www.pwc.lu/mifid 4 th MiFID II Breakfast Delegated Acts/Level 2 another milestone is reached Regulatory Advisory Services
Table of Contents Section Overview Page 1 MiFID II Genesis 1 2 Update on Level 2 Regulation 5 3 MiFID II Delegated Acts impacts summary 8 4 Business Challenge 1 Product Governance 10 5 Business Challenge 2 FX Trades 12 6 Business Challenge 3 SI 14 7 Business Challenge 4 Advice 16 8 Business Challenge 5 Inducements 18 9 Business Challenge 6 Insurance investment products 20 10 Conclusions & Next steps 21 Appendices 1 DA Impact Summary 24
Section 1 MiFID II Genesis 4th MiFID II Breakfast Delegated Acts/Level 2 another milestone is reached 1
Section 1 MiFID II Genesis MiFID II: a European record in terms of negotiations? 110 articles in the 2 LI texts + 16 in the LII directive and 91 in the first LII regulation 15 working groups at ESMA 446 pages of TA 554 pages of TS 8 years since the start of the drafting of the first proposal MiFID II / MiFIR 3 discussions papers 5 consultations papers 51 European Council sessions 6 public hearings (nearly 3000 participants in total) 4th MiFID II Breakfast Delegated Acts/Level 2 another milestone is reached 2
Markets issues Section 1 MiFID II Genesis MiFID II: a step change compared to MiFID I Importance of change Positions limits on commodities markets New transparency for bonds and derivatives OTFs Transparency rules for equities Product intervention MTFs End of the concentration rule Suitability/ appropriateness Inducements Product governance MiFID I Investors protection issues Importance of change MiFID II/MiFIR 4th MiFID II Breakfast Delegated Acts/Level 2 another milestone is reached 3
Section 1 MiFID II Genesis A specific context that made things even more difficult Political context: 2008 crisis but vivid memories of MiFID I negotiations Pressure to move fast (G 20 in Pittsburg, Dodd Frank ) Transparency rather than liquidity Several moving parts (EMIR, PRIIPS, IDD ) Temptation to split Markets and IP issues versus necessity to compromise Economic context: higher integration of wholesale markets compared to retail markets A European wholesale market? Similar needs and similar solutions But some important differences: sovereign debt Differences in consuming retail investment products Level of sophistication Risk appetite Distribution mode: integrated versus disintegrated Institutional and technological context: new forces in motion Lack of efficient enforcement or failure of MiFID I? Political sensitivity of retail investor protection issues at the national level ESAs versus NCAs Complexity versus risk Digitalisation/Fintech Appetite for more data but lack of existing data 4th MiFID II Breakfast Delegated Acts/Level 2 another milestone is reached 4
Section 2 Update on Level 2 Regulation 4th MiFID II Breakfast Delegated Acts/Level 2 another milestone is reached 5
LEVEL 3 LEVEL 2 LEVEL 1 Section 2 Update on Level 2 Regulation Delegated Acts/Level 2 timeline & outlook 2014 2015 2016 2017 2018 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Jan Jan Transposition period (national level) Transition period Entry into force: 2 September 2014 Delegated Acts ESMA RTS ESMA ITS Publication of ESMA final technical advice 04/2016 Publication of Draft RTS Q2/Q3 2016* 2 nd Batch: Q4 2016* Publication of Draft ITS Q2/Q3 2016* 2 nd Batch: Q4 2016* Delay until 2018 officially proposed by E.C. ESMA guidelines Q3 2016** National transposition (Level 1) *Possibility of extension ** Not all guidelines are expected to be ready by Q2 2016. ESMA will supplement its guidelines with Q&A s. 4th MiFID II Breakfast Delegated Acts/Level 2 another milestone is reached 6
Section 2 Update on Level 2 Regulation Investor Protection Level 2 legislative structure leaves room for national gold plating & interpretations 1. Scope 2. Safekeeping 3. Product governance 4. Inducements Directive Delegated Acts Regulation 1. Scope 2. Organisational requirements 3. Operating conditions 4. Operating obligations for Trading Venues 5. Reporting for commodity derivatives 6. Data provision obligations Principles and rules subject to Member State transposition 4th MiFID II Breakfast Delegated Acts/Level 2 another milestone is reached Principles and rules NOT subject to Member State transposition 7
Section 3 MiFID II Delegated Acts impacts summary 4th MiFID II Breakfast Delegated Acts/Level 2 another milestone is reached 8
Section 3 MiFID II Delegated Acts impacts summary MiFID II DA impact value chain and market interaction Key business impacts and challenges Product governance applicable to all FI placed in EU Manufacturers 1 Distributors Advice redefined and duties specified Idea Design Investment Documentation Marketing Private Banking 4 FX trades (re-)defined and subject to distinct rules SI rules subject to specific threshold test 2 3 Brokers & Counterparties Trading Venues & B2B investors B2B & Nominees Retail Banking / Execution Only Insurance 5 6 Inducement rules scrutinise current distribution set-up Insurance companies are at the melting point of IDD and MiFID II 4th MiFID II Breakfast Delegated Acts/Level 2 another milestone is reached 9
Section 4 Business Challenge 1 Product Governance 4th MiFID II Breakfast Delegated Acts/Level 2 another milestone is reached 10
Section 4 Business Challenge 1 Product Governance Product Governance Product governance rules are triggered for all FI in the EU High Medium Low Key MiFID II requirements Art. 9 & 10, MiFID II DD DA acts final texts & highlighted changes Product manufacturers will have to: Undertake a scenario analysis (compliant with PRIIPS) of their financial instruments which shall assess the risks of poor outcomes for end clients posed by the product and in which circumstances these outcomes may occur. Determine whether a financial instrument meets the identified needs, characteristics and objectives of the target market. Consider the charging structure proposed for the financial instrument. For product distributors, there is no more explicit requirement for a distributor to enter into a written agreement with a manufacturer non-subject to MiFID or its agent to comply with the duty to take all reasonable steps to obtain adequate and reliable information from the manufacturer 2016 Frequency Storage obligation Product manufacturer: Financial instruments: Annually (at least) and prior to any further issue or re-launch if material changes Product distributors: Offered and recommended products: Annually Services: Annually Product issuance approval Product documentation (i.e. KIID, PRIIPS, Term Sheet) Periodical product review Product range assessment 4th MiFID II Breakfast Delegated Acts/Level 2 another milestone is reached 11
Section 5 Business Challenge 2 FX Trades 4th MiFID II Breakfast Delegated Acts/Level 2 another milestone is reached 12
Section 5 Business Challenge 2 FX Trades FX Trades FX derivatives are exposing to SI rules and EMIR collaterisation High Medium Low Key MiFID II requirements Art. 7 & 10, MiFID II DR Art. 1, 4 & 7, EMIR OTC Collaterisation Frequency DA acts final texts & highlighted changes Definition of FX spot contract as a contract with delivery terms: (i) 2 trading days (ii) a period generally accepted as standard (iii) AND no ex-ante agreed rolling Derivative = FX forward contracts IF (i) exceeding 2 TD or market practice AND with at least on major currency (USD, EUR, GBP, JPY, CHF, HKD, etc) (ii) NOT a means of payment (i.e. settlement contract) Relevance for SI in case of admitted to trading on a trading venue (e.g. OTF) EMIR variation margin requirements apply above threshold of EUR 500.000 (minimum transfer amount) Ongoing review of positions (exposure) regarding variation margin requirements (EMIR) Market observation regarding admission to trading venue of standard FX forwards or FX swaps (i.e. CCPs) 2016 Storage obligation Ongoing trade reporting obligation (TD+1) MiFID Trade Reporting only if admitted to trading on a trading venue In case of SI relevance, pre-trade & post trade transparency requirements 4th MiFID II Breakfast Delegated Acts/Level 2 another milestone is reached 13
Section 6 Business Challenge 3 SI 4th MiFID II Breakfast Delegated Acts/Level 2 another milestone is reached 14
Section 6 Business Challenge 3 SI Systematic Internaliser Potential impacts for all non-matched traded FI High Medium Low Key MiFID II requirements Art. 12 to 17, MiFID II DR DA acts final texts & highlighted changes Firm which executes client orders OTC on frequent, systematic and substantial basis SI determination at the level of each financial instrument and expanded to non-equity Redefinition of thresholds for becoming SI for bonds, structured finance products, derivatives, emission allowances: exact percentage replaces range for frequency and substantial criteria Qualification of SI to the class of bonds/structured finance products issued by the same entity or by any entity within the same group Pre & Post trades transparency for instruments traded on trading venues within the same group Frequency Develop quarterly process to monitor breaches of thresholds at Legal Entity level Notification of SI status to National Competent Authority (NCA) 2016 Storage obligation History of OTC transactions and access to data on transactions executed in the UE on any trading venue or OTC on each FI (assessment of SI done a 6 months period). For which there is a liquid market (Art. 18 MiFIR). Currently all FX derivatives are deemed illiquid (Final Technical Report on RTS/ITS Sept 2015) Pre-trade prices reported to the market for all instruments 4th MiFID II Breakfast Delegated Acts/Level 2 another milestone is reached 15
Section 7 Business Challenge 4 Advice 4th MiFID II Breakfast Delegated Acts/Level 2 another milestone is reached 16
Section 7 Business Challenge 4 Advice Investment Advice Service level, information duties and responsibility increases High Medium Low Key MiFID II requirements Art. 44 to 70, MiFID II DR DA acts final texts & highlighted changes Definition of advice/service Level: 1. Independent advice some softening of obligations, but no clarifications on key terms adequately representative or proportionate to the scope 2. Both independent and non-independent advice can be provided firm cannot present itself as independent as whole (clear reference to independent services) 3. Advice addressed to the general public vs. personal recommendations via email or internet Statement of Suitability: For every advice situation a statement of suitability needs to be provided ex-ante and clarification for automated or semi-automated advice (i.e. ROBO) Legal persons or joint accounts: Policy to determine representative account holder (contacting party/-ies) Frequency Information on advice: Ex-ante Suitability Test/Statement: Ex-ante Suitability Review: Ex-post (optional) Permanent selection process for independent advice product range (global or limited) 2016 Storage obligation Service level per client Product range (selection process and evidencing) Suitability (suitability test and statements) Recording (client interactions pertaining to order placement) 4th MiFID II Breakfast Delegated Acts/Level 2 another milestone is reached 17
Section 8 Business Challenge 5 Inducements 4th MiFID II Breakfast Delegated Acts/Level 2 another milestone is reached 18
Section 8 Business Challenge 5 Inducements Inducements Proportionate, quality enhancing, recurring and disclosed High Medium Low Key MiFID II requirements Art. 11, 12 and 13, MiFID II DD DA acts final texts & highlighted changes Quality Enhancing unchanged: 1. Definition of additional or higher level service, e.g. open architecture, suitability review incl. asset allocation, tools for clients 2. Proportionality principle linking the received inducement to the quality enhancement 3. Recurring inducement payments require a continuous quality enhancement for the client Research unchanged: research (except minor non-monetary) considered as inducements Distribution chain Requirements apply to all firms that are providing an investment or ancillary service Documentation Record fee flows and how fees enhance quality Disclosure ex-ante and ex-post annually (amount/generic descript.) Frequency Permissibility: Ex-ante and ongoing Disclosure: Ex-ante & ex-post 2016 Storage obligation Retain documentation on inducement permissibility (quality enhancement test) Conflict of interest register 4th MiFID II Breakfast Delegated Acts/Level 2 another milestone is reached 19
Section 9 Business Challenge 6 Insurance investment products 4th MiFID II Breakfast Delegated Acts/Level 2 another milestone is reached 20
Section 10 Conclusions & Next steps 4th MiFID II Breakfast Delegated Acts/Level 2 another milestone is reached 21
Section 10 Conclusions & Next steps C-Suite roadmap for 2016 Key decisions and actions 1 2 3 Prepare implementation concepts & TOM(s) Perform detailed gap assessment Draft functional & technical specifications Define, document and communicate on new service level to clients 4th MiFID II Breakfast Delegated Acts/Level 2 another milestone is reached 22
Olivier Carré Luxembourg, MiFID II Leader 400, Route d Esch L-1471 Luxembourg Telephone: +352 49 48 48 4174 E-Mail: olivier.carre@lu.pwc.com Join us on www.pwc.lu/mifid or www.mifid2.lu This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers, Société Coopérative, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. 2016 PricewaterhouseCoopers, Société Coopérative. All rights reserved. In this document, refers to PricewaterhouseCoopers, Société Coopérative which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.
Appendix 1 DA Impact Summary 4th MiFID II Breakfast Delegated Acts/Level 2 another milestone is reached 24
Appendix 1 DA Impact Summary Summary of key impacts Topic Safekeeping of clients assets Best execution disclosure Suitability on joint accounts Suitability on accounts managed by third party Suitability when Robo advisors/managers Main key impacts from MiFID II DA Investment firm have to only deposits financial instruments with a third party in a jurisdiction where the safekeeping of financial instruments for the account of another person is subject to specific regulation and supervision and that third party is subject to this specific regulation and supervision Link to UCITS V Investment firms have to summarise and make public on an annual basis the top five investment firms in terms of trading volumes. The DA clearly exclude a look through until the trading Venue Investment firm shall establish and implement policy to determine who should be subject to the suitability assessment and how this assessment will be done in practice, including from whom information about knowledge and experience, financial situation and investment objectives should be collected. The financial situation and investment objectives shall be those of the client, but the knowledge and experience shall be those of the person authorised to carry out transactions on behalf of the underlying client. When providing investment advice or portfolio management services are provided through an automated or semi-automated system, the suitability assessment shall lie with the investment firm providing the service and shall not be reduced by the use of an electronic system. 4th MiFID II Breakfast Delegated Acts/Level 2 another milestone is reached 25