A fund will be a qualifying money market fund if its primary objective is to maintain the net asset value of the capital, it invests exclusively in high quality money market instruments with a maturity of no more than 397 days, and provides liquidity through same day or next day settlement. Most of the retail service providers are either matching orders (and might therefore be caught by the MTF requirements - see 4.9 below) or acting in a riskless capacity. Given the principles - led nature of regulation, in particular in the post-MiFID environment, fi rms should be slower to presume the professional clients can look after themselves. MiFIDs key requirement in relation to marketing communications is that they be fair, clear and not misleading, a requirement familiar to all FSA-regulated fi rms. As a result, some measures in the two directives overlap (for example, in relation to confl icts of interest). The marketing of collective investment schemes is restricted in a way not contemplated by MiFID. IHS Markit. Currency risks must be stated. and so on. changes to the fi nancial promotion regime that govern the ways that fi rms advertise their services; changes to the classifi cation of clients and the type of documentation that must be put in place before a fi rm can do business with a client; new suitability and appropriateness requirements that apply both to retail and professional customers; new requirements relating to the management of confl icts of interest; detailed new rules relating to handling of orders and, in particular, potential changes for fi rms that deal as principal in certain equities (these requirements are commonly referred to as pre-trade transparency or systematic internalisation); new requirements relating to the use of client assets; and. August 17, 2023. Keep a step ahead of your key competitors and benchmark against them. guidance is well underway, and in almost all areas fi rms have suffi cient materials to start reviewing their existing processes. FSA intends to retain its new rules restricting the ability of fi rms to use dealing commission to pay for other services on behalf of their clients. There are some key differences highlighted below. A confl ict of interest will exist only where a fi rm owes a duty to a client. For example . The communication must include the name of the investment firm; The communication must not emphasise potential benefi ts without also giving a fair and prominent indication of risks. So do institutional and retail investors. Therefore, the FSA are right to say that fi rms already have all they need to start MiFID project planning. All other clients unless the client can meet the qualitative and quantitative criteria. The sheer breadth and depth of its impact is unlike any change to fi nancial services regulation that the UK has ever seen. 1 Executive Summary . This is completely at odds with the FSAs existing regime relating to the promotion of collective investment schemes. Investment fi rms generally want to understand the objectives of their clients and, if for no other reason than their own credit risk, to understand that the client can bear the fi nancial risks of the transactions they are entering into. There are four key timing aspects to MiFID: First, FSA was required to publish, in draft, its new rules by 1 November 2006, to be followed by a three month consultation process. regulation 30 of the Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2017 applies algorithmic trading requirements to certain persons exempt under MiFID, where they are members of a regulated. There was a broad degree of support for the proposal, in particular political support from the Member States, coupled with some trepidation about the quality of, and philosophy that would underpin, any pan- European rulebook. If MiFID was intended to create a level playing fi eld by introducing maximum standards, and there remain differences between Member States, then the only logical conclusion for the Commission must be that a single European regulator is the only way to achieve its aim. Entry into application will follow 30 months after entry into force on 3 January 2017. Proposed new rules on FX contracts under MiFID II - Lexology MiFID II and MiFIR are designed to address these objectives by strengthening the transparency framework for the regulation of markets in financial instruments, including where trading in such markets takes place over- the-counter (OTC). MiFID is a European Union law that standardizes regulations for investment services across all member states of the European Economic Area. What is the clients preference regarding risk taking? MiFID views Professional Clients as being at a signifi cant disadvantage to the investment fi rms with whom they deal, and worthy of extensive regulatory protection. Firms that are operating as an ATS at present will need to be aware of and comply with the new requirements relating to operating an MTF, in particular in relation to pre- and post-trade transparency. Where the service being outsourced is the investment management of retail client portfolios, the outsourcing fi rm must ensure that the third party is authorised in another state and that there is a co-operation agreement between FSA and that third party state. PDF The MiFID 2 Guide - FCA Handbook Firms must ensure that if assets will be held in a country which regulates custody and client asset holding, that the instruments are deposited with an authorised institution in that third party country. What are the purposes of the investment to the client? Equities, commodities, debt instruments, futures and options, exchange-traded funds, and currencies all fall under its purview. There is a new provision for carve-outs to pre-trade transparency allowing for deferral of pre-trade data. There are relatively few areas where MiFID will create structural change for many business lines. There will also be a new regime for SIs in non-equity financial instruments. In this note we will highlight the key aspects of these requirements and provide an overview of the common challenges investment firms are facing ahead of and during implementation. On 16 January 2019, the Central Bank has published the seventh edition of it's Investment Firms Q&A which includes new Q&As ID 1041 and 1042, in relation to tied agents under the MiFID II Regulations. It also notes MiFID 2 includes a "reasonableness" standard so firms can adopt . There are a number of elements to this defi nition. For instance, when holding commission rebates in accordance with FSAs commission rebate rules, commission will not be client money until its ownership has been determined. This guide comprises the following sections: MiFID implementation will not be easy but, with proper planning, fi rms will be able to ensure that they minimise the burden of change, both to businesses and to Legal and Compliance teams. New European commodity derivatives regime - Global law firm It not only covers virtually all aspects of financial investment and trading but also covers virtually all financial professionals within the EU. FSAs analysis here seems to be closely linked with the above description of FSAs view on what constitutes dealing on own account, in that such transactions, where on a matched principle basis, might be said to be executed inside the regulated markets. FSA has said that it intends to retain its existing defi nition of client money, and to include a carve-out refl ecting the effect of the existing banking exemption which means that a bank accepting a deposit does not have to place the deposit with anyone else. However, fi rms will need to view their new responsibilities in light of MiFIDs philosophy. Some jurisdictions have talked about this term in a very broad sense - for example, arguing that payments of commission for the sale of products are designed to enhance the quality of the service to the client by fi nancing the provision of advice. The Implementing Directive extends this requirement in the following way. MiFID is an attempt to deal with these two issues. Alternatively, reporting to a trade repository under EMIR satisfies the obligation provided the EMIR report contains at least the same information. PDF Alternative Investment Fund Managers Directive (AIFMD) - Deloitte US In our view, it would be diffi cult for many fi rms to say that they carry on business in a disorganised, infrequent or unsystematic ways if they see themselves as being in the market for trading shares. 2008 is unlikely to see lots of enforcement cases for technical breaches of MiFIDs requirements. Directive on Markets in Financial Instruments repealing Directive 2004/39/EC and amending Directive 2011/61/EU and Directive 2002/92/EC. MiFID II will severely restrict those exemptions and will have a significant impact on firms that currently rely on them. FSA has also made it clear that there is no way around the MiFID restrictions on depositing client funds with unregulated custodians, and therefore fi rms that use such custodians in third countries will need to review their arrangements. MiFID II - Overview, History, Who and What It Covers Firms will need to review their existing processes to make sure that, in the future, they can comply with requirements relating to categorisation. The second, contained in the Directive, contains the core conduct of business obligations relating to fi rms. It is the foundation of financial legislation for the European Union, designed to assist traders, investors, and other participants in the financial sector. management fees, advisory fees, custodian fees, entry- and exit charges etc.). But on the basis that most industry players will try to take reasonable steps, what is FSAs approach to enforcement action likely to be? Electronic trading is encouraged since it is easier to record and track. The legislative proposals were the subject of intense political debate between the European Parliament, the Council of the EU, and the Commission. PDF MIFID II REQUIREMENTS AND CHECKLIST - HubSpot (Reference, see 15 Answer 11 (e) in MiFIR Q&A link) A gray area exists with options on ADRs. A revised version of the originalMiFID, MiFID II rolled out on Jan. 3, 2018, more than six years after the European Commission, the EU's executive branch, adopted a legislative proposal for it. There have even been suggestions, fuelled by the Commission, that Member States that are late will. Where Member States permit the marketing of AIF to retail investors they can impose stricter requirements. 65(6) of the MiFID II Delegated Regulation Despite the fact that research was covered in great detail in the Market Abuse Directive (MAD), the drafters of MiFID have felt it necessary to add additional restrictions. Will Kenton is an expert on the economy and investing laws and regulations. MiFID expands the list of instruments compared to ISD. Whether the firm is likely to make a financial gain, or avoid a loss, at the expense of the client (guidance makes it clear that normal business operation in order to achieve a profi t is not caught); Whether the firm has an interest in the outcome of a service distinct from the clients interest; Whether the firm has a financial or other incentive to favour the interest of another client over the interest of this client; Whether the firm carries on the same business as the client; Whether the firm receives an inducement relating to any particular service. Systematic Internalisers (SIs), firms that, on an organised, frequent, systematic and substantial basis, deal on own account by executing client orders outside of a trading venue without operating a multilateral system, will have pre-trade transparency obligations. The key restriction is that such business can only be undertaken in relation to non-complex instruments, and the defi nition of a non-complex instrument is very restrictive. MiFID contains no similar restriction. April 2014. According to the ESMA guidelines, a . A marketing communication is subject only to Home State rules. FSA is to delete its existing requirement that fi rms provide employees with a written notice of the personal account dealing restrictions. Transparency requirements under MiFID II and MiFIR generally fall into two categories. Finally, to be classifi ed as non-complex, an instrument must be such that information on its characteristics is likely to be understood so as to enable the average retail client to make an informed judgment about it. FSA has indicated that fi rms currently subject to FSAs Alternative Trading System rules will be the only fi rms likely to be operating an MTF. Transaction Reporting Under MiFID II - CME Group "Counting the Cost of MiFID II," Page 1. Firms are required to document execution policies and are likely to include compliance with these policies as part of their terms of business. The Implementing Directive makes it clear that a function is only critical or important if a defect or failure in its performance would materially impair the continuing compliance of a fi rm or its fi nancial performance, or the soundness or the continuity of its services. The Markets in Financial Instruments Directive (MiFID) is one of the cornerstones of EU financial services law setting out which investment services and activities should be licensed across the EU and the organisational and conduct standards that those providing such services should comply with. The MiFID II and MiFIR regime also captures economically equivalent contracts (or 'lookalikes') which extend transparency to new depths to ensure adequate disclosure for purposes of systemic monitoring. First, the Commissions intention was to expand the range of services that could be provided under the European passport regime. In particular, it imposes morereporting requirements and tests in order toincrease transparencyand reduce the use of dark pools (private financial exchanges that allow investors to trade without revealing their identities) and over-the-counter (OTC) trading. Training on new requirements may be necessary; and fi rms may feel some frustration at the lack of clear rules in some areas where preference has been given to a principalsbased regime; but ultimately fi rms will need to show that they took reasonable steps to achieve compliance with MiFIDs requirements. Outsourcing of important operational functions may not be undertaken in such a way as to impair materially the quality of its internal control and the ability of the supervisor to monitor the fi rms compliance with all obligations. Firms may want to rely upon a Nabarro Nathanson MiFID Opinion (see Section 5) to demonstrate compliance. What is the clients fi nancial situation and can they bear the risks of the investment? Dodd-Frank Act: What It Does, Major Components, and Criticisms, Brexit Meaning and Impact: The Truth About the U.K. Leaving the EU, Tier 3 Capital: Definition, Examples, vs. Appendix 4.4 contains the information required to assess appropriateness for Retail Clients. This gives fi rms an added challenge. FSA is much more likely to act with the industry in order to help fi rms who have been seen to take reasonable steps to prepare for MiFID to improve performance in any areas that may, nonetheless, still be lacking. MiFID II covers virtually every asset and profession within the EU financial services industry. When dealing with retail or professional clients, and whether a suitability or an appropriateness test applies, fi rms are not permitted to not encourage clients to provide them with the required information. Such fi rms might be required to revert to the client if they intend to dis-apply best execution to the risk-taking elements of the trade. One key difference is that in a number of cases, clients categorised as Professional Clients under MiFID receive more regulatory protection then they would have done as Intermediate Customers under the existing FSA rules. Firms can rely upon the information provided by clients unless they are aware or ought to be aware that the information is manifestly out of date, inaccurate or incomplete. For example, on occasions it may be that a fi rm decided that no change was necessary, and it would be important to be able to show why, and how, this decision was reached. Firms will need to seek a sensible way through all these contradictions. Firstly, there are general transparency requirements which can be separated into pre-trade and post-trade disclosure of the details of orders submitted to and transactions conducted on a trading venue (i.e. Unfortunately, MiFID has failed to achieve that objective and fi rms will need to be able to classify their clients in accordance with the rules applicable in the Member State of the client, not the firm. Firms are required to: publicise restrictions on personal account transactions; be informed by employees of all transactions that they enter into; and to keep a record of such transactions (although these requirements do not apply to decisions under a discretionary portfolio mandate, or transactions in UCITS or their equivalents). Despite this, ARMs tend to have lighter obligations than APAs. It focused too narrowly on stocks (ignoring fixed-income vehicles, derivatives, currencies, and other assets) and did not address dealings with firms or products outside the EU, leaving the rules about those to be decided by individual members. On the one hand, Recital 33 of MiFID states that it applies to the fi rm which owes contractual or agency obligations to clients. Cryptocurrency Regulations Around the World. FSAs guidance suggests that fi rms will be able to make it a term of their dealing with Professional Clients that transactions will be on a request for quote basis without best execution applying, although in practice fi rms will need to be careful that sales activities do not mean that the quote came before the request, as FSA state that the existence of an order cannot be determined solely by reference to a terms of business. This situation would never do in relation to a directive such as MiFID that was intended to produce a single European rulebook. Appendix 4.8 contains a fl ow chart setting out when a fi rm might be considered to be a Systematic Internaliser. ARMs are designed to enable investment firms to report data to the competent authorities whereas APAs will make public post-trade transparency information required to be provided by investment firms, including SIs. Under MiFID they will have a passport applied to them for the fi rst time. Brexit refers to the U.K.'s withdrawal from the European Union after voting to do so in a June 2016 referendum. MiFID II: Definition, Regulations, Who It Affects, and Purpose Once a fi rm has classifi ed its clients, it needs to gather information about that client. RMs, MTFs and OTFs will have to offer pre-and post- trade transparency data separately and to publish it free of charge within fifteen minutes of publication of a transaction. CESR had originally argued that further guidance was required, but the Commission disagreed, and FSA has taken this to its logical conclusion by stating that it will no longer require Terms of Business to be agreed between Professional Customers. Following a thorough MiFID review and practical implementation project, fi rms will have a record of what has changed. Theyprovide pricing and cost advantages to buy-side institutions such as mutual funds, and pension funds, which claim that these benefits ultimately accrue to the retail investors who invest in these funds. Therefore, in future, most business will be subject to the regulation by the Home Member State. Client agreements in MiFID II Article 19(7) of the MiFID I Directive contains a high-level obligation on firms to establish a written agreement with the client setting out the rights and obligations of the parties and the other terms applying to the services. SIs do, however, maintain a certain level of discretion as they are able to choose their clients on a commercial basis. If a product is available in an EU nation, it is covered by MiFID IIeven if, say, the trader wishing to buy it is located outside the EU. Together with Regulation No 600/2014 it provides a legal framework for securities markets, investment intermediaries, in addition to trading venues. Firms currently have to deal with FSAs detailed requirements which often end up with lengthy fact-fi nd documentation and, in addition, Reason Why Letters to justify courses of action. Requirements - General When considering the following sections, firms must always consider if the omission of any relevant fact will result in the information being insufficient, unclear, unfair or misleading. FSA is currently working hard behind the scenes to try to retain the basic elements of the existing regime, but it is diffi cult to see how they are compatible with MiFID and, if FSA does take this view, its rules might be challenged. You can be subject to a MiFID derived or MiFIR requirement, even if you are not an authorised financial institution. The Implementing Directive effectively narrows this obligation merely to Retail Clients, on the basis that investment fi rms can assume that professional clients have the necessary experience and knowledge. If a fi rm is a Systematic Internaliser as defi ned above, it has certain obligations. The other instruments caught by MiFID that were not caught by ISD are already subject to regulation in the UK. We have already observed, in Section 3.3 above, the extent to which the MiFID approach to client classifi cation is at odds with the overall philosophy of the directive. Does our compliance manual contain all of our conduct of business obligations, or are some kept elsewhere e.g. Pre-trade transparency obligations to make public bids and offer prices and depth of trading will be extended to apply to a new category of trading venue, OTFs, as well as RMs and MTFs and will also apply to actionable indications of interest. MiFID II | European Securities and Markets Authority For some fi rms, it is clear that IT costs may be substantial; management time may have been, and may continue to be, eaten up by MiFID preparation; and some business will be fundamentally altered following MiFIDs implementation. Reporting must be made through an ARM or the trading venue through whose system the transaction was completed. 4.3 CLIENT DOCUMENTATION (TERMS OF BUSINESS). Investment research is the subject of another regulatory defi nition in MiFID. Once published, data may be subject to consolidation or further onward reporting by Approved Publication Arrangements (APAs), Approved Reporting Mechanisms (ARMs) and Consolidated Tape Providers (CTPs). What Is a Multilateral Trading Facility (MTF) & How Does It Work? Early planning will help identify implementation issues. This was a clear early warning that, following MiFID implementation, the FSA did not expect fi rms to say that they had been unable to complete MiFID implementation on time. This is the second step in our client lifecycle. Bankers, traders, fund managers, exchange officials, and brokersand their firmsall have to abide by its regulations. In addition, there must be a level of liquidity in any instrument before it can be considered non-complex, and the liability of the client must be limited to the cost of acquiring the instrument itself. MiFID II | Third Countries | Global law firm | Norton Rose Fulbright However, if a branch does overseas business (for example, a German branch of a UK fi rm deals with Austrian clients) then the UK rules apply to the business undertaken by the German branch. Under MiFID I, firms are subject to the following recordkeeping requirements: Firms must keep records of: (a) every client order and (b) every decision to deal taken in the course of providing the service of portfolio management.1 Firms must keep records of transactions. The final MiFID II and MiFIR texts were published in the Official Journal of the EU on 12 June 2014 and entered into force 20 days later on 2 July 2014. At a high-level, whilst all FSA rules apply to retail clients, rule application is very limited in professional market - Intermediate Customers can opt out of protections such as client money and best execution. In many respects, the Commission has managed to maintain this principle in the detail of MiFID. The Implementing Directive makes it clear that the confl ict of interest policy must be applied to research analysts, and there are restrictions on the activities of analysts which are similar to those already contained in FSAs rules. All derivatives contracts are effected by MiFID II and led to increased reporting requirements for trading participants. Other activities undertaken with such parties. On July 20, 2023, Virgin Media was granted permission to lodge an appeal, but it could be many months before an appeal is heard. An Executive Summary, which can act as both an introduction to the topic for the uninitiated and as a summary for management who need to be aware, at an overview level, of what MiFID means, and who will be looking to Legal and Compliance Offi cers to ensure proper implementation; An explanation of the background to MiFID - like many regulatory changes, it often helps to understand what MiFID is trying to achieve to make sure that a fi rm can properly interpret the new rules; A description of changes to the scope of MiFID when compared with the existing ISD regime; Detailed coverage of the key rule changes. Application to all firms, not just those carrying on MiFID business In seeking to avoid two CASS rulebooks, the FCA has indicated that it will apply the MiFID II requirements to all firms. This is the only wholesale markets measure where FSA will seek permission to gold-plate, and it is likely to come under pressure not to do so. FSAs rationale is that services are provided on behalf of clients, whereas activities are conducted with clients. We hope that a MiFID Opinion will give comfort to senior management, as well as Legal and Compliance Offi cers, and prove a helpful record should FSA decide to review MiFID implementation at a fi rm or across the industry. What are fi rms intended to read into this development? All FSA-regulated fi rms will need to be aware of, and plan how to meet, the changes it will bring. of MiFID II, with a focus on OTF trading in bonds and derivatives. Second, the Commission wanted to enable fi rms to conduct cross-border business on the basis of harmonised rules. In structure, MiFID follows the approach of its predecessor, ISD, in that it identifi es specifi c instruments to which the Directive relates. However, once an initial gap analysis has been undertaken, fi rms should then be able to identify key areas of change; get management and business by-into proposed action points; and proceed to implement those changes. E.U. Indeed, for some fi rms, MiFIDs key impact will be to require an extensive review of existing policies and procedures and for revised compliance systems, documentation and controls to be put in place. This section sets out some practical steps on managing the diffi culties of planning for MiFID implementation. Firms must maintain records and accounts in a way that ensures their accuracy. The existing UK regime applies to both written communications (non-real time fi nancial promotions) and oral promotions (real-time). Certain suitability and appropriateness requirements are applied to Professional Customers, and the extent to which execution-only business can be used to justify the nonapplication of such rules is restricted. However, conducting business on a cross-border basis was still not easy. The intention behind MiFID is to create pan-European rulebook. Coordinating implementation is a complex process requiring, potentially, new procedures, changes to business practices, and correspondence with clients. Despite trading on US exchanges, ADRs are reportable under MiFID II if they represent shares in an EEA stock. MiFID 2: Keeping it on record | Womble Bond Dickinson
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