Transcript MiFID and its impact for EU accessing countries

Markets in Financial Instruments Directive
and its impact for the EU accessing countries
Matjaž Albreht
The Slovene Securities Market Agency
VIII. Annual Conference of the Macedonian Stock Exchange
Ohrid, 29 – 31 March 2007
Disclosure
Any views expressed by an individual in this
presentation do not necessarily reflect views of
the Slovene Securities Market Agency.
Agenda
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History of adopting MiFID
About MiFID
Why MiFID needs to replace ISD?
4 Levels of MiFID
Impact of MiFID
Key provisions of Level 1 MiFID
Key guidelines of Level 2 MiFID
MiFID vs. ISD
Impact of MiFID on the EU accession countries
History of legal framework
ISD was
adopted
1993
TIMELINE
MiFID entered
in force
MiFID measures
should be applied
by industry
30.04.2006
01.11.2007
April 2004
31.01.2007
MiFID was
adopted
MiFID should be
implemented by
Member States
TIMELINE
VISION
MiFID would play an important role in the
wider European economic reform agenda
given the contribution that deep and liquid
capital markets can make to encouraging
investment, innovation, growth and
employment.
What is MiFID?
It is a major part of the EU’s Financial Services Action
Plan that sets out a comprehensive regulatory regime
covering investment services and financial markets in
Europe, containing measures that will:
 change and improve the organisation and functioning of
investment firms,
 facilitate cross border trading, and thereby
 encourage the integration of the EU capital markets,
 ensure strong investor protection with a comprehensive set
of rules governing the relationship, which investment firms
have with their clients.
Why MiFID needs to replace the
Investment Services Directive (ISD)?
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The ‘passport’ system has to be updated in order to eliminate
barriers to cross-border trading and thus inject more competition
into the European investment services industry.
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Investor protection needs to be enhanced in order to attract new
investors to the EU capital markets. The "concentration rule"
poses a barrier to the emergence of an integrated and
competitive trading infrastructure and so needs to be amended.
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New services, such as investment advice, and new financial
instruments, such as derivatives, need to be brought within the
scope of European legislation in order for these products to
circulate freely.
MiFID comprises of four levels
LEVEL 1: EU decision making
Directives adopted by the European Parliament
and the Council by co-decision procedure.
LEVEL 2: technical implementing measures
Adopted by Commission after having been submitted
to the ESC by Level 3 Committees (CESR).
LEVEL 3: non-binding guidelines and
recommendations adopted by CESR.
LEVEL 4: enforcement of
Community law.
Customers and small investors
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They will have a bigger choice of investment service providers who
will be required to conform to high standards of behavior to their
clients. This should allow them to seek out services of the best
quality at the cheapest price.
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Firms will be subject to greater competition forcing them to be
more responsible vis-à-vis their clients and to offer a better level
of service. Small (retail) investors will have a bigger choice of
products and services.
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Consumers will enjoy the same level of protection whether they
choose a domestic service provider or a foreign one (from another
Member State).
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When executing client orders, firms will have to take reasonable
steps to deliver the best possible result ("best execution").
Overall effects of MiFID
The MiFID will:
 significantly reduce the barriers to cross-border trading of
shares and cross-border provision of investment services;
 end the monopoly which certain stock exchanges have had
on the trading of securities;
 create new opportunities for firms, markets and indeed
consumers.
Effects of MiFID depend on ...
... the extent to which the various players are
prepared to seize the opportunities on offer. If
they are prepared to do so, there could be:
 a significant increase in competition among exchanges
and between exchanges and other trading platforms;
 a big increase in stronger cross border trading, and a
significant decrease in the cost of capital – benefiting
the overall economy and investors;
 lower costs for issuers and investors of accessing
capital markets and give investors a far greater choice
of equities, bonds, etc. to invest in.
Provisions of Level 1 MiFID
 It abolishes the so called “concentration rule” so that
Member States can no longer require investment firms to
route orders only to stock exchanges. Therefore,
exchanges will be exposed to competition from:
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multilateral trading facilities (MTFs), i.e. broadly nonexchange trading platforms, and
‘systematic internalisers’, i.e. banks or investment firms
that systematically execute client orders internally on own
account (rather than sending them to exchanges).
 MTFs and 'systematic internalisers' will be subject to
similar pre- and post-trade transparency requirements as
the exchanges. This will ensure a level playing field
between the exchanges and their new competitors – and
full information on trading activity to the market.
Provisions of Level 1 MiFID
(continuing)
It updates the ‘single passport’ for investment firms, which was
first introduced in the ISD and extends the list of services and
financial instruments covered to bring it into line with the new
market realities. Investment advice is covered for the first time.
This reflects modern trends since more and more retail customers
are investing in securities and seeking advice from their bank or
their broker. This will allow investment firms to provide services
across the EU on the basis of a single authorisation from their
"home" Member State. At the same time, investor protection rules
are strengthened and harmonized at a high level so that investors
can feel confident in using the services of investment firms,
wherever those firms originate from in the EU. Ensuring investor
confidence is critical for pan-European trading to deepen.
Level 2 MiFID measures
The Commission can only propose "level 2" measures in
those areas where the "level 1" Directive specifically
gives it the power to do so. The main areas covered are:
 conduct of business requirements for firms - their
obligation to divide their clients into different categories
("eligible counterparties", "professional" and "retail"),
their obligations towards each category of client, their
obligation to assess whether the products and services
which they provide are "suitable" or "appropriate" for
their client and their obligation to secure "best execution"
for their clients (i.e. the best possible result with the
emphasis on best price for retail investors).
Level 2 MiFID measures
(continuing)
 organisational requirements for firms and markets compliance, risk management and internal audit functions
that operate independently, identification and management of
conflicts of interest and limitations on out-sourcing, especially
to third countries;
 transaction reporting to relevant competent authorities of
buy and sell transactions in all financial instruments;
 transparency requirements for the trading of shares (i.e. preand post trade transparency for regulated markets, MTFs and
'systematic internalisers') to ensure a level playing field
between exchanges, MTFs and systematic internalisers for
the trading of the most liquid shares in Europe.
MiFID vs. ISD
Investment services and activities
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Investment advice defined as provision of personal
recommendations to a client about financial
instruments (built in as an important element of
investor protection).
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Placing of financial instruments without a firm
commitment basis.
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Operation of Multilateral Trading Facilities – MTF`s
(the purpose is to help facilitate competition and at
the same time guarantee that all market places are
governed by standards which seek to protect market
integrity).
MiFID vs. ISD
Auxiliary services
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Investment research and financial analysis or other
forms of general recommendation relating to
transactions in financial instruments.
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Investment services and activities as well as auxiliary
services of the type included under Section A or B of
Annex 1 related to the underlying of the derivatives
included under Section C – 5, 6, 7 and 10 - where these
are connected to the provision of investment or
auxiliary services.
MiFID vs. ISD
Financial Instruments
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Options, futures, swaps, forward rate agreements and
any other derivative contracts relating to securities,
currencies, interest rates or yields, or other derivatives
instruments, financial indices or financial measures
which may be settled physically or in cash.
Options, futures, swaps, forward rate agreements and
any other derivative contracts relating to commodities
that must be settled in cash or may be settled in cash
at the option of one of the parties (otherwise than by
reason of a default or other termination event).
Options, futures, swaps, and any other derivative
contract relating to commodities that can be physically
settled provided that they are traded on a regulated
market and/or an MTF.
MiFID vs. ISD
Financial Instruments (continuing)
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Options, futures, swaps, forwards and any other
derivative contracts relating to commodities, that can
be physically settled not otherwise mentioned in C.6
and not being for commercial purposes, which have the
characteristics of other derivative financial instruments,
having regard to whether, inter alia, they are cleared
and settled through recognised clearing houses or are
subject to regular margin calls.
MiFID vs. ISD
Financial Instruments (continuing)
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Options, futures, swaps, forwards and any other
derivative contracts relating to commodities, that can
be physically settled not otherwise mentioned in C.6
and not being for commercial purposes, which have the
characteristics of other derivative financial instruments,
having regard to whether, inter alia, they are cleared
and settled through recognised clearing houses or are
subject to regular margin calls.
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Derivative instruments for the transfer of credit risk.
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Financial contracts for differences.
MiFID vs. ISD
Financial Instruments (continuing)
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Options, futures, swaps, forward rate agreements and
any other derivative contracts relating to climatic
variables, freight rates, emission allowances or inflation
rates or other official economic statistics that must be
settled in cash or may be settled in cash at the option of
one of the parties (otherwise than by reason of a default
or other termination event), as well as any other
derivative contracts relating to assets, rights, obligations,
indices and measures not otherwise mentioned in this
Section, which have the characteristics of other derivative
financial instruments, having regard to whether, inter alia,
they are traded on a regulated market or an MTF, are
cleared and settled through recognised clearing houses or
are subject to regular margin calls.
MiFID’s impact for the EU
accessing countries
 opportunity for domestic investment firms to act cross
national borders using single passport;
 competition between exchanges and other trading
platforms will significant reduce transaction costs;
 lower costs and cross-border trading will increase
liquidity of domestic market;
 learn on experiences and mistakes of EU Member States.
More information about MiFID
 Directive 2004/39/EC on Markets in Financial Instruments
 Commission Directive 2006/73/EC of implementing
Directive 2004/39/EC as regards organisational
requirements and operating conditions for investment
firms and defined terms for the purposes of that Directive
 Commission Regulation (EC) No 1287/2006 of
implementing Directive 2004/39/EC as regards
recordkeeping obligations for investment firms,
transaction reporting, market transparency, admission of
financial instruments to trading, and defined terms for the
purposes of that Directive
http://europa.eu.int/eur-lex/
Questions?