MiFID stands for Markets in Financial Instruments Directive. European Commission first adopted MiFID I in April 2014 and proposed in November 2007, just before the 2008-09 financial crisis with the key objective of increasing competition in financial market and protect consumers. Post Financial crisis in 2008, European Commission submitted proposals to revise the Markets in Financial Instrument Directive (known as MiFID – II) which will come into force from 3rd January 2018. MiFIR is name of the accompanying regulation of MiFID and MiFID II Laws

    MiFID II Aims and Objectives

    ⦁ Aims to make Financial markets

    a. More efficient
    b. More resilient
    c. More transparent
    d. Data Standardization

    ⦁ Objectives

    a. Ensure a level playing field for all Financial Entities
    b. Increase Market Transparency for market participants
    c. Improve investor protection
    d. Improve Corporate Governance
    e. Ensure Best Execution

    ⦁ Coverage of MiFID II

    ⦁ Banks, Investment Firms within EU*
    a. Interdealer Brokers, Stockbrokers, Investment Advisors
    b. Investment and Portfolio Managers
    c. Financial Advisers
    d. Local Authorities

    Key Pillars and Rules of MiFID II:

    Client Services

    ⦁ Client onboarding (Sales and Relationship Management)

    a. Capture all additional client information for classification and suitability check
    b. Proper client categorization based on services chosen
    c. Maintaining records of all voice and electronic communication

    ⦁ Marketing and distribution:

    a. Mandatory periodic suitability and appropriateness check
    b. Restriction on distribution of third-party products
    c. Proper Marketing and Distribution of advisory materials

    ⦁ Product Governance:

    a. Any Product offered in the market must be suitable for the target customer
    b. Product design should be done considering Clients’ expectations and suitability
    c. Product Distribution strategy should be appropriate and consistent with the need of target market

    ⦁ Portfolio management:

    a. Periodic assessment of the suitability
    b. Rebalance Portfolio based on client’s risk profile change or return requirements
    c. Enhanced and frequent reporting on client service information
    d. Provide all cost break down and disclose all Conflict of Interests

    Investor Protection:
    ⦁ Fair Dealing and Reporting:

    a. Firms treat their customers in a fair and transparent way
    b. Put customers interests at the centre of their business models and corporate culture

    ⦁ Service Quality and Compliance:

    a. Increased level of disclosures for all investors
    b. Stricter complaint handling procedures, mitigation and disclosure of conflict of interests, oversight of remuneration policies, and control of marketing materials
    c. Ban of inducements within all EU member states

    ⦁ Recordkeeping:

    a. Recordkeeping requirements for 5-7 years of All services and transactions
    b. Records of all voice and electronic interactions with clients

    Best Execution:

    ⦁ Investment research:

    a. Development of new advisory offerings
    b. Selection of proper Trading/Execution Venues which provides best execution

    ⦁ Transaction Management:

    a. Compliance with new rules and trading obligations
    b. Provides annual report of top five execution venues and quality of execution obtained
    c. Introduction of position limits and controls for commodities derivatives trading

    ⦁ Guarantee Best Execution:

    a. Provide Best Execution in terms of cost and time
    b. More control on High Frequency and Algorithmic trading
    c. Limitation on trading on Dark Pools for equities and equity-like products

    Pre – Trade Transparency

    ⦁ Product Scope:

    a. MiFID II product scope covers Shares, depository receipts, exchange traded funds, certificates ,bonds, structured finance products, emission allowances and traded derivatives (“non-equity instruments”)

    ⦁ Trading Venues:

    a. Regulated markets (“RMs”) and multilateral trading facilities (“MTFs“)
    b. Organised trading facilities (“OTFs”), Systematic Internalisers (“SIs”)
    c. Other investment firms trading in over-the-counter (“OTC”) financial instruments

    ⦁ Waivers:

    a. Pre-Trade Waivers are available for orders that are large in scale compared with normal market size, request-for quote and voice trading systems, derivatives which are not required to be traded on RMs, MTFs or OTFs for which there is not a liquid market.
    b. If a waiver is granted, indicative pre-trade bid and offer prices must be published continuously during trading hours.

    ⦁ Limit on Waivers:

    a. MIFID II also limits dark pool trading according to a “double volume cap” mechanism
    b. Under this mechanism, waiver is capped at
    c. 4% of total volume on organised trading venues,
    d. 8% for a given stock across EU


    Post – Trade Transparency

    ⦁ Reporting Scope:

    a. Post-trade transparency requirements are applicable for both equity and non-equity instruments
    b. Apply to all investment firms (including SIs) as well as trading venues i.e. MTFs, OTFs and RMs.
    c. SIs are are required to publish the volume and price of those transactions and the time at which they were concluded through an Authorised Publication Arrangement(“APA”) – Real time reporting as early as technologically possible
    d. SIs will be subject to both Pre and Post Trade Transparency requirements

    ⦁ Key Fields:

    a. Key Transaction details, For examples: Execution date and time; Publication date and time; Venue; Instrument type code; Instrument identification code; Price; Notional; Quantity; Transaction identification code; and To be cleared or not
    b. Buyer and Seller details
    c. Buy/Sell decision makers
    d. Transmission, Instrument details
    e. Waiver indicator
    f. Algorithm details (For Algorithmic trading)

    ⦁ Real Time Reporting Scope:

    a. Reporting deadline will be reduced to 5 mins from 1st Jan 2020 from existing 15 mins

    Corporate Governance and Supervisory Powers

    ⦁ Revamp the role of Compliance Function:

    a. Compliance function to be more effective and get more involved in firm’s business
    b. Monitor remuneration policies, mainly for key executives
    c. Monitor firm’s risk and business on periodic basis

    ⦁ Role of Management Body:

    a. Management should have adequate knowledge and experience about the business
    b. Should take responsibility and accountability considering client’s interest in mind
    ⦁ Proper Corporate Governance Framework:
    a. Set a proper corporate governance framework for the firm and strengthen control functions
    b. Create a new function such as Chief Control Officer and/or strengthening the role of the Chief Compliance Officer
    c. Maintain all documents and communications including recording of where senior management deviates from the compliance officer’s assessment and recommendations

    Impact of MiFID II on European Banks

    ⦁ Strategy

    a. Rework around the product type offered in the market
    b. Rework around the trading platforms they will operate in the future,
    c. Rethink viability of certain businesses such as Derivatives, Automated Trading
    d. Use of Trading venues, OTFs and other third parties

    ⦁ Operating Models

    a. Improvement of trading workflow and reporting process
    b. How traders or business lines interact with clients
    c. How clients are categorized and orders are handled

    ⦁ Data and Technology

    a. Standardization of Data across different financial institutions including LEI, UTI etc.
    b. High impact on the technology side due to more significant data requirements, reporting requirements
    c. Technology requirements to store recording of client discussions

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