MiFID
General Awareness Training
Part 1 – Overview of the changes
Part 2 – MiFID in more detail
Part 3 – Economic Impact
Part 1 – What are the big recent and new
changes?
2007 at a glance
MiFID
Capital Adequacy
Directive
2007
Risk – based
Supervision
(already in)
Principles-based
Regulation
Responsibility of Firms and Senior Managers
FSA’s
Principles based Rules
Authority
and
Risk based
Supervision
Firms and Senior Management
Senior
Management
Deliver
Responsibility
Outcomes
Changes
More Principle-based Regulation

The eleven FSA principles e.g. Treating Customers Fairly
Outcomes rather than detailed rules
More senior management responsibility
Predictability of FSA policy at time of decision
More informal guidelines e.g. sector newsletters

Trade body guidelines e.g. MiFID Connect

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More Principles-based RegulationExample

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

A firm had inadequate and incomplete compliance policies and procedures
e.g. no up to date compliance manual and no regular visits to its branches.
Reporting to management was informal: it was not clear if senior
management was aware of key problem areas.
It did not follow some of its own procedures which were sometimes above
FSA Rule Standards.
The firm (Carr Sheppard) was fined £500,000 for breach of Principle 2 (firm
must conduct its business with due skills and date) and Principle 3 (A firm
must take reasonable care to organise and control its affairs responsibly
and effectively, with adequate risk management systems).
Changes
The Risk-based Approach

By FSA of firms e.g. ARROW II
By Senior Management within Firms
Within FSA e.g. allocation of resources

Applies to amount of capital required by firms


Changes
The Risk-based Approach – Example from the firm’s [Risk Map]

[Here put in Excerpt from the Firm’s Risk
Map, Risk Register or ICAAP]
Changes
New Capital Adequacy Calculations – the Impact on the
Firm

[Put in key points of change between current
and future calculation of capital adequacy of
firm]
Part 2
MiFID
MiFID
“
“
MiFID was conceived for the noble purpose
of opening up Europe’s Capital Markets by
improving price transparency of traded
financial instruments while making it easier
to execute trades across borders.
FT
MiFID
“
“
Alarm over financial instruments directive
EU plans attacked by banks and
investment firms
FT
Which Firm Functions are affected?
Front Office
e.g. Sales, Trading and
Investment Management
e.g. Conduct of Business
Operations
e.g. trade reporting
HR
e.g. Training
Senior Management
MiFID
I.T. Technology
e.g. data collection
Internal Audit
e.g. authority
Legal
e.g. Client Agreements
Compliance
MiFID at a glance
Internal System and Controls
Relationships with Clients
MiFID
Equal treatment of Exchanges
and Multilateral Trading
Facilities and price
transparency
Equivalent Conduct of
Business Rules in all EEA
Countries
MiFID
What is the scope and impact of MiFID

A broad range of requirements
- best execution, pre- and post-trade transparency, client
disclosure and reporting…

Affecting most areas of a firm
- senior management, managers, client services, trading,
custody…

Affecting many types of buy-side and sell-side firm
- Traditional and electronic exchanges, banks, asset managers,
issuers, brokers, systematic internalisers...
MiFID
What is the scope and impact of MiFID? (Cont.)

Most financial instruments are within scope
- equities, fixed interest, derivatives, stock lending, OTC
trading…
- Commodities

The impact of MiFID will vary
- between firms (depending how well prepared they are)
- between lines of business (some more affected than others)
- and between jurisdictions (depending on current national
market practice, relative to the level playing field of EEA-wide
MiFID)
MiFID
Appropriate
ness/
Suitability
Client
Categorisation
Design products
Best
Execution
Inducements
Client
Reporting
Acquire clients
Complaint
Management
Product
information
Conflicts of
Interest
Research
Advise clients
Outsourcing
Docu mentation/
Archiving
Execute business
Terms of
Business
Pre-/PostTrade
Trans parency
Reporting
Robust Financial and Operating Controls
under MiFID and Capital Requirements
Directive



Risk identification and management e.g. Risk
Maps and ICAAP capital allocation
Assessment of exposures e.g. for financial
crime and market abuse
Corporate Governance e.g. proper job
descriptions, Management Information to
Board, Record Keeping etc
Robust Financial Systems and Controls
under MiFID – Examples
[Extract from the Firm’s Financial Crime Risk
Assessment including management of the
risk.]
Relationships with Clients under MiFID
(and other changes)

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

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A new shorter Conduct of Business Rulebook
The overriding ‘Client’s Best Interests’ Rule
Categorisation of new and existing clients
Account Opening procedures including more KYC
Change Terms of Business
Duties of Suitability and Appropriateness to retail and
professional clients
Order execution and trading including best execution
Trade and Periodic Reports
Relationship with clients under MiFID and
other changes
- Examples



Some new clients who would be Intermediate
Customers under current rules may be Retail
Clients under new rules
Firm must consider all venues including electronic
order matching systems offering “best possible
outcome” for execution policy
Pre-trade and post-trade price transparency
information for liquid equities
Markets
Multilateral Trading Facilities
The end of the
Concentration Rule
and Systematic Internalisers
Exchanges
Separation from transaction
Reporting (and sale of data)
Publication of Pre-Trade
and Post-Trade equity
prices
Markets - Example




There is a Client Order for a UK equity
Currently main market is LSE and Plus
Markets
Firm can choose which to use
In future Firm’s Execution Policy will look at
these and electronic order matching systems
e.g. Chi-x, and, if traded outside UK, at other
exchanges and markets
Best Execution
To produce “best
possible outcome.”
Order Transmitters
have same but
less responsibility
Client Instructions
override the duty
Best Execution
Many factors of
which price is
important for retail
Applies to agency
and principal Client
Orders
Duty is owed to
Professional and
Retail Clients
Execution Policy
summary to
Clients
Client negotiating on
Quote requested by it
excluded from the duty
Best Execution – Example
[Extract from the Firms Best
Execution Policy]
Cross-border services and branches under
MiFID
Cross border sales
under Home State
Regulators Rules
Uncertainties over who
regulates branches for third
country business
Passporting
Systems and Controls
under Home State
Regulators Rules
Simpler notification
procedure
Cross-border services and branches under
MiFID - Example




UK Firms solicits business from individuals
resident in Italy
Currently very difficult because Italian
Conduct of Business Rules restrict sales to
the “public” by non-Italian regulated Firms
In future cross-border sales can be made
under FSA COB Rules and not local rules
Sales by Italian Branch still under local rules.
Unclear whose rules apply to branch’s third
country sales
The new Approved Persons (AP) Regime



FSA has withdrawn plans to remove
wholesale customer-facing and corporate
finance persons from the AP regime
The merger into a single controlled function
for each of management, finance and
customer facing roles
Approved Individuals moving within new
Customer Controlled Function (CF30) need
no FSA approval, but the Firm must assess
them as “competent “
Training and Competence
 No compulsory examinations for wholesale
New Rule
 Examinations from FSSC recommended list
taken into account by the FSA in the
knowledge component of competence
The “competent employee” rule
i.e. the skill, knowledge and
expertise for the job (SYSC)
 Firms must meet “competent employee”
Rule
Training and
Competence
•Employees must remain competent
• For retail
•No annual fixed time target
• Compulsory examinations remain
•For firm and individual to decide
• Responsibility of firm to assess
competence in change of job within the
same Controlled Function
•CPD should be recorded
• Ethical behaviour part of competence
Changes to a Firm’s Policies and Procedures

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Account Opening
Conflicts of Interest
Suitability and Appropriateness
Execution Policy
Training and Competence
Record Keeping
Changes to a Firm’s Policies and Procedures
- Example
[Give example of changes to a
specific policy of the firm such as
conflicts of interest.]
MiFID and other changes
Part 3
Economic Impact
The Possible Impact of MiFID
European
markets for
customers
More competition
to exchanges
driving better
prices
Cross-border
investment costs
reduce
Firms provide better
service at lower cost
Outsourcing
opportunities
increase
Economic Impact on Firm?
[Examples relating to the firm such as the following]




Any changes to business strategy
Will the firm have Retail Clients?
Will it opt up individuals to become elective
Professional Clients?
To whom will the firm give Best Execution
(where there is a choice)?
The Challenge and Opportunity of MiFID
“
“
The clear cost of
implementation of MiFID will
only prove justified if firms
take the opportunities
generated to raise revenues.
John Tiner’s Speech to the FSA’s MiFID Conference May 2007