MiFID II Through the eyes of your business July 2014 kpmg.co.uk
# MiFID II THE JOURNEY SO FAR... MiFID II/MiFIR ( MiFID II ) is the long awaited recast of the Markets in Financial Instruments Directive, and was published in the Official Journal of the EU on 15 June 2014. The mandated review of MiFID fell in the heat of the financial crisis, and the impact of this timing is clear in its outcome. The focus on transparency, consistency and competition remains, but is now supplemented with a broadened focus on reducing systemic risk, strengthening financial stability by ensuring maximum transparency in markets and applying a renewed focus on investor protection. MiFID II seeks to narrow exemptions enshrined in MiFID I and thus subjects more firms to MiFID II requirements. It applies to more products, and extends and reinforces Reporting, Reporting, and, while introducing new trading venues and defining new requirements for both old venues and new. MiFID II also completes the 2009 G20 Pittsburgh commitment by introducing a trading obligation for OTC derivatives contracts subject to clearing under EMIR, and seeks views on straight-through processing for both exchange traded and OTC derivatives contracts for direct and indirect clients. MiFID comes at a time when firms are already struggling through implementation of other major regulatory requirements extraterritoriality requirements of Dodd-Frank, Capital Requirements Regulation (CRR), European Market Infrastructure Regulation (EMIR), Alternative Investment Fund Managers Directive (AIFMD) and more with implementation timelines that will stretch through and in some cases beyond MiFID. However, MiFID II is far more wide-reaching and wide-ranging across a firm than any one of these on its own, and interacts with all of them. The interconnectedness between MiFID II and other reforms on remuneration, data reporting, governance, investor protection, and record keeping creates added complexity in assessing and planning for MiFID II. Interestingly, MiFID II is also being used to amend, over-ride and clarify other Directives and Regulations, including AIFMD, CRD IV, EMIR, and REMIT. Similarly, MiFID/R will also supersede many excising national rules which means firms need to map the new requirements with what is already in place in different countries. In particular, the structural change driven by multiple ring fencing initiatives could impact approaches to strategic and operational changes in response to MiFID. On 22 May 2014, the European Securities and Markets Authority (ESMA) published the Consultation paper and Discussion paper on draft technical standards and technical advice, adding new details and direction for firms to interpret. Against this backdrop, it is imperative that firms to get to grips with the magnitude of the proposed changes and the potential game changing nature of some of the proposals. These changes could result in firms having to assess the viability of continuing to provide certain products and services, or provide those services in a different way, and for many firms, there is significant work to do to close gaps in compliance of current processes against current MiFID requirements before extending their scope. The breadth and inter-connectedness of MiFID/R means that it is time for firms to consider managing their regulatory portfolio in a different way to achieve efficiencies, save costs and achieve potential synergies in the inevitable change to people, processes and technology.
MiFID MiFID II 3 II # And of course, MiFID II isn t the only Directive and Regulation on the horizon. For both buy-side and sell-side firms there are a multitude of directives and regulations passing through different stages of law-making (ignoring the scrutiny firms face from national regulators). It is time for firms to consider managing their regulatory portfolio in a different way to achieve efficiencies and save costs and avoid missing opportunities to make strategic decisions which reflect the combination of multiple regulations, and achieve potential synergies in the inevitable change to people, processes and technology.
Business Sell-side Buy-side Function # MiFID II IMPLICATIONS FOR YOUR BUSINESS Reporting Reporting Reporting Micro structural issues Micro structural issues Client on-boarding Front Office Middle Office Back Office Treasury Finance Compliance/Risk Management Reporting Reporting Micro structural issues Micro structural issues Data Publication and Access Reporting Data Publication and Access
SUMMARY OF KEY CHANGES MiFID II # Restrictions on advice and new requirements for inducements and unbundled services. New definitions of complex and non-complex products. New emphasis on suitability and appropriateness tests. Strengthening of client asset protection and appointment of officer Best execution extended to new products, increased disclosure Pre-trade transparency extended to all liquid MiFID products. Waivers tightened. Post-trade transparency extended to all liquid MiFID products. Deferred publication tightened. Reporting reporting requirements extended to new products and new data fields. Micro structural Issues Direct electronic access needs increased governance and control High frequency trading firms to be authorised and regulated Algorithmic trading subject to testing, review and disclosure, increased fees derivatives derivatives position limits for both ETD and OTC. Daily position reporting. Trading venues reclassified as MTF, OTF, SI OTC derivatives trading on centralised venues where subject to clearing Indirect clearing arrangements extended to ETD products Formalised criteria required for portfolio compression and data to be published Increased real time processing for trading, clearing and transfer of collateral Data Publication and Access Non-discriminatory access between CCPs and trading venues Non-discriminatory access to and license requirement for benchmarks
reporting # MiFID II BUSINESS AREAS AND IMPACTS Key requirements Advice, Inducements and Unbundled services Business Functions Client onboarding Front Office Middle Office Back Office Treasury Finance Risk Mgmt - - Product Governance - Operational impact Analysis Classification of clients will be impacted and clients classified as advisory will get enhanced protection. There will be more disclosure around inducements and a requirement to return monetary benefits. Previously bundled services will have to be unbundled and any service that is provided ancillary to trading will need a different fee structure. Consequently, clients will need to be re-papered. Manufacturers and distributors will need to review product governance, distribution and financial promotion and reassess products according to the new definition. As a result, there may be a focus on non-complex products which will result in less choice for clients, less revenue and will have an impact on firm s funding profile. Classification, Suitability and - - Appropriateness Client Assets Best Execution - - - Data Providers Client on-boarding is likely to take longer and be a more intrusive process for clients. Suitability and appropriateness processes will have an impact on client sales, and appropriateness test will apply to execution only business with financing element. Municipalities and local public authorities can no longer be treated as an ECP resulting in reclassification and repapering. Firms will have an enhanced accountability for client assets. The re-use of assets will be limited or banned in the case of Title Transfer Collateral Agreements for retail clients. Client consent and disclosure will be required before assets are reused which is likely to have an impact on stock lending, borrowing and repo activity. In order to get the best possible result for the client, order handling processes and policies require updating to demonstrate to the client how the firm will meet its best execution requirement across all relevant asset classes. Additionally, firms will have to publish the top 5 trading venues used across all asset classes. Significant new publication infrastructure build required for both pre and post trade transparency reporting. Pre-trade transparency Post-trade transparency reporting New requirements will apply to all liquid asset classes and waivers currently in place will be tightened. Pre-trade transparency data from trading venues will need to be collected, aggregated and provided to Consolidated Tape Provider (CTP). Firms will need to build a new publication channel to provide relevant data, even if relying upon a waiver as waivers can be suspended. New requirements will apply to all liquid asset classes and waivers currently in place will be tightened. Pre-trade transparency data from trading venues will need to be collected, aggregated and provided to CTP. Firms will need to build a new publication channel to provide relevant data, even if relying upon a waiver as waivers can be suspended. Applies to new MiFID products and new fields to be populated. Trade reporting and transaction reporting to be aligned where possible and where not possible, the data will need to be reported separately. Responsibility for elements of transaction reporting such as flagging algo trades, short selling, repo activity, waivers and decision maker, will pass to the front office. In addition, firms that accept delegated reporting from discretionary investment management firms, will need to obtain more data to meet the necessary requirements.
Data Publication & Access Derivative Micro Structural Issues MiFID II # Key requirements Business Functions Client onboarding Front Office Middle Office Back Office Treasury Finance Risk Mgmt Direct Electronic Access Algorithmic Trading High Frequency Trading derivatives (ETD & OTC) position limits & daily reporting MTF, OTF, SI - OTC Trading - Central clearing Access to Trading venues Benchmarks - - Operational impact Analysis New systems and controls required for client access, to include a requirement that a user is competent and systems and controls are adequate. Real time monitoring required by the DEA provider. More transparency required around algorithmic trading. Executed trades to be flagged, and strategies behind the algorithms disclosed to DEA providers and regulators. To manage disorderly trading conditions, trading venues will introduce new fees for cancelled trades and order to transaction ratios, resulting in changes to trading strategies to mitigate increased costs and disclosure. High frequency trading firms are defined as firms that submit two messages per second. Firms that exceed two messages per second will be classified as HFT firms. High frequency trading firms dealing on own account and using algorithms will be required to be authorised in EU. Position limits per trading venue will be applied and need to be carefully managed by firms. Position limits will be extended to apply to related securities and equivalent OTC transactions. Firms must provide daily position reporting to venues and and regulators. Where a firm is classified as an NFC under EMIR, the application of the position limits will mean NFC classification is no longer applicable. protection, conduct of business and best execution rules apply in varying degrees to trading venues. There are new definitions of an MTF, SI and creation of a new category of venue, an OTF. The type of trading activities that can be transacted on these trading venues will change as a result of the new definitions. Previous trading activity conducted OTC may now have to be traded on a public trading venue. Requirement to trade, clear and move collateral/margin as close to real time as technologically possible may involve a significant infrastructure build. Eligible trades must be traded on a trading venue, increasing transparency. Margin requirements will increase the cost of clearing OTC derivatives which will be partially off-set by reduced capital requirements. Changes to CCP pricing, products and schemes will result in CCPs being more transparent, fair and non-discriminatory. Firms may incur increased costs as a result of the requirement that trading venues provide fair and non-discriminatory access. New definition of benchmarks may result in any rates, indices and figures that are published requiring a licence. Firms operating benchmarks will need to promptly provide data to trading venues and CCPs.
# MiFID II TIMELINE OF MIFID II 19 Feb 2014 Final texts published for national consideration 22 May 2014 ESMA publish DP & CP 1 Aug 2014 CP & DP close 3 July 2015 Draft Technical Standards submitted by ESMA including: publication waivers, volume caps, deferred publication, record-keeping, transaction reporting and reference data requirements, trading and clearing obligations for derivatives, access to CCPs and trading venues 3 Jan 2016 Guidelines developed by ESMA on management body, client knowledge and competence, transaction reporting to competent authorities Jan 2017 Implementation September 2020 al provisions for energy derivative contracts end, report on organisational provisions for CTPs submitted to EU Parliament and Council 2014 Q2 Q3 Q4 2015 Q2 Q3 Q4 2016 Q2 Q3 Q4 2017 2018 2019 2020 Implementation timeline (Estimated dates) Apr 2014 Plenary vote to adopt MiFID II 12 Jun 2014 Published in OJ Dec 2014 Advice on Delegated Acts Dec 2015 Final ITS Jun 2016 Transposition into national law of member states 3 Sept 2018 Report on functioning of consolidated tape submitted to EU Parliament and Council
UNDERSTANDING THE IMPACT PRIORITY ACTIONS MiFID II # Key workstreams Priority Actions Review services and products to clients including advisory and non-advisory and complex and non-complex products under new definitions. Assess key impacts to business model and the viability of continuing to provide the same services. Review classifications and re-paper following reviews and assessments. Identify MiFID products and trading venues for MiFID liquid products that will be subject to pre-trade and post-trade publication including trading activity subject to waivers. Reporting Review data warehouses to assess most efficient way of collating data for new fields, to avoid duplication between Reporting and Trade Reporting. Review on-boarding process to ensure static data collected for reporting and commodity derivatives position reporting. Microstructural issues Catalogue clients accessing markets via direct electronic access including clients that have whitelabelled the service. Identify clients and internal desks that are using algorithms to trade and identify strategies behind algorithm to disclose to NCA. Implement systems and controls and real time monitoring. Assess commodity derivative positions, related securities and OTC equivalent positions and assess if subject to commodity position limits and daily reporting to trading venue and NCA. Identify trading venue to report listed positions. Firms need to consider whether their current trading activities fall with new definitions of MTF, SI and OTF and if so, review the viability of their desk activities. Where necessary firms may consider transferring business to a platform/trading venue. Date Publication & Access Firms will need to build publication channels to pass pre and post trade transparency data to Approved Publication Arrangements for onward transmission to CTP. Data will have to be disaggregated by trading venues so that firms only have to buy data relevant to their needs.
# MiFID II KPMG'S APPROACH KPMG member firms are developing their regulatory requirements tool to incorporate MiFID II/MiFIR and allow tracking from the regulatory text through baseline assessment and compliance validation. It can underpin programme planning and assurance and providing a clear audit trail of compliance to regulators. Rules decomposition Captures and links: Directive and Regulation text Initial draft and final RTS, ITS, Delegated Acts Supporting/ clarifying FAQs Compliance validation Details compliance requirements: Translate decomposition into clear compliance requirements Supports risk and control assessment Underpins governance arrangements Validates effective implementation Current state assessment Maps regulatory requirements to: Core businesses Core functions/ processes Related regulatory requirements of key coming/ in progress regulations Supports gap analysis Programme plan Program plan which is: Mapped to compliance requirements Links multiple workstreams, across multiple businesses Reviewed and refreshed to reflect continuous refinement of requirements
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# MiFID II KPMG member firm contacts United Kingdom Kara Cauter T: +44 20 7311 6150 Karim Haji T: +44 20 7311 1718 Netherlands Rob Voster T: +31 2 0656 8439 France Sophie Sotil Forgues T: +33 1 5568 7474 Spain Ana Rosa Cortez T: +34 91451 3233 Germany Marcus Lange T: +49 69 951195 530 Luxembourg Anne-Sophie Minaldo T: +35 222 515 17909 Italy Pietro Stovigliano T: +39 02676431 Switzerland Pascal Sprenger T: +41 58 249 4223 fsregulation@kpmg.co.uk www.kpmg.com/regulatorychallenges The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. 2014 KPMG International Cooperative ( KPMG International ), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. Printed in the UK. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.