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Markets in
Financial Instruments Directive (MiFID)
It is obvious
that for different types of clients, the Market of Financial
Instruments Directive (MiFID) means different things.
First,
reading the directive, we have the feeling that
this is the next client classification obligation. A “Know (even more)
Your Customer ”.
Investment banks, retail banks, portfolio managers, stockbrokers and
broker dealers, corporate finance firms, futures and options firms,
commodities firms etc. have to distinguish between three types of
clients:
1. Retail clients
2. Professional clients
3. Eligible counterparties (ECP)
Clients can move between categories to obtain more or less regulatory
protection.
European regulators
(like the FSA in UK) are already
considering to
use the MiFID client categorisation regime as a basis for classifying
clients doing non-MiFID business.
Firms must review the information they have on each client (again!).
They will need to gather
additional information
about their retail
clients.
Second, it is the next
effort to regulate Hedge Funds.
The Markets in Financial Instruments Directive (MiFID)
has a significant impact on hedge fund managers
across the EU/EEA (European Union / European Economic Area).
These managers must be very careful: If they do not complete
the legal and structural work and do not comply, they may have to
cease trading until they are MiFID compliant.
Fund management
firms who think they are exempt from the Markets in Financial
Instruments Directive (MiFID) have to be more careful.
The intention to regulate hedge funds is clear.
The interpretations will show this direction.
Many will be considered “investment firms” and will be within the
scope of MiFID (and the Capital Requirements Directive / Basel
ii/Basel iii).
Hedge funds are "normally" domiciled offshore
(in the Cayman Islands for example).
According to the UK-based
hedge fund managers, the administrations are usually carried out in
Ireland.
It will not change.
But...What
about the new Markets in Financial Instruments Directive (MiFID) rules
for outsourcing?
Yes, the natural reaction will be an
Irish administrator who is the service provider to the
Cayman-domiciled fund.
Third,
this is a directive that gives powers to the Home supervisors. Like
the Capital Requirements Directive (which is implementing Basel ii in
the European Union).
We can forget the “mutual recognition”
doctrine. The Home supervisor is powerful.
WE ARE DEVELOPING THE MIFID 2 PAGES. YOU MAY VISIT:
MIFID 2 (INFORMATION AND NEWS ABOUT
MIFID 2)
MIFID II (THE MIFID II DIRECTIVE
IN AN EASY TO READ FORMAT)
MIFID II TRAINING
Markets in
Financial Instruments Directive (MiFID)
It is time to kiss the
Investment Services Directive good-bye.
It
has set the legislative framework for investment firms and
securities markets in the European Union since 1993, and it has
provided for a single passport for investment services.
The
Investment Services Directive has been replaced by MiFID that reflects
developments in financial services and markets and extends the scope
of the passport to cover commodity derivatives, credit derivatives and
financial contracts for differences for the first time.
There
are also opportunities with the Markets
in Financial Instruments Directive (MiFID).
Firms will be
authorised and regulated (in their home state) and after that these
firms will be able to use the MiFID passport to
provide services to customers in other EU member states.
It becomes easier (and cheaper) to carry out cross border
business. This is a new world for many players in the financial
market.
Geographic and business boundaries are changed and in
many cases are eliminated.
European retail customers will have
access to a wider range of services.
No-EU firms will definitely take advantage of
the new opportunities.
A group of
nine investment banks - ABN Amro, Citigroup, Credit Suisse, Deutsche
Bank, Goldman Sachs, HSBC, Merrill Lynch, Morgan Stanley and UBS - are
pooling their trade transparency data and are creating a pan-European
platform for the collection and sale of trading data.
But, European investors (individual or institutional) are going to
expect the protections afforded by MiFID when dealing with U.S. or
non-EU businesses.
European Exchanges, do you understand what
it happening?
Big banks,
or internalizers, will not have to pay an exchange fee and reporting
costs, and they can report trades in a web site.
Exchanges will have to lowering reporting costs.
But, the
banks will be clearing trades internally, at an even lower cost.
Systematic internalizers become global stock exchanges.
"Best execution".
These are very nice words and a really good
excuse. It will definitely impact off-book transactions.
Firms
that deal from their own book now are "systematic internalizers," and
they will publish their quotes. It is interesting to realize the
impact on hedge funds.
Which firms are affected?
MiFID has directly affected those firms that fall within its
scope.
In general, MiFID covers most if not all firms that were subject to
the ISD, plus some that were not.
It includes:
• investment banks;
• portfolio
managers;
• stockbrokers and broker dealers;
• corporate
finance firms;
• many futures and options firms; and
• some
commodities firms.
Retail banks and building societies are subject to MiFID for
some parts of their business – for example, the sale of
securities, or investment products which contain securities – but
not for others.
Authorisation conditions and procedures
The Directive requires the Member States
to harmonise the rules governing investment services and
activities.
To that end, the Member States must set up an authorisation system
enabling investment firms to operate throughout the EU.
In
other words, the Directive must allow investment firms, banks and
stock exchanges to offer their services across borders on the
basis of the authorisation issued by the competent authority of
their home Member State.
Since authorisation is subject to the same conditions in all the
Member States, it will promote the harmonisation of rules
governing investment firms.
In this context, the Directive
is intended to align national rules governing the provision of
investment services and the operation of stock exchanges, with the
ultimate aim of creating a single European "securities rule book".
It will benefit investors, issuers and other market stakeholders by
promoting efficient and competitive markets.
Prudential assessment
This Directive is also intended to establish the harmonisation
of the assessment rules of procedure and criteria for the
acquisition of a qualifying holding.
Its objectives include the maximum harmonisation of the notification
thresholds for an envisaged acquisition or the disposal of a
qualifying holding, and the maximum harmonisation of the
assessment procedure and the list of assessment criteria.
In the context of an envisaged acquisition, the prudential
assessment of the shareholders and of management fulfils detailed
criteria and is conducted jointly by the competent authorities.
The Directive states in particular that the competent
authorities judge the appropriateness of the proposed acquirer and
the financial soundness of the envisaged acquisition on the basis
of:
- the reputation and experience of
those who direct the business of the insurance company following
the envisaged acquisition;
- the financial soundness of the
proposed acquirer;
- the existence of reasonable grounds to
suspect an operation or attempt to launder money or finance
terrorism.
Investor protection
The Directive will considerably enhance investor protection by
setting minimum standards for the mandate and powers that national
competent authorities must have at their disposal and establishing
effective mechanisms for real-time cooperation in investigating
and prosecuting breaches of the rules.
Transparency and market integrity
The
Directive creates an obligation to safeguard market integrity, to
report transactions and to keep records.
In particular, it
establishes a pre-trade transparency obligation.
This requires "internalisers" (i.e. firms dealing on own account by
executing client orders outside regulated markets or multilateral
trading facilities) to disclose the prices at which they will be
willing to buy from and/or sell to their clients.
However, it
limits this disclosure obligation to transactions not above
standard market size, defined as the average size of orders
executed in the market.
This means that European wholesale
markets will not be subject to the pre-trade transparency rule and
that wholesale broker-dealers will not be exposed to significant
risks in their role as market makers.
Operator protection
The Directive includes a set of protective
measures for "internalisers" when they are obliged to quote, so
that they can provide this essential service to clients without
running undesirable risks.
These measures include the possibility of updating and withdrawing
quotes.
The Directive also establishes a fair market for
retail investors. It prevents financial institutions from
discriminating between such investors, e.g. by offering some of
them improvements to publicly quoted prices.
Final provisions
The Directive is designed to improve the
Community rules on securities markets. It therefore sets out the
general obligations which Member State authorities must enforce.
Implementing measures, reports and reviews will be adopted by
the Commission following consultations with market participants
from the Member States and taking into account the opinion of the
Committee of European Securities Regulators.
Become a
Certified Hedge Fund Compliance Expert (CHFCE)
Distance Learning
and Online Certification Program
To learn more
www.hedge-funds-association.com/Distance_Learning_and_Certification.htm
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