. Maybe FSA should simply copy the text and not provide commentary! PricewaterhouseCoopers LLP 6 June 2006

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117 Preparing for MiFID a firm s perspective Kevin Tolan Head of European Corporate Compliance Mellon International c The difference is measurable

118 Overview of presentation What we will cover Who is Mellon? Working in a group structure Where it all began The Mellon Approach The Toolkit Work currently underway Experiences and learning points What we won t cover Technical aspects of MiFID c The difference is measurable

119 Who is Mellon? c The difference is measurable

120 Implementation plans within a group structure Each LoB is responsible for ensuring it meets its regulatory requirements Corporate Compliance: assumes lead role of tracking and interpreting MiFID through its development acts as technical experts on the Directive Co-ordinates cross-lob working party Seeks to promote sharing of best practise Take responsibility for tasks that impact multiple businesses Report to senior management on preparations c The difference is measurable

121 Where it all began Initial focus commenced Q Introductory presentations summer 2005 Ongoing analysis of key developments and interpretive notes Cross-business working party formed Q External consultancy brought in Q Regular updates provided to key clients c The difference is measurable

122 The Mellon Approach Brief senior management Bring in operations not a compliance project Ongoing communication Produce gap analysis Identify work that be commenced immediately Identify other projects underway that can be utilised c The difference is measurable

123 The Toolkit A Toolkit designed to ensure all potential impacts are identified Based on Mellon s own analysis, attendance at key conferences, inputs and outputs from consultancy work Guides the reviewer through pertinent questions to be asked of each area Contains old and prospective rules Allows for issues/actions to be allocated to a business line c The difference is measurable

124 Work currently underway Running through toolkit with each LoB Getting donkey work underway, eg Review of organisational structures Census of conflicts Review of client classifications Review of outsource arrangements Review of EU branch structures Review of existing customer reporting arrangements Speaking to IT vendors & suppliers c The difference is measurable

125 Experiences to date / learning points Start the work! Involve senior management and operations if not already done so Break down requirements into key streams and actions Identify other projects underway Be selective in attending conferences Be prepared to deal with numerous offers of assistance from professional firms Will you be reliant on your IT vendors and their preparations? c The difference is measurable

126 Kevin Tolan Head of European Corporate Compliance Mellon International c The difference is measurable

127 Oliver Lodge A Personal View MiFID SYMPOSIUM June 2006 A member of the Chiltern Group