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

Risk – based Supervision (already in)

Capital Adequacy Directive

Principles-based Regulation 2007

Responsibility of Firms and Senior Managers

FSA’s Principles based Rules

Senior Management Deliver

Authority and

Risk based Supervision

Firms and Senior Management 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

More Principles-based Regulation-Example

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?

MiFID

Front Office e.g. Sales, Trading and

Investment Management e.g. Conduct of Business

Operationse.g. trade reporting

I.T. Technology e.g. data collection

Internal Audit e.g. authority

Compliance

Legal e.g. Client Agreements

Senior Management

HR e.g. Training

MiFID at a glance

MiFID

Relationships with Clients Internal System and Controls

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)

Appropriate ness/

Suitability

Best Execution

Inducements Complaint

Management Conflicts of

Interest Outsourcing Terms of

Business

Client Categorisation

Client Reporting

Research Product information

Docu -mentation/ Archiving

Pre-/Post-Trade

Trans -parency

Design products Acquire clients Advise clients Execute business Reporting

MiFID

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)

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

Exchanges

The end of the Concentration Rule

Multilateral Trading Facilities

and Systematic Internalisers

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

Best Execution

To produce “best possible outcome.”

Many factors of which price is

important for retail

Applies to agency and principal Client

Orders

Duty is owed to Professional and

Retail Clients

Client negotiating on Quote requested by it

excluded from the duty

Execution Policy summary to

Clients

Client Instructions override the duty

Order Transmitters have same but

less responsibility

Best Execution – Example

[Extract from the Firms Best

Execution Policy]

Cross-border services and branches under MiFID

Passporting

Cross border sales under Home State Regulators Rules

Uncertainties over who regulates branches for third country business

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

New Rule

The “competent employee” rule i.e. the skill, knowledge and expertise for the job (SYSC)

No compulsory examinations for wholesale Examinations from FSSC recommended list taken into account by the FSA in the knowledge component of competence Firms must meet “competent employee” Rule

•Employees must remain competent •No annual fixed time target

•For firm and individual to decide •CPD should be recorded

• For retail

• Compulsory examinations remain

• Responsibility of firm to assess competence in change of job within the same Controlled Function

• Ethical behaviour part of competence

Training and Competence

Changes to a Firm’s Policies and Procedures 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

Outsourcing opportunities

increase

Firms provide better service at lower cost

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