MiFID2 Extraterritorial Impact on FIs and AMIFs. Charlotte Stalin Jason Valoti

Transcription

1 MiFID2 Extraterritorial Impact on FIs and AMIFs Charlotte Stalin Jason Valoti 15 March 2017

2 TIMING: EU LEGISLATIVE PROCESS LEVEL 1 LEVEL 2 LEVEL 3 LEVEL 4 The European Parliament and European Council prepare framework legislation which sets out the bones of the legislation. The European Commission collaborates with relevant expert groups (i.e. ESMA, EBA) to produce detailed implementing measures and technical standards. Guidance and recommendations are published to address any issues not covered at Level 2 The European Commission reviews how Member States have transposed the legislation into national law to ensure consistency across the EU. MiFID2 MiFIR Delegated & Implementing Scope/ authorisation Pre & post trade Acts transparency ESMA Guidelines National Implementation Passport and third country firms Transaction reporting Organisational and conduct of business Third country firms cross-border business Regulatory & Implementing Technical Standards (RTS/ITS) ESMA & Commission FAQs Review by European Commission. OTFs, MTFs, regulated markets requirements Trading obligations shares/otc derivatives. Regulator enforcement

3 MiFID2 TIMELINE Timeline updated regularly and available online on elexica here

4 UK IMPLEMENTATION - KEY POINTS FCA generally adopting "intelligent copyout approach Gold plating - Consistency applied to 3 rd country branches/non- MiFID firms Copy relevant sections of MiFID2 and the L2 provisions directly into the FCA Handbook, with minimal changes Largely retaining existing UK retail-focussed regimes which were front-running MiFID2 Continues with theme gold plating (i) investment research, (ii) inducements and the interaction with RDR / adviser charging rules, and (iii) product governance and extension of RPPD Clear application to branches of 3 rd country firms Higher degree of gold-plating for AIFMs and UCITS ManCos, (i) inducements and research rules, (ii) best execution transparency rules and (iii) telephone taping and electronic document retention

5

6 KEY IMPLICATIONS FOR SELL SIDE APPLICATION ORGANISATIONAL (LEGAL ENTITY) CONDUCT (BRANCH) MARKET (TRADED ON EU VENUE) Organisational Requirements Corporate Governance & Remuneration Product governance (org) Conflicts of Interest Outsourcing Taping Client assets Algo Trading Record Keeping Transaction Reporting Inducements Investor Protection Best Execution Product governance (cob) Cost & Charges Client Agreement Client order handling Client best interest Transparency Pre and Post Trade Transparency Commodity Position Limits Systematic Internalisers Mandatory Trading Clearing & Post Trade Processes

7 KEY AREAS OF CONCERN FOR APAC CLIENTS DIRECT OR INDIRECT ALL DEPENDS PRODUCT GOVERNANCE Target market Post sale monitoring Stress testing/scenario analysis CONDUCT OF BUSINESS CONDUCT Repapering/Disclosures Inducements Best execution IMPACT OF MiFID2 WILL BE GLOBAL TRADING VENUES Pre and post trade transparency Mandatory trading obligation ALGO/DEA 6 / B_LIVE_APAC1: v1 Simmons & Simmons LLP Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

8 PRODUCT GOVERNANCE Level 2: Articles 9 and 10 Delegated Directive 7 April 2016 Level 3: ESMA Guidelines on Product Governance 5 Oct 2016 (Final guidelines expected Q1/Q2 2017) Key Issues for Market Identification of target market Negative and Positive Level 3 Exchange of Management Information industry discussions around repositories for information Sales information and feedback from distributor to manufacturer Impact on ECPs/ markets business Product registers around products/target market/distribution chains Involvement of management body- line of responsibility Impact on cash equities business compatible with mass retail market Re-papering requirements for distribution relationships Impact on structured notes/repackaging business - where distribution through third parties, post sales responsibility extension Impact on funds business UK gold plating for AIFMs/UCITS Mancos Proportionality issues non-complex products, different client types Industry bodies working to create target market analysis, guidance and template agreements

9 CONDUCT: REPAPERING Level 2: Articles of Delegated Regulation 25 April 2016 Level 3: ESMA Investor Protection Q&A s 16 December 2016 Key Issues for Market: Re-classification of local authorities as retail Member states can enhance criteria (FCA) making it difficult to opt up Retailification of standards generally Enhanced costs and charges disclosures to all clients (pre and post trade) Requirement to enter into client agreements with professionals repapering Client reporting extended to ECPs Robust standards for client communications and marketing materials 8 / B_LIVE_APAC1: v1 Simmons & Simmons LLP Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities. Dealings with local authorities Transitional arrangements with existing local authorities Impact on client communications and papering requirements Impact on past and current marketing documents and processes How will business aggregate and disclose costs How to show cumulative effect Can the business agree to limited application of costs and charges to ECP and Professional clients (what does the term embed a derivative mean?) Industry bodies working to create good practice guides and template costs and charges disclosure documents

10 CONDUCT: INDUCEMENTS Level 2: Article Commission Delegated Directive 7 April 2016 Level 3: ESMA Investor Protection Q&A s 16 December 2016 (Further ESMA Q&A s expected) Key Issues for Market: How will asset manager pay (P&L or RPA model)? How will research budget be set? What is research? Outside of research what is an inducement? Positive obligations on sell-side firmsunbundle costs, steps to not disseminate unsolicited research How will the market define and charge for services outside of execution services? Extra-territoriality- what about if dealing with non-eu entities? For brokerage services, how to identify, unbundle and charge for services? What changes will be required to current business and pricing models? How will services be valued? Inconsistencies between buy-side and sell-side For asset management business which model shall pursue (P&L or RPA model)? Will clients agree to RPA model? Pan European understanding of what qualifies as research (AMF Vs. FCA) US dealers providing research could trigger IAA registration requirement

11 CONDUCT: BEST EXECUTION Level 2: RTS 27 & 28, Articles of Delegated Regulation 25 April 2016 Level 3: ESMA Investor Protection Q&A s 16 December 2016 Key Issues for Market: More prescriptive standards to be provided to clients Requirement to publish information about a firm s top-5 trading venues ESMA Investor Protection Q&A sufficient steps vs. reasonable steps, fairness of price Obligations when dealing OTC or on specific client instructions First reports to be published by 30/6/18 (1/1/18 to 31/3/18) Firms revisiting approach taken as a result of MiFID1 Re-papering of execution policies - specific detail set out at Level 2 Procedures to be created to enable annual disclosure of information First reports to be done without full information from trading venues- best efforts basis Industry seeking confirmation on scope (SFT in or out) Implementation into processes: Ex ante and ex post monitoring Annual review of policies and following material change

12 CONDUCT: CONFLICTS Level 2: Articles 27, of Delegated Regulation 25 April 2016 Level 3: ESMA Investor Protection Q&A s 16 December 2016 Key Issues for Market: Extensive conflict management requirements Disclosure to clients to be used at a last resort Specific disclosure obligations to clients set out at Level 2 Requirement to review conflicts policies periodically and at least on an annual basis Senior Management to receive on a annual basis written report on Conflicts Policy and Process Explicit obligations for firms which produce investment research and when underwriting and placing- identification and management of conflicts Significantly higher obligation on firms to manage their conflict of interestspositive obligation to identify, manage and mitigate - with annual review Implementation of clear lines of reporting and authority to senior management Re-papering requirements for internal policies and procedures Obligation to disclose specific and tailored to clients Training to staff on higher conflict management obligations Consider office, communication structures between various lines of business.

13 ELECTRONIC TRADING Level 2: Article 20 of Delegated Regulation 25 April 2016, RTS 6, 7, 8 & 10 Level 3: ESMA Draft guidelines calibration publication of trading halts (Final guidelines expected Q2/3 2017), ESMA Market Structure Q&As (Further Q&A s expected) Key Issues for Market: Requirement to notify NCA that engaging in algo trading and the relevant Trading Venue (NCA can request details of strategy, parameters, compliance/risk controls, testing details) Commercially sensitive data? HFT licensable (if not already licensed to DOOA) Scope of limited human intervention? Significant IT systems build, controls and testing, consider timing for compliance Obligations if pursuing market making Clear lines of accountability for development, deployment, updates and monitoring Impact on ALGO/HFT trading Consider system builds, implementation of testing, conformance well in advance of January 2018 Storing of data Testing of systems Training requirements for staff, traders and compliance arrangements Putting in place organisational structure around algo trading capacity Market making requirements Extra-territoriality- applies to non-eu firms that trade with EU entities/tv

14 MANDATORY TRADING OBLIGATION Level 2: RTS 1, 4, 5, 6 &12, ESMA Discussion Paper on the trading obligation for derivatives under MiFIR, ESMA CP on draft RTS expected May 2017 Level 3: ESMA Q&As on Transparency and Market Structure Key Issues for Market: Non-systematic, ad-hoc, irregular and infrequent trades definition Products in scope - Industry calling for more clearly defined product list than currently proposed Uncertainty around how many trading venues should a derivative or a class of derivatives be traded in order to be caught? When will obligations apply? Phase in for Derivatives proposed in line with EMIR Impact on trading practices and strategies as trades pushed onexchange How will dual-listed shares be treated (where most liquid outside EU) Impact on matched principal trading/ broker crossing networks No clear timeframe on equivalency decisions by EU Commission on third country trading venues Extra-territoriality - consider cross border aspect for all group entities Monitor for ESMA follow-up consultation Paper in Q2 2017

15 SYSTEMATIC INTERNALISER Level 2: Commission Delegated Regulation 18 May 2016 & Delegated Regulation 25 April 2016, RTS 1 Level 3: ESMA Transparency Q&A 18 November Key Issues for Market: Firms to assess their trading activity on a quarterly basis on data from the previous 6 months Consolidated tape data published 1 August 2018; SI regime in force 1 September 2018 Firms can opt in from 3 Jan 2018 Transparency and organisational obligations on SI s Intergroup transactions to be included in calculations Treatment of MPT/RPT? Meaning of in the Union Class of bonds SI? Opt in? Out of scope? Timing Firms considering advantages/disadvantages of being an SI ESMA letters to EC concern over network of SI s being created to circumvent MiFID2 obligations Extensive implementation and organisational requirements if in scope. Uncertainty over to whom SI will be required to provide quotes and the term commercial policy

16 PRE-TRADE TRANSPARENCY Product Disclosure by Regulated Market (RM) Multilateral Trading Facility (MTF) Organised Trading Facility (OTF) [1] Systematic Internaliser (SI) Investment firm other than SI Now MiFID2 Now MiFID2 MiFID2 Now MiFID2 Now MiFID2 Shares admitted to trading on a RM Other shares traded only on a MTF or an OTF Share-like instruments (depositary receipts, ETFs, certificates and other similar financial instruments) traded on a RM, a MTF or an OTF Bonds, structured finance products, emission allowances and derivatives traded on a RM, a MTF or an OTF Key Yes No [1] Concept to be created by MiFID2.

17 POST-TRADE TRANSPARENCY Level 2: Commission Delegated Regulation 18 May 2016, RTS 1 & 2 Level 3: ESMA Q&A on definition of traded on a trading venue expected Key Issues for Market: New post-trade transparency regime for equity-like and non-equity (i.e. bonds, structured finance products, emissions allowances, derivatives) Changes to MiFID1 hierarchy/agreement of who needs to publish- MiFID2 will be selling firm (unless buyer SI and seller is not) Firms can only publish through an APA as close to real time as possible (1m;15/5m) Timing to be met in line with clock synchronisation requirements Meaning of traded on a trading venue Obligation to publish on reasonable commercial basis - set out at Level 2 Consider the impact on trading activities Need to engage APA/ review arrangements for publication of post trade information IT implications and functionality requirements to enable synchronisation of business clocks to meet reporting requirements

18 CLEARING & POST TRADE PROCESSES Level 2: RTS 1, 2, 14, 15 & 26, Commission Delegated Directive (7 April 2016), Commission Delegated Regulation (18 May 2016), ESMA Final Report draft RTS Indirect Clearing MiFIR/EMIR (May 2016) Key Issues for Market: Client assets, restrictions on TTCA arrangements Non-discriminatory clearing access for financial instruments Timing of requirements and interaction with EMIR Indirect clearing arrangements (OTC/ETD) Firms/Market operators must conclude an agreement with the participants to the portfolio compression providing for the compression process and its legal effects Consider the impact on the wider clearing obligations on trading practices Any changes to client assets arrangements - note requirement for single officer. Commission to report to the European Parliament and the Council whether there is a need to temporarily exclude ETDs from the scope of the non-discriminatory access provisions to CCPs and EU trading venues Monitor for timing of requirements.

19 RECORD KEEPING Level 2: Articles of Delegated Regulation 25 April 2016 Level 3: ESMA Investor Protection Q&A s 16 December 2016 (Further Q&A s expected) Key Issues for Market: Immediately record date & time of order receipt/decision to deal Need to maintain and record also MAD and MAR policies & procedures in writing Meaning of initial order? RFQ fall within record requirements? Storage allowing IT or other efficient exploitation Non-exhaustive list provided by ESMA - will Member States opt to add additional record keeping requirements? Monitor for MS gold-plating. Updating current order management systems to capture detailed data? Seeking 3rd party providers? Where and how to store the data? Data protection and privacy implications storing data third parties/clients Processes to back-up the data/security measures?

20 TELEPHONE TAPING Level 2: Article 76 of Delegated Regulation 25 April 2016 Level 3: ESMA Investor Protection Q&A s 16 December 2016 Key Issues for Market: Storage retention FCA (6 months) MiFID2 (5/7 years) - requiring complex storage, indexing and retrieval systems- Very costly on firms. How are firms to deal with employee mobile devices record or ban use for work purposes? Recording internal & external calls/electronic communications regarding handling of client orders and transactions Must make records available on request to clients (inc. internal records) Data protection and privacy? Consider whether to tape lines of all staff for completeness? Select staff? Do current systems support such capabilities? Resources to monitor and review recordings? Whether to capture personal mobile devices? Telephone & electronic communication policy Requirement to monitor recordings on a proportionate basis (% or tailored based on who the call is with) Industry meeting with FCA in April 2017 to discuss scope of requirements

21 TRANSACTION REPORTING Level 2: RTS 22 Level 3: ESMA Final Guidelines regarding the implementation of the transaction reporting regime (10 October 2016). Key Issues for Market: Expanded to 65 Mandatory reportable fields - including identity of client, individuals responsible for execution and algorithms Obligation on firms that receive and transmit or otherwise handle orders, but do not execute orders, to transmit the required details of such orders to the receiving investment firm, or report the order themselves Records stored for 5 years Analyse, the processes currently adopted and decide on operating model to be used going forward (i.e. use of brokers, ARM or self-report) Consider chain of transactions and determine who will be making the report Consider flows of information and Written Transmission agreements in place specifying entity responsible for making reports Consider data protection and privacy implications

22 CONTACT US Charlotte Stalin, Partner, London T E charlotte.stalin@ simmons-simmons.com Charlotte specialises in UK and European regulatory matters and advises financial institutions on a wide range of regulatory matters. In particular, Charlotte advises EU and non EU investment firms and banks on the provision of financial services across Europe and on the establishment and structuring of their businesses. She also advises clients on the ongoing regulatory reform and has extensive experience dealing with ongoing compliance with FCA rules. T E jason.valoti@simmonssimmons.com Jason Valoti, Partner, Singapore Jason acts for international investment banks in relation to structured and OTC derivative transactions, synthetic and cash CDOs, CLOs and repackaged securities and other asset and fund backed structures, including Shariah compliant transactions. Jason also advises international investment banks in relation to equity and commodity linked note, warrant and certificate issues. In addition, he advises investment managers on structured debt capital markets transactions.

23 simmons-simmons.com elexica.com This document is for general guidance only. It does not contain definitive advice. SIMMONS & SIMMONS and S&S are registered trade marks of Simmons & Simmons LLP. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated practices. Accordingly, references to Simmons & Simmons mean Simmons & Simmons LLP and the other partnerships and other entities or practices authorised to use the name Simmons & Simmons or one or more of those practices as the context requires. The word partner refers to a member of Simmons & Simmons LLP or an employee or consultant with equivalent standing and qualifications or to an individual with equivalent status in one of Simmons & Simmons LLP s affiliated practices. For further information on the international entities and practices, refer to simmonssimmons.com/legalresp. Simmons & Simmons LLP is a limited liability partnership registered in England & Wales with number OC and with its registered office at CityPoint, One Ropemaker Street, London EC2Y 9SS. It is authorised and regulated by the Solicitors Regulation Authority. A list of members and other partners together with their professional qualifications is available for inspection at the above address.