Document process management solutions for MiFID compliance

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1 Adobe Technical White Paper produced in conjunction with Equiduct Document process management solutions for MiFID compliance Adobe technology provides document process management solutions, enabling investment firms to meet new European Union financial regulations Table of contents 1 What is MiFID? 2 New customer records required by MiFID 3 Information required by MiFID 4 Document handling requirements 4 Document process alternatives 5 A technology solution for MiFID customer records management 5 Summary The European Commission s Markets in Financial Instruments Directive (MiFID) is one of the most important and far-reaching reforms ever made to the European capital markets. MiFID is designed to harmonize investment rules and procedures, provide customer protection, and increase market transparency across Europe. The new regulations will have a significant impact not only on how banks and investment firms conduct business and report transactions, but also on the type and breadth of client information financial firms are required to collect and retain. The new regulations require investment firms to gather and maintain information records that classify customers according to numerous financial and investment factors. Firms are also required to document the suitability of investment instruments and strategies for customers based on their classification. Firms must maintain trade and transaction records for individual clients, along with documents that confirm they considered client investment preferences when making trades and investment decisions. MiFID introduces significant document process management challenges that cannot be addressed with manual, paper-based processes, which are counterproductive to the goals of MiFID. MiFID documentation requirements are best addressed by a comprehensive system of electronic forms, document delivery, and records management that enables firms to capture, process, and archive client information efficiently and more securely. What is MiFID? European financial markets have changed rapidly during the last few years. As traditional geopolitical investment barriers ease, regulators are producing new investment rules and procedures to create an integrated European market, encourage competition, and protect investors in this evolving trading environment. In April 2004, the European Commission finalized MiFID, introducing a single market and regulatory framework for investment services across 29 European member states. The directive will take effect in November 2007.

2 MiFID aims to create a single, integrated, and transparent market for investment services, protecting investors by ensuring access to more open and competitive markets and providing appropriate guidance for levels of investment. MiFID has far-reaching implications, including a requirement that banks and investment firms collect, maintain, and archive significant amounts of information about their customers. While most firms have sophisticated IT infrastructures for transactional activities, such as trading and reporting, few have a document process management infrastructure in place for customer records of the type and scale required by MiFID. Adobe has leveraged its free and ubiquitous Adobe Reader software, enabling customer-facing applications to be easily accessible and immediately usable by clients, constituents, partners, and employees with a variety of devices and operating systems. New customer records required by MiFID Customer classification: One of MiFID s stated objectives is to protect investors. Accordingly, firms must classify their customers in order to ascertain their financial status, investment goals, and appetite for risk. After a customer has been classified, a firm can apply the appropriate standard of oversight, information sharing, and duty of care to meet the customer s stated investment goals and choices. MiFID requires investment firms to collect information on their customers and maintain documentation that supports categorizing them into one of three classifications: Retail clients: Mainly individual investors who are investing their own money. Professional clients: Individuals and institutions that possess the experience, knowledge, and expertise to make their own investment decisions and properly assess risk. Eligible counterparties: Investment firms, credit institutions, insurance companies, pension funds and their management companies, and other regulated and authorized financial institutions. Suitability and appropriateness: Another key provision of MiFID requires investment firms to provide a level of service that is suitable and appropriate to clients needs. To comply with this requirement, a firm may not provide investment advice or portfolio management services prior to collecting client information, including relevant knowledge, investment experience, and financial situation and objectives. MiFID regulations require firms to confirm clients can manage suggested investment risks according to their stated investment objectives. With easy access to client information, a firm can recommend suitable services and investments to meet each client s investment objectives and risk tolerance. Execution policy: Article 21 of MiFID stipulates that financial services firms that conduct transactions on behalf of their clients must take all reasonable steps to obtain the best possible result, taking into account price, costs, speed, likelihood of execution and settlement, size, nature, or any other consideration relevant to the execution of the order. Because of these conditions, firms must have sufficient records that reveal they have performed best execution practices on their clients behalf. Firms are also required to develop best execution policy documents that define their trading venues and methods for routing particular orders. These documents must be disclosed to customers and regulators, and client acknowledgement and consent for the policy must be obtained by individual firms. Firms also need to monitor and demonstrate compliance with their execution policy documents and periodically review the success of the policy in meeting clients stated investment goals. This requires firms to have data management, archiving, and reporting services in order to quickly review key policy and compliance information. 2

3 Document types Static documents One-for-all Individual documents Signed Periodic reports Frequent/real-time updates Price lists Product/ financial instruments Execution venues Service level agreements Execution policy document Customer classification documents Client appropriateness/ suitability details Daily/weekly/ quarterly/ annual statistics Member lists (for exchanges) Prices Trades Corporate actions Figure 1. New MiFID regulations demand an array of document types, many requiring different records-management and data-reporting processes. Intelligent PDF documents can be accessed via the Internet or and integrated with advanced form-processing features and powerful business logic capabilities, such as calculations, routing instructions, error checking, and data validation. PDF documents can also provide encryption, authentication, and digital signatures, which helps to protect the privacy and security of records during every step of the management cycle. Information required by MiFID Figure 1 illustrates the broad categories of documents that banks and investment firms are required to provide to be in compliance with MiFID. Static documents, which include annual reports and service level agreements, must be distributed to all clients at predetermined intervals. Individual documents, such as execution policies and client-disclosed financial information, require a signature or other form of acknowledgement to be authorized or actionable. MiFID also requires firms to provide comprehensive reporting on market activity and to track details, such as time and prices, on all individual trades, purchases, and sales. Investment firms may also be required to document a client s source and extent of regular income, assets (including details of liquid assets, investments, and property), and regular financial commitments. MiFID regulations require investment firms to maintain documented evidence of what the client knows and understands about investing. This may include a client s history of previous transaction records, as well as the nature and frequency of transactions. Even a client s level of education, profession, or former profession may be relevant in this context. The client s investment objectives also need to be ascertained: the length of time the client intends to hold the investment, the client s preferences regarding risk-taking, and the purpose behind the investment. To satisfy the requirements of best execution practices, investment firms will need to correlate execution information reference and transactional data, price information, speed of execution, cost of clearing, and cost of settlement records with individual information about clients investment goals. To comply with MiFID, firms are required to create and maintain a robust audit trail capable of aligning disparate processes and systems across the enterprise, including transaction records, customer communications, document management systems, and workflow processes. The new MiFID regulations require investment firms to classify their customers, understand their risk profiles, and track their investment objectives. Investment organizations must demonstrate they take investor classifications into account when taking actions on behalf of the customer, under the new guidelines. 3

4 Document handling requirements MiFID not only increases the number of documents that banks and investment firms must collect and maintain, but it also changes the way documents are handled and processed. All personal financial information must be gathered and maintained as securely as possible and be easily accessible to appropriate members of the investment firm. The data must be available to update, examine, and audit for a minimum of five years. Investment firms are required to obtain acknowledgement through signatures or electronic receipt tracking that all mandatory parties have received and signed key documents, such as execution policies. All client classification and temporary execution policy changes must be stored and synchronized, while all client data must be readily retrievable. This helps ensure that investment prerogatives are being followed and that procedures are in compliance with regulator requests for information about individual transactions or trading patterns. Moreover, the new borderless EU marketplace demands that these policy and client documents be available with minimal language and translation complications. General document handling requirements include: Version control: Documents must reflect incremental changes and clarify the most current version. Distribution of updated materials: When documents are updated, they must be distributed to all mandated recipients and data stores. Valid to and from controls: Execution policies may be temporary. For example, they may be valid from November 1, 2007, or valid to December 31, These controls must be easily tracked. Adobe security solutions deliver document control, rights management, encryption, digital signatures, and document certification services that travel with a document wherever it goes. Firms can control who may open, view, print, copy, or modify a document online or offline, inside or outside the firewall. Confidentiality: Document distribution and storage systems must provide confidentiality, by either password or encryption. Signatures and acknowledgement of receipt: Signatures, acknowledgement, and tracking are required to ensure correct distribution. Receipt tracking: The document must enable some form of audit history to show who has accessed specific documents. Electronic or paper format enablement: Documents must be enabled for electronic and/or paper-based processing. For example, services may be requested through online electronic forms while the signature authorizing the services may be stored on a hard copy. Such linked paper-based and electronic documents must be stored so that both can be easily retrieved. Document process alternatives In investment and financial services arenas, mandatory reporting and documentation have historically been handled through manual, paper-based processes. However, manual document processing is no longer an economically viable or manageable option in a post-mifid marketplace. Manual and paper-based processes are prone to error and therefore do not comply with the levels of due diligence and accountability required by MiFID. The volume of documentation and reporting required by MiFID legislation is simply too great and too costly to be processed efficiently by hand, especially when firms have to account for staff time, postage, and document storage and retrieval. The potential for human error in collecting, distributing, storing, and archiving the information can also incur additional costs. Security and authentication need to be robust and seamless and support rapid and automated integration with documents and systems. In addition, certain MiFID regulations demand near instantaneous information distribution or notification, which is essentially impossible in mass, paper-based processes. 4

5 Adobe electronic document process management solutions help investment firms: Save time by automating document creation and revision Access electronic correspondence with Adobe Reader Streamline document security management with document-based security features Apply server-managed document control policies to protect access Ensure receipt, acknowledgement, and nonrepudiation with high-assurance digital signatures Accelerate the time-to-delivery of documents, products, and services Firms that endeavor to collect and manage the volume of client information required by MiFID with paper processes will experience immense logistical challenges and run the risk of subjecting client information to error and privacy breaches. A technology solution for MiFID customer records management Adobe offers electronic document process management solutions to help investment firms and financial institutions comply with MiFID regulations, while also addressing the security issues around document distribution and collaboration, electronic forms, and digital signatures. Electronic document process systems automate document creation, revision, and management, making it easier and quicker to add, delete, or amend documents. Electronic documents are easy to audit, even when archived, since data and information is searchable and easily retrievable. Electronic document processes reduce errors introduced by manual manipulation, enable rapid record and information processing, and ensure information is delivered instantaneously. To collect information, Adobe solutions use dynamic, XML-based intelligent PDF documents with intuitive, ubiquitous interfaces and easy-to-follow workflows. Intelligent document technology yields electronic forms and process management components that are easily customized to comply with MiFID s customer information management mandates. Adobe also offers an extensive array of electronic record safeguards that can protect, authenticate, and control PDF files by using a range of technologies, including digital rights management (DRM) and digital signatures. DRM can restrict who may view a document or what an individual may do with it. Digital signature technologies establish who may sign a document electronically and safeguard the document from being altered or tampered with, maliciously or otherwise. These technologies can be employed according to MiFID directives to enhance the reliability and authenticity of PDF-based forms and documents. About Equiduct Equiduct will enable firms to meet their statutory commitments, as defined by MiFID, to provide best execution practices and transparency to their clients in a cost-effective, integrated, Europe-wide, single connection for trading services and execution. Equiduct will be a Belgian-regulated, pan-european-regulated market. It will address the sweeping changes being introduced by MiFID with respect to European equities impacting all European investment firms starting in November Equiduct s pan-european market data services will provide for a virtual consolidated tape, which will be the reference of choice for cross-border trading. Equiduct 70 St. Mary Axe London EC3A 8BD UK Adobe technologies also offer solutions that can help investment firms cope with the sheer volume of documentation required by MiFID. As an enterprise platform for document process management, Adobe LiveCycle ES (Enterprise Suite) helps firms capture, process, and archive customer information more efficiently. LiveCycle ES software combines robust process automation with electronic forms, information assurance, and document generation capabilities in an integrated and highly scalable set of products that ease the burden of MiFID compliance. Adobe solutions also support the PDF for Archiving (PDF/A) standard for long-term archival of electronic documents. For hybrid processes that include high volumes of paper and electronic documents, firms can choose to store and extract customer information with dynamic barcode forms. These barcodes can automatically update when customer data changes; the data can be simply scanned and extracted as needed for other processes. Adobe s barcoded form technology can process both electronic and paper forms in a single unified environment using LiveCycle ES. Summary MiFID s customer records and document requirements demand more than a paper-based solution and more than a fragmented IT infrastructure that binds existing office productivity tools. Adobe provides end-to-end solutions that comply with document process management workflow and record-keeping requirements posed by MiFID, while maintaining high levels of accountability and security for business-critical information. Adobe Systems Europe Limited Stockley Park 3 Roundwood Avenue Uxbridge UB11 1AY United Kingdom Adobe, the Adobe logo, LiveCycle, and Reader are either registered trademarks or trademarks of Adobe Systems Incorporated in the United States and/or other countries. All other trademarks are the property of their respective owners Adobe Systems Incorporated. All rights reserved. Printed in the USA /07