MiFID II Update: Are we nearly there yet? TISA Thursday, 6 November 2014 Charlotte Hill Partner Covington & Burling LLP 841550.1 Overview Current status The ESMA DP and CP Key points 28 1
MiFID II Directive on markets in financial instrument Regulation on markets in financial instruments ( MiFIR ) 29 Current Status Published in OJ on 12 June 2014 Came into force 2 July 2014 Member States must adopt and publish by 3 July 2016 the measures transposing MiFID II into national law Apply those provisions i by 3 January 2017 30 2
ESMA Formulating Level II measures Discussion Paper on MiFID II technical standards Consultation Paper Early 2015: Second CP on Level 2 measures May 2015: ESMA final technical advice 31 The ESMA Papers Similar topics, different focus, for example: DP: authorisation, branches, cross-border services, date reporting CP: complaints handling, record keeping, product governance, investment advice, client assets 32 3
Inducements and Research Little change to MiFID inducements Rules On-going payments (e.g. trail commission) require on-going service Annual disclosure of overall inducements/benefits 33 Inducements and Research, cont d New Guidance on providing research, without breaching inducements Rules Only allowed where: no cost widely distributed no access to analysts If not, costs must be unbundled 34 4
Conflicts of Interest No major change on identifying and managing conflicts New proposals: disclosure Keep record of alternatives to disclosure considered/discounted ESMA: Generic conflict disclaimers i are ineffective for regulatory purposes 35 Independent advice, suitability and appropriateness Advisers prohibited from receiving fees from product providers Advisers to charge for advice Test of independence 36 5
Client Money TTCA problematic for retail clients New measures for protection of professional clients Consideration of appropriateness Securities financing: signature required 37 Best Execution ESMA concerned with improving investors ability to differentiate between services provided Execution outside a regulated market: firms must adapt policies to explain counterparty risk involved 38 6
Best Execution, cont d OTC execution: check fairness of price Acting for both sides (inter-dealer broking) disclose actual fees received from one party to the other Market makers to comply with data requirements that apply to regulated markets 39 Systematic Internalisers Meaning of frequent and systematic 0.25% or 0.5% of EU turnover and daily trading for illiquid stocks Substantial basis More firms caught than previously 40 7
Concentration Rule Abolition of concentration rule transactions could be undertaken OTC Now, equity transactions will need to be undertaken on a regulated market unless exemption applies (narrow) will make it difficult to run equity-based broker crossing networks 41 High Frequency Trading Entities doing HFT must be authorised and comply with market-making rules ESMA suggests possible definitions of HFT more than 750,000 trading messages a day average lifetime of orders 42 8
High Frequency Trading, cont d Compulsory market-making requirement will only apply where it is the investment firm and not its client that is undertaking the HFT business so few investment firms will be hit, but some clients will be 43 Abusive Trades Trades attempting to build momentum in a stock Trades that affect the volume weighted average price Trades that have an impact on price 44 9
Commodity Derivatives ESMA given powers to limit trading in commodity derivatives Lists circumstances where it may take such action to limit ability of firm or market to hold positions Examples: rise in demand for a product an investor with a significant position 45 Terms of Business Terms of business changes, but no repapering of clients Terms required for professional clients No terms for ECPs, but required to have a contract covering reporting arrangements 46 10
Reporting Quarterly reports Professional clients not just retail ECP: written agreement to non-report 47 Transaction Reporting New definition of execution of a transaction includes receipt and transmission of orders where no execution occurs Will require Trader IDs; Client IDs; Algo IDs; Committee IDs Share issuance included 48 11
Remuneration Policy required, signed off by board, showing how client interests put first Has individual served client interests and performed compliantly? 49 Record keeping Written records of face-to-face meetings Mandated information: date, place, attendees ESMA proposing that this record should be sent to client 50 12
Timing and Next Steps ESMA s consultation ended 1 August 2014 Large number of unresolved issues ESMA has until May 2015 to complete consultation Advice to commission December 2015 In effect 3 January 2017 51 Disclaimer These slides are a summary only and do not necessarily stand on their own. They are not intended to be advice and may not be relied upon as such. These slides have been prepared solely for the benefit of attendees at the TISA seminar, Understanding EU Policy and Regulatory Proposals on Thursday, 6 November, 2014. 52 13