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Adapting to a new trading landscape: MiFID II and MiFIR

Are you ready for the transformation?

Banking alert | 20 May 2016 | Adapting to a new trading landscape: MiFID II and MiFIR

The new framework affects all major dimensions of operations: new processes and policies need to be created; people will require specific training; and innovative technologies will need to be in place for business model automation.

Introduction

The Markets in Financial Instruments Directive (MiFID) was designed to liberalise Europe’s capital markets and establish common investor protection standards across Europe to ensure that customers understand the risks and costs of the products and services they are buying.

The revised directive, MiFID II, and new Markets in Financial Instruments Regulation (MiFIR) are part of the post-financial crisis reforms, seeking to reduce systemic risk and strengthen financial stability 

Key changes of the revised framework

MiFID II and MiFIR build on a number of the provisions introduced in MiFID I and will affect the marketing, sale and distribution of all in-scope products for clients within the EU. The key areas of change include:

 

1. Investor Protection

  • Product governance. Stricter rules for product governance in terms of correctly assessing product risks and ensuring its distribution strategy is adequate for the level of market sophistication
  • Client segmentation. Stronger focus on client classification (such as identifying professional clients, retail clients, or eligible counterparties) determines treatments in terms of information disclosure, reporting and suitability assessment

 

2. Regulated Markets

  • OTC derivatives. Eligible OTC derivatives need to be executed on trading venues.
  • Organised Trading Facilities (OTFs). The revised directive introduces a new trading venue.
  • Algorithmic trading. New provisions driven by technological developments.

 

3. Market transparency

  • Pre and post-trade transparency. Requirements have been extended to non-equity instruments and apply to OTFs.

 

4. Reporting and controls

  • Transaction reporting. More granular reporting, including details of persons responsible for execution and details of end clients.
  • Record keeping. MiFID II sets the overall requirement to store records of all orders and all transactions for a minimum period of five years.

How you will be impacted by the new framework

MiFID II and MiFIR will have wide implications for operating and business conduct models. In particular, we foresee the following key impacts:

  • Your policies for evaluation of product suitability and client segmentation will require updating;
  • Your front-office staff will need to be trained on new policies and processes;
  • Your advisors will need to be certified based on skills and product experience;
  • You will need to consider how you report against best execution;
  • Your systems must be capable of continuously assessing product suitability for clients as well as meeting the more granular reporting requirements; and
  • Enhanced systems, controls and record keeping requirements will add cost and complexity.
     

How we can help

  • MiFID II/MiFIR Transformation. Our gap analysis approach will ensure that you are compliant with the new requirements by the first quarter of 2018. We take a holistic approach which includes identifying gaps across product governance arrangements, systems and controls, verifying compliance with enhanced reporting obligations and reviewing how your business model fits in the new framework. With other regulations such as the European Market Infrastructure Regulation (EMIR), the Market Abuse Directive (MAD) and the Market Abuse Regulation (MAR), as well as the regulation on Key Information Documents (KIDs) for Packaged Retail Investment and Insurance-based Investment Products (PRIIPs) going into effect, we ensure a comprehensive and holistic approach to regulatory transformation.
  • Training. Meeting the new requirements will require training specific staff members, including members of the Board. We have experience in providing training on areas of risk and regulation.
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