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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.






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.

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