What is MiFID II?
The European Commission (EC) released in October 2011 its proposal to amend and extend the Markets in Financial Instrument Directive (MiFID), referred to as MIFID II. After intense discussions between the Commission, Council and Parliament (the “Trialogue”), the revised Directive was adopted by the European Parliament on 15 April 2014.
While primary objectives of the initial directive (“MiFID I”) were to increase the competition, improve investor protection and EU passporting, MIFID II introduces a range of measures which seek to address issues raised by the financial crisis, such as making financial markets more efficient, resilient and transparent, improving investor protection, as well as addressing commitments made by the G20 on these topics.
Key areas of impact in the MiFID II proposal include:
- The scope of MiFID will be extended to more firms, such as certain commodity firms, data providers and third country firms.
- Additional instruments will be brought into the scope of MiFID, such as structured deposits/products and emissions allowances.
- Derivatives, which are sufficiently liquid and eligible for clearing, will need to be traded on eligible platforms.
- New category of trading venue, called Organised Trading Facilities (OTFs), will be introduced.
- Requirements will be imposed on operators of OTFs and the operation of OTFs will be introduced as a separate permission.
|Transparency and transaction reporting
- Transparency requirements will be extended to additional instruments, such as bonds and derivatives.
- Trade reports will need to be published through Approved Publication Arrangement (APA) firms, which will also be subject to authorisation and certain organisational requirements.
- Transaction reports will need to capture additional information (including identification of individuals – or computer algorithms where relevant – responsible for the investment decision).
- Key systems changes could be required to capture additional reporting requirements (including new instruments). Static data may require cleansing in order to ensure additional information is reported correctly.
|Third country firms
- MiFID II seeks to introduce a more harmonised regime for third country firm access to the EU.
- As a minimum, third country firms seeking to access the retail market will be required to establish branches.
- The 3rd country branch would need to meet certain MiFID II requirements and be subject to authorisation and supervision in by the National Competent Authority where the branch is established.
- An equivalence decision will need to be made by the EC in respect of third countries before firms from these jurisdictions can request to provide services.
- Advice must meet certain criteria in order to be classified as “independent” (including the assessment a sufficient range of financial assets).
- Additional information will need to be provided to clients.
- Definition of non-complex instruments will be updated to remove “structured UCITS”, which will prevent these funds from being sold on an “execution-only” basis.
- Firms should ensure that best execution for retail clients includes the total cost, that they are not receiving any benefit for routing orders to a particular venue that would be a conflict of interest and that they meet disclosure requirements.
- When retail client assets are involved, the possibility for firms to conclude title transfer financial collateral arrangements for the purpose of securing or otherwise covering their obligations is limited.
- Receipt of third party monetary inducements by certain firms, such as portfolio managers and firms giving independent investment advice, will be banned
- Firms should assess their use of third party inducements and incentive structures for all investment services, regardless of client type, to ensure there are no conflicts of interest.
- National regulators will have powers to permanently ban products, in coordination with ESMA. ESMA will also be able to temporarily ban products.
- Position limits for products, such as commodity derivatives, will be introduced. This will include powers for regulators to require existing positions to be reduced.
MiFID II timeline
The following key milestones are expected in the next coming months:
Deloitte MiFID II services
Though MiFID II will not be transposed and applied before end 2016 / early 2017, impacts will be significant, especially with the ban of inducements. Certain countries in Europe (e.g. UK, Netherlands) have already implemented similar measures in their national legislation. Other EU countries did or will follow this trend.
It is now time for the industry (credit institutions, investment firms, asset management) to assess first strategic but also operational impacts on this forthcoming text, by estimating especially which of their revenue is at risk and how this loss of revenue can be compensated.
In fact, while MiFID I was mainly a compliance matter for private banking, MiFID II questions strategy and business models. Because changing a business model may take years, investment firms need to clearly assess now the impacts given the nature of their activities.
Deloitte Luxembourg can help you understand and assess potential impacts that MiFID II will have on your business. Those firms that go through this assessment exercise sooner rather than later will find that they are well positioned to plan for the necessary changes to their business model and their operations, create new opportunities to further increase their market position while minimising business disruption and compliance costs.
In order to properly and timely anticipate strategic impacts and new compliance requirements of MiFID II, Deloitte Luxembourg can also provide you with quality and practical trainings which will address your specific needs.
Deloitte Luxembourg delivers sustained improvements in business performance to its clients in all aspects of enterprise transformation including strategy, process, and information technology.
Our multidisciplinary team of consultants, including specialists in strategic planning, regulatory consulting, risks mitigation, organisation and information systems technology, will complement your team and help you to create, defend and/or re-invent your business and to develop economic models by guiding you through the complexities of this new regulatory environment.