European Union: EU MiFID | In Brief

EU MIFID: Markets in Financial Instruments Directive in brief with a focus on retail clients

Objectives of MIFID

MIFID is a cornerstone of the EU's Financial Services Action Plan (FSAP) to create a single market in financial services by 2010. It enhances the ability for cross-border trading in the EU and provides better protection for investors- Investment Services 'passport' to market transparency.

So what is its scope?

Most types of firms across the industry in a wide variety of sectors (investment banking, asset management, exchanges) are affected by MIFID. Among them are Retail Banks and Insurance Firms conducting securities business and regulated markets and investment exchanges. MIFID increases the scope of existing regulation from transferable securities to derivatives and commodities.

What is MIFID exactly?

Core investment services covered by MIFID include the reception and transmission of orders, the execution of orders on behalf of clients, dealing on own account, portfolio management, underwriting and/or placing of financial instruments etc.

Investment products covered by MIFID include:

  • Transferable securities
  • Money market instruments
  • Units in collective investments (non-UCITS)
  • Options, futures, swaps and any other derivative contracts related to:
  • Securities, interest rates or yields
  • Commodities that may be settled in cash
  • Commodities that may be settled physically and are traded on a regulated market or MTF
  • Climatic variables, freight rates, emission allowances or inflation rates that may be settled in cash
  • Financial Contracts For Difference
  • Derivative instruments for the transfer of credit risk

Provides for 3 competent authorities:

  • The Central Bank of Cyprus
  • The authority for the supervision and development of Co-op societies
  • The Cyprus Securities and Exchange Commission

Has MIFID changed? What is new with MIFID?

Well it now has a broader scope and is the single conduct of business regime. It has also extended its organizational requirements.

Markets have to be more transparent with regards to its systems and processes etc., record keeping, reporting requirements, business models, and supervisory processes.

 Clients have to be categorized into three predetermined categories:

  • Retail clients
  • Professional clients
  • Eligible counterparties

Changes in client communication:

Communication must be in good time, clear, fair and not misleading

Scope:

  • Marketing documentation
  • Client agreement
  • Client transaction reporting
  • Portfolio statement

Let's focus on retail clients:

With regards to retail clients, the information provided must be accurate and balance potential benefits with "fair and prominent" indication of risks.

Where comparisons are made, they must be meaningful, fair and balanced, appropriately sourced and referenced, and Include key facts and assumptions.

Information should be presented in a way that is likely to be understood by the average member of the group to whom it is directed, or by whom it is likely to be received.It should not disguise, diminish or obscure important information, and material changes to information provided must be notified in good time.

What sort of information should be provided to the client?

  • Information about the company and its services for retail clients and potential retail clients
  • Additional information for retail clients regarding portfolio management services
  • Information about financial instruments including a description of nature and risks of financial instruments in sufficient detail to enable clients to take investment decisions on an informed basis
  • Information about costs and associated charges
  • About outcomes

With MIFID comes Internal Organization issues:

Senior management has more responsibility than ever before.
Senior management is responsible for; insuring that the firm complies with all internal organization provisions, it should review the effectiveness of the policies, arrangements and procedures put in place to comply with MIFID, It should take appropriate measures to address any deficiencies, and it should receive on a frequent basis, written reports from internal audit, risk control and compliance function.

What about the Compliance function?

Well here, a company has to establish a permanent and effective compliance function which works independently.

The compliance function should undertake two principal roles:

  • monitors adequacy and effectiveness of policies and procedures in place to ensure compliance and actions taken to address deficiencies, AND
  • advises relevant personas on how to comply on an ongoing basis

Compliance function – Key impacts introduced by MIFID

  • Thematic compliance reviews
  • Compliance deficiency/rectification log
  • Training of ALL employees to promote compliance behavior
  • Possible revisions of compliance manuals
  • Improved complaints handling via escalation procedure and systemic reporting to compliance
  • Effective interaction with other RM and control

RISK CONTROL-requirements put in place by MIFID:

  • Risk management policies and procedures need to be establish and maintained.
  • Business risks need to be identified and it is important to set risk tolerances (limits).
  • A company must be able to demonstrate that the arrangements to manage risks are consistently effective.
  • An independent risk control function should be in place where nature, scale & complexity of the business warrants it.

MIFID requires that records are retained. The requirements are that:

  • All records have to be kept for 5 years

Records have to be stored in a way that:

  • Facilitates the competent authority's access to them
  • Shows where changes or corrections have been made (and what the original entry was)
  • Once a transaction is settled, it cannot be changed or manipulated further

CLIENTS ASSETS (cash)

Requirements:

  • Upon receiving client funds, a company must promptly place these into an account (or accounts) with either
  • A central bank
  • An authorized EU bank
  • An authorized bank in a third country
  • Or a qualifying money market fund (unless the firm itself is an authorized credit institution)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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