London Compliance

MiFID Overview

BCS 25th April 2005

Simon BarkerHead of Regulatory Affairs

BNP Paribas London branch

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London Compliance

Disclaimer

Any views are personal to the speaker and are not those of BNP Paribas

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London Compliance

Summary

Background to MiFID

Impact Assessments

Project teams

Key issues

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London Compliance

Background

The Markets in Financial Instruments Directive (MiFID) introduces a consolidated regulatory regime across the EU for financial instruments

MiFID impacts all areas of financial services businesses and will require significant work to implement

MiFID will create significant operational impact but also strategic opportunities and threats

MiFID must be implemented by 1st November 2007Level 1 passed in April 2004

Level 2 passed in August 2006

Member States had to transpose MiFID by 31 January 2007…….

Level 3 currently underway

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London Compliance

Background

MiFID is a business issue: it is not just a Compliance or IT problem

Issues such as best execution go to the heart of how the business operates: solutions must be business led and not Compliance or IT led

Successful implementation depends on senior management support and commitment: senior management must assume responsibility for implementation and establish effective governance structure to deliver effective implementation

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London Compliance

Impact Assessment

Comprehensive impact assessment must be undertaken: identify gaps between current state and MiFID requirementscompleted on a front-to-back basis for each business area

addressing impact on marketing, sales, trading and back office activities

Assessment needs to include: Business processesSystems impactsDocumentation requirements, including client documentation

and internal policies and proceduresTraining and education

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London Compliance

Mobilise Project teams

Participation is required from all areas of the firm, including:

Business ManagementITOperationsLegalComplianceRisk ManagementInternal AuditHR

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London Compliance

Key impacts of MiFID

Client classification: Clients to be classified as “Retail”, “Professional” or “Eligible Counterparty”. The level of protection a client receives depends on their classification.

ImpactsRe-classify clients (change existing flags)May need to capture new information on clientsMay need to feed client classifications to downstream systems

Best Execution: Firms must obtain the ‘best possible result’ when executing client orders (with limited exclusions). Applies to all investments. Firms are required to put in place an execution policy and demonstrate compliance with the policy.

ImpactsSystems to comply with best execution policiesCapture and retain information necessary to demonstrate

compliance with policies

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London Compliance

Key impacts of MiFID

Pre-trade TransparencyApplies to cash equities admitted to trading on a regulated market

Systematic Internalisers to publish a firm quote in liquid sharesApplies to orders up to standard market size

Post-trade TransparencyApplies to cash equities admitted to trading on a regulated market

Firms must make public volume and price of transactions at the time they were concluded

As close to real-time as possibleReasonable commercial basisEasily accessible to other market participants

New venturesProject Turquoise

Project BOAT

Equiduct

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London Compliance

Key impacts of MiFID

Suitability: New requirements to assess suitability or appropriateness of products for clients in certain cases. KYC information will need to capture relevant information

Impacts May need to capture additional information on clients May need to feed information to downstream systems to support

advice/trading decisions

Transaction reporting: Shifts emphasis to report to home/host state competent authority of the firm and not the regulated market and extends obligation to ANY product traded on a regulated market (includes off-exchange transactions)

ImpactsChange to content of reports

Unique client identifiers

Change to recipient of reports Identify securities to be reported

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London Compliance

Key Impacts of MiFID

Conflicts of Interest: Prescriptive requirements to identify, manage and disclose conflicts of interest

ImpactsNew conflicts management systemsConsider whether additional system access changes required

Client information: More prescriptive requirements for information to be delivered to clients (best execution policy, conflicts policy)

ImpactsWeb contentRecording changes to documents on web

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London Compliance

Key Impacts of MiFID

Outsourcing: outsourcing of ‘critical’ or ‘important’ functions must not significantly impair firm’s internal controls or weaken ability to monitor compliance. Includes intra-group arrangements

ImpactsOutsourcing of IT functions may need to comply with new

requirements

Record Keeping: Prescriptive requirements to keep records for 5 years to demonstrate compliance

ImpactsConsider any systems that do not support a 5 year retention period

Commodity derivatives: regulated under MiFID for the first time on a pan-European basis

ImpactsConsider whether commodities systems support requirements

described above

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London Compliance

Conclusions

Key changes still to be settled

Business opportunities ?

FSA move to more principles based regulation

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