MiFID II
Through the eyes of your business
July 2014
kpmg.co.uk
MiFID II/MiFIR (“MiFID II”) is the long awaited recast of the Markets in Financial Instruments Directive, and was published in the Official Journal of the EU on 15 June 2014. The mandated review of MiFID fell in the heat of the financial crisis, and the impact of this timing is clear in its outcome. The focus on transparency, consistency and competition remains, but is now supplemented with a broadened focus on reducing systemic risk, strengthening financial stability by ensuring maximum transparency in markets and applying a renewed focus on investor protection.
MiFID II seeks to narrow exemptions enshrined in MiFID I and thus subjects more firms to MiFID II requirements. It applies to more products, and extends and reinforces Transparency Reporting, Transaction Reporting, and Investor Protection, while
introducing new trading venues and defining new requirements for both old venues and new.
MiFID II also completes the 2009 G20 Pittsburgh commitment by introducing a trading obligation for OTC derivatives contracts subject to clearing under EMIR, and seeks views on straight-through processing for both exchange traded and OTC derivatives contracts for direct and indirect clients.
MiFID comes at a time when firms are already struggling through implementation of other major regulatory requirements – extraterritoriality requirements of Dodd-Frank, Capital Requirements Regulation (CRR), European Market Infrastructure Regulation (EMIR), Alternative Investment Fund Managers Directive (AIFMD) and more – with implementation timelines that will stretch through and in some cases beyond MiFID.
However, MiFID II is far more wide-reaching and wide-ranging across a firm than any one of these on its own, and interacts with all of them. The interconnectedness between MiFID II and other reforms on remuneration, data reporting, governance, investor protection, and record keeping creates added complexity in assessing and planning for MiFID II. Interestingly, MiFID II is also being used to amend, over-ride and clarify other Directives and Regulations, including AIFMD, CRD IV, EMIR, and REMIT.
Similarly, MiFID/R will also supersede many excising national rules which means firms need to map the new requirements with what is already in place in different countries.
In particular, the structural change driven by multiple ring fencing initiatives could impact approaches to strategic and operational changes in response to MiFID.
On 22 May 2014, the European Securities and Markets Authority (ESMA) published the Consultation paper and Discussion paper on draft technical standards and technical advice, adding new details and direction for firms to interpret. Against this backdrop, it is imperative that firms to get to grips with the magnitude of the proposed changes and the potential game changing nature of some of the proposals. These changes could result in firms having to assess the viability of continuing to provide certain products and services, or provide those services in a different way, and for many firms, there is significant work to do to close gaps in compliance of current processes against current MiFID requirements before extending their scope.
The breadth and inter-connectedness of MiFID/R means that it is time for firms to consider managing their regulatory portfolio in a different way to achieve efficiencies, save costs and achieve potential synergies in the inevitable change to people, processes and technology.
THE JOURNEY SO FAR...
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MiFID II3 MiFID II
And of course, MiFID II isn’t the only Directive and Regulation on the horizon. For both buy-side and sell-side firms there are a multitude of directives and regulations passing through different stages of law-making (ignoring the scrutiny firms face from national regulators).
It is time for firms to consider managing their regulatory portfolio in a different way to achieve efficiencies and save costs – and avoid missing opportunities to make strategic decisions which reflect the combination of multiple
regulations, and achieve potential synergies in the inevitable change to people, processes and technology.
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IMPLICATIONS FOR YOUR BUSINESS
Client on-boarding
Sell-sideBuy-sideBusiness Function
Investor Protection
Investor Protection
Trading and Clearing
Micro structural
issues Transparency
Transparency Front Office
Commodity Derivatives Transparency
Transaction Reporting
Commodity Derivatives Transparency
Transaction Reporting Middle Office
Trading and Clearing Commodity
Derivatives Transaction Reporting
PublicationData and Access Trading and Clearing Transaction
Reporting Back Office
Investor Protection
Trading and Clearing
Investor Protection Trading and
Clearing Treasury
Trading and Clearing
Investor Protection Trading and
Clearing Finance
Micro structural
issues Investor Protection Transparency
Micro structural
issues
Compliance/Risk Management
Micro structural
issues Commodity Derivatives Investor Protection Trading and
Clearing Data Publication and Access
Investor Protection Transparency
Transaction Reporting Commodity
Derivatives Trading and Clearing Transaction
Reporting Commodity
Derivatives Trading and Clearing
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MiFID II
SUMMARY OF KEY CHANGES
Investor Protection
Restrictions on advice and new requirements for inducements and unbundled services.
New definitions of complex and non-complex products.
New emphasis on suitability and appropriateness tests.
Strengthening of client asset protection and appointment of officer Best execution extended to new products, increased disclosure Transparency
Pre-trade transparency extended to all liquid MiFID products. Waivers tightened.
Post-trade transparency extended to all liquid MiFID products. Deferred publication tightened.
Transaction Reporting
Transaction reporting requirements extended to new products and new data fields.
Micro structural Issues
Direct electronic access needs increased governance and control High frequency trading firms to be authorised and regulated
Algorithmic trading subject to testing, review and disclosure, increased fees Commodity derivatives
Commodity derivatives position limits for both ETD and OTC. Daily position reporting.
Trading and Clearing
Trading venues reclassified as MTF, OTF, SI
OTC derivatives trading on centralised venues where subject to clearing Indirect clearing arrangements extended to ETD products
Formalised criteria required for portfolio compression and data to be published
Increased real time processing for trading, clearing and transfer of collateral Data Publication and Access
Non-discriminatory access between CCPs and trading venues Non-discriminatory access to and license requirement for benchmarks
‹#› MiFID II
BUSINESS AREAS AND IMPACTS
Business Functions Operational impact
Key requirements
Client on- boarding
Front Office
Middle Office
Back
Office Treasury Finance Risk
Mgmt Analysis
Investor Protection
Advice, Inducements and Unbundled services
• • - • - • •
Classification of clients will be impacted and clients classified as advisory will get enhanced protection. There will be more disclosure around inducements and a requirement to return monetary benefits. Previously bundled services will have to be unbundled and any service that is provided ancillary to trading will need a different fee structure. Consequently, clients will need to be re-papered.Product
Governance
• • • • • - •
Manufacturers and distributors will need to review product governance, distribution and financial promotion and reassessproducts according to the new definition. As a result, there may be a focus on non-complex products which will result in less choice for clients, less revenue and will have an impact on firm’s funding profile.
Classification, Suitability and
Appropriateness
• • - - • • •
Client on-boarding is likely to take longer and be a more intrusive process for clients. Suitability and appropriateness processes will have an impact on client sales, and appropriateness test will apply to execution only business with financing element. Municipalities and local public authorities can no longer be treated as an ECP resulting in reclassification and re- papering.Client Assets
• • • • • • •
Firms will have an enhanced accountability for client assets. The re-use of assets will be limited or banned in the case of Title Transfer Collateral Agreements for retail clients. Client consent and disclosure will be required before assets are re- used which is likely to have an impact on stock lending, borrowing and repo activity.BestExecution
• • - • - - •
In order to get the best possible result for the client, order handling processes and policies require updating to demonstrate to the client how the firm will meet its best execution requirement across all relevant asset classes. Additionally, firms will have to publish the top 5 trading venues used across all asset classes.Transparency
DataProviders
• • • • • • •
Significant new publication infrastructure build required for both pre and post trade transparency reporting.Pre-trade
transparency
• • • • - - •
New requirements will apply to all liquid asset classes and waivers currently in place will be tightened. Pre-trade transparency data from trading venues will need to be collected, aggregated and provided to Consolidated Tape Provider (CTP). Firms will need to build a new publication channel to provide relevant data, even if relying upon a waiver – as waivers can be suspended.Post-trade
transparency
• • • • - - •
New requirements will apply to all liquid asset classes and waivers currently in place will be tightened. Pre-tradetransparency data from trading venues will need to be collected, aggregated and provided to CTP. Firms will need to build a new publication channel to provide relevant data, even if relying upon a waiver – as waivers can be suspended.
Transaction reporting Transaction
reporting
• • • • - - •
Applies to new MiFID products and new fields to be populated. Trade reporting and transaction reporting to be alignedwhere possible and where not possible, the data will need to be reported separately. Responsibility for elements of transaction reporting such as flagging algo trades, short selling, repo activity, waivers and decision maker, will pass to the front office. In addition, firms that accept delegated reporting from discretionary investment management firms, will need to obtain more data to meet the necessary requirements.
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MiFID II
Business Functions Operational impact
Key
requirements Client on- boarding Front
Office Middle Office Back
Office Treasury Finance Risk
Mgmt Analysis
Micro Structural Issues Direct Electronic
Access
• • • • - - •
New systems and controls required for client access, to include a requirement that a user is competentand systems and controls are adequate. Real time monitoring required by the DEA provider.
Algorithmic
Trading
• • • • - - •
More transparency required around algorithmic trading. Executed trades to be flagged, and strategiesbehind the algorithms disclosed to DEA providers and regulators. To manage disorderly trading conditions, trading venues will introduce new fees for cancelled trades and ‘order to transaction ratios’, resulting in changes to trading strategies to mitigate increased costs and disclosure.
High Frequency
Trading
• • • • - - •
High frequency trading firms are defined as firms that submit two messages per second. Firms thatexceed two messages per second will be classified as HFT firms. High frequency trading firms dealing on own account and using algorithms will be required to be authorised in EU.
Commodity Derivative Commodity derivatives (ETD & OTC) position limits &
daily reporting
• • • • - - •
Position limits per trading venue will be applied and need to be carefully managed by firms. Positionlimits will be extended to apply to related securities and equivalent OTC transactions. Firms must provide daily position reporting to venues and and regulators. Where a firm is classified as an NFC under EMIR, the application of the position limits will mean NFC classification is no longer applicable.
Trading and Clearing
MTF, OTF, SI
• • • • • - •
Investor protection, conduct of business and best execution rules apply in varying degrees to tradingvenues. There are new definitions of an MTF, SI and creation of a new category of venue, an OTF. The
type of trading activities that can be transacted on these trading venues will change as a result of the new definitions.
Previous trading activity conducted OTC may now have to be traded on a public trading venue.
OTCDerivatives
Trading
• • • • - - •
Requirement to trade, clear and move collateral/margin as close to real time as technologicallypossible may involve a significant infrastructure build. Eligible trades must be traded on a trading venue, increasing transparency.
Clearing
• • - • • • •
Margin requirements will increase the cost of clearing OTC derivatives which will be partially off-set by reduced capital requirements.Data Publication & Access Central
clearing
• • • • • • •
Changes to CCP pricing, products and schemes will result in CCPs being more transparent, fair andnon-discriminatory.
Access to
Trading venues
• • • • • • •
Firms may incur increased costs as a result of the requirement that trading venues provide fair andnon-discriminatory access.
Benchmarks
- • - • • • •
New definition of benchmarks may result in any rates, indices and figures that are published requiringa licence. Firms operating benchmarks will need to promptly provide data to trading venues and CCPs.
‹#› MiFID II
TIMELINE OF MIFID II
19 Feb 2014 Final texts published for national consideration
1 Aug 2014 CP & DP close
3 July 2015
Draft Technical Standards submitted by ESMA including:
publication waivers, volume caps, deferred publication, record-keeping, transaction reporting and reference data requirements, trading and clearing obligations for
derivatives, access to CCPs and trading venues
3 Jan 2016
Guidelines developed by ESMA on management body, client knowledge and competence, transaction reporting to competent authorities
Jan 2017 Implementation
September 2020 Transactional provisions for energy derivative contracts end, report on organisational
provisions for CTPs submitted to EU Parliament and Council 22 May 2014
ESMA publish DP & CP
Apr 2014 Plenary vote to adopt MiFID II
Dec 2014 Advice on Delegated Acts 12 Jun 2014
Published in OJ Dec 2015
Final ITS
Jun 2016 Transposition into national law of member states
3 Sept 2018 Report on functioning of consolidated tape submitted to EU Parliament and Council Implementation timeline (Estimated dates)
2014 Q2 Q3 Q4 2015 Q2 Q3 Q4 2016 Q2 Q3 Q4 2017 2018 2019 2020
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MiFID II
UNDERSTANDING THE IMPACT – PRIORITY ACTIONS
Key workstreams
Investor Protection
Transparency
Transaction Reporting
Microstructural issues
Commodity Derivatives
Trading and Clearing
Date Publication &
Access
Review services and products to clients including advisory and non-advisory and complex and non-complex products under new definitions. Assess key impacts to business model and the viability of continuing to provide the same services. Review classifications and re-paper following reviews and assessments.
Identify MiFID products and trading venues for MiFID liquid products that will be subject to pre-trade and post-trade publication including trading activity subject to waivers.
Review data warehouses to assess most efficient way of collating data for new fields, to avoid duplication between Transaction Reporting and Trade Reporting. Review on-boarding process to ensure static data collected for Transaction reporting and commodity derivatives position reporting.
Catalogue clients accessing markets via direct electronic access including clients that have whitelabelled the service. Identify clients and internal desks that are using algorithms to trade and identify strategies behind algorithm to disclose to NCA. Implement systems and controls and real time monitoring.
Assess commodity derivative positions, related securities and OTC equivalent positions and assess if subject to commodity position limits and daily reporting to trading venue and NCA. Identify trading venue to report listed positions.
Firms need to consider whether their current trading activities fall with new definitions of MTF, SI and OTF and if so, review the viability of their desk activities. Where necessary firms may consider transferring business to a platform/trading venue.
Firms will need to build publication channels to pass pre and post trade transparency data to Approved Publication Arrangements for onward transmission to CTP. Data will have to be disaggregated by trading venues so that firms only have to buy data relevant to their needs.
Priority Actions
‹#› MiFID II
KPMG'S APPROACH
KPMG member firms are developing their regulatory requirements tool to incorporate MiFID II/MiFIR and allow tracking from the regulatory text through baseline assessment and compliance validation. It can underpin programme planning and assurance and providing a clear audit trail of compliance to
regulators.
Compliance validation
Details compliance requirements:
Translate decomposition into clear compliance requirements
Supports risk and control assessment
Underpins governance arrangements
Validates effective implementation Rules decomposition
Captures and links:
Directive and Regulation text
Initial draft and final RTS, ITS, Delegated Acts
Supporting/ clarifying FAQs
Programme plan
Program plan which is:
Mapped to compliance requirements
Links multiple workstreams, across multiple businesses
Reviewed and refreshed to reflect continuous refinement of requirements
Current state assessment
Maps regulatory requirements to:
Core businesses
Core functions/ processes
Related regulatory requirements of key coming/ in progress regulations
Supports gap analysis
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France
Sophie Sotil Forgues T: +33 1 5568 7474 Spain
Ana Rosa Cortez T: +34 91451 3233 Germany Marcus Lange T: +49 69 951195 530
Luxembourg Anne-Sophie Minaldo T: +35 222 515 17909 Italy
Pietro Stovigliano T: +39 02676431 Switzerland Pascal Sprenger T: +41 58 249 4223
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