www.pwc.lu/regulatory-compliance Flash News European Parliament adopts MiFID II 23 April 2014 Following the political agreement reached on 14 January 2014 by the European Parliament, the Council and the European Commission, the European Parliament has formally adopted the MiFID II regime in a plenary vote on 15 April 2014. The MiFID II regime comprises an amended Directive and a new Regulation (MiFIR). 1. Background The original Markets in Financial Instruments Directive (MiFID) came into effect on 1 November 2007. Nearly six and a half years after its entry into force, work on the revision of the MiFID regime is entering the final straight. MiFID II aims to address a number of issues underlying the operations of firms and financial markets, as identified by the Financial Stability Board and by the European Commission during the financial crisis. The implementation of MiFID II will prove to be challenging for the financial industry. The 720-page directive will have a substantial impact on the distribution activities and the value chain of asset managers, investment firms, banks, distributors and market operators. MiFID II developments should be followed actively by all financial firms in order to keep abreast of events. 2. MiFID II for banks, investment firms and asset managers Banks and investment firms already regulated under the MiFID rules will remain within the scope of MiFID II; additional types of firms will now also fall within scope as existing MiFID exemptions are tightened. Highlights include the following: Governance MiFID II sets out new requirements for the management body. The management body must provide effective oversight of senior management and is explicitly charged with ensuring the segregation of duties within the firm to prevent conflicts of interest. As regards the maximum number of directorships, MiFID II follows the CRD IV regime, it provides competent authorities with the possibility of enabling members of the management body to hold one additional non-executive directorship, i.e. by accepting one executive directorship with up to three non-executive directorships, or by holding up to five non-executive directorships.
Investor protection MiFID II strengthens investor protection measures. Firms will have to ensure that each product they manufacture and/or offer and the distribution strategy they adopt for each are consistent with the identified target market, both from the outset and on an ongoing basis. MiFID II also mandates enhanced disclosure to clients. MiFID II introduces new obligations with respect to the suitability test: Firms providing investment advice to retail clients will be required to provide a statement of suitability before the transaction. Firms providing portfolio management services will be required to carry out a periodic assessment of suitability. Firms willing to provide investment advice will be able to carry it out if they inform the client at the outset whether they will provide the clients with a periodic assessment of suitability. MiFID II also expands the definition of complex instruments, e.g. structured UCITS. Investment firms providing services other than investment advice and portfolio management will be required to test the appropriateness of such instruments. MiFID II introduces the notion of independent advice, meaning that: firms providing independent advice must assess a range of financial instruments which is sufficiently diverse and not limited to those instruments that they issue or provide, and firms providing independent advice are not allowed to accept or receive inducements from third parties. The new rules regarding inducements were subject to intense negotiation. Firms providing independent advice and portfolio management services will not be allowed to accept and retain fees, commissions or any monetary or nonmonetary benefits paid by any third party in relation to the provision of the service to clients, with the exception of minor non-monetary benefits under certain conditions. MiFID II sets out a new regime for recordings of telephone conversations and electronic communications. MiFID II also extends the current best execution requirements and introduces a range of new obligations concerning remuneration and potential conflicts of interest. Third-country regime and EU market access MiFID II creates a new regime for granting third-country firms access to EU markets. The regime is based on a differentiated approach depending on the types of clients a third-country firm expects to serve: The provision of services to retail clients may require the firm to establish a branch in each EU country where it wishes to operate (i.e. no passport available). Bilateral agreement between EU member states and third countries will continue at the discretion of the individual Member States and EU clients will not be precluded from obtaining services from third-country firms at their exclusive initiative.
The provision of services to per se professional clients and eligible counterparties does not require the firm to establish a branch provided that the European Commission, after assessment, deems it equivalent, and that it is registered with ESMA (i.e. passport available). Algorithmic and high-frequency trading MiFID II introduces new requirements for firms engaging in algorithmic and highfrequency trading, for those that provide them with market access and for the regulated markets on which they trade. All must have adequate controls in place and report the activity to regulators. Firms that engage in algorithmic trading to pursue a market-making strategy will now be contractually bound to provide liquidity to the trading venue on which they operate. Regulated markets will have to ensure that they introduce minimum tick sizes and have circuit breakers in place to avoid disorderly trading conditions. Commodities MiFID II introduces net position limits and reporting obligations for commodity derivatives. Position limits are to be set by national regulators in accordance with parameters to be established by ESMA. Asset management and fund distribution A re-engineering of the distribution chain and a review of the product structuring of asset managers and distributors will be necessary to comply with the MiFID II regime, due notably to: the new rules on inducements the introduction of the concept of independent advice and the two underlying obligations the review of the definition of complex instruments (which will extend to UCITS and impact the execution-only services). Some EU countries, for instance the United Kingdom and the Netherlands, have already implemented stricter local investor protection regimes that anticipate the MiFID II regime and that already impact asset managers and distributors locally. 3. MiFID II for market operators The changes for market operators in MIFID II can generally be found in MiFIR texts. Transparency rules MiFIR enhances the pre-trade transparency rules and expands them to nonequities instruments. It imposes a stricter regime for the granting of waivers. With respect to post-trade transparency rules, MiFIR extends the scope and the content of the reporting.
Organised trading facilities (OTFs) MiFIR introduces a new trading venue, the OTF, which it defines as a multilateral system which is not a regulated market or MTF and in which multiple third parties buying and selling interest in bonds, structured finance product, emissions allowances or derivatives are able to interact in the system in a way which results in a contract. The definition is intentionally broad so as to capture a variety of electronic platforms that were previously not subject to the requirements applied to RMs and MTFs. Firms operating a trading platform that qualifies as an OTF will now face new authorisation, governance and transparency requirements. Operators of an OTF may not trade against their own capital on their own platform but, subject to certain conditions, can undertake matched principal trading. The range of products they are allowed to trade excludes equities. Open market access MiFIR introduces two new open access requirements: Central Counterparties (CCPs) are required to clear financial instruments in a non-discriminatory and transparent manner, regardless of where the transaction is executed. Trading venues must provide trade feeds on a non-discriminatory and transparent basis at the request of an authorised or recognised CCP. MiFIR also completes the EU OTC derivatives market reforms. Under MiFIR, sufficiently standardised derivatives must be traded on an electronic platform when the counterparties are financial counterparties or non-financial counterparties above the EMIR clearing threshold. 4. Next steps Many texts are yet to be adopted. In line with the traditional approach for European legislation, the key next steps for the complete adoption of MiFID II regime are the following: Q2 2014: Publication in the Official Journal of the European Union Q2 2014: Consultation by ESMA (advice, Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS) ) Q1-Q2 2015: Delivery of ESMA advice, RTS and ITS to the European Commission Q2 2015: Drafting of Delegated acts by the European Commission Q2 2016: Transposition in national laws Q4 2016: Application of new rules for firms in scope. Our PwC Regulatory Watch services will keep you updated on any upcoming MiFID II-related developments. Impact assessment notes and technical papers can be regularly delivered to you by our in-house regulatory experts.
For more information, please contact: Olivier Carré Regulatory & Compliance Advisory Leader +352 49 48 48 4174 olivier.carre@lu.pwc.com Emmanuelle Caruel-Henniaux Regulatory Banking Leader +352 49 48 48 2111 emmanuelle.henniaux@lu.pwc.com Jörg Ackermann Financial services Consulting Partner +352 49 48 48 4131 jorg.ackermann@lu.pwc.com Stéphane Defourny Regulatory & Compliance Advisory Manager + 352 49 48 48 2778 stephane.defourny@lu.pwc.com PwC Luxembourg (www.pwc.lu) is the largest professional services firm in Luxembourg with 2,300 people employed from 57 different countries. It provides audit, tax and advisory services including management consulting, transaction, financing and regulatory advice to a wide variety of clients from local and middle market entrepreneurs to large multinational companies operating from Luxembourg and the Greater Region. It helps its clients create the value they are looking for by giving comfort to the capital markets and providing advice through an industry focused approach. The global PwC network is the largest provider of professional services in audit, tax and advisory. We re a network of independent firms in 157 countries and employ more than 184,000 people. Tell us what matters to you and find out more by visiting us at www.pwc.com and www.pwc.lu. 2014 PricewaterhouseCoopers, Société coopérative. All rights reserved. In this document, PwC Luxembourg refers to PricewaterhouseCoopers, Société coopérative (Luxembourg) which is a member firm of PricewaterhouseCoopers International Limited ( PwC IL ), each member firm of which is a separate and independent legal entity. PwC IL cannot be held liable in any way for the acts or omissions of its member firms.