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4th PwC MiFID II Breakfast
Delegated Acts/Level 2 –another milestone is reached
www.pwc.lu/mifid
Regulatory Advisory Services
May 2016
1 MiFID II Genesis 1
2 Update on Level 2 Regulation 5
3 MiFID II Delegated Acts impacts summary 8
4 Business Challenge 1 – Product Governance 10
5 Business Challenge 2 – FX Trades 12
6 Business Challenge 3 – SI 14
7 Business Challenge 4 – Advice 16
8 Business Challenge 5 – Inducements 18
9 Business Challenge 6 – Insurance investment products 20
10 Conclusions & Next steps 21
Appendices
1 DA Impact Summary 24
Table of Contents
PageSection Overview
PwC
May 2016
MiFID II GenesisSection 1
4th PwC MiFID II Breakfast • Delegated Acts/Level 2 – another milestone is reached
1
PwC
May 2016
MiFID II: a European record in terms of negotiations?
8 years since the start of the drafting of the first proposal
51 European
Council sessions
6 public hearings
(nearly 3000 participants
in total) 3 discussions
papers5
consultations papers
15 working groups at
ESMA446 pages of
TA554 pages of
TS
110 articles in the 2 LI texts +
16 in the LII directive and 91 in the first LII regulation
MiFID II / MiFIR
Section 1 – MiFID II Genesis
4th PwC MiFID II Breakfast • Delegated Acts/Level 2 – another milestone is reached
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PwC
May 2016
MiFID II: a step change compared to MiFID I
Ma
rk
ets
is
su
es
Investors protection issues
End of the concentration
rule
Transparency rules for equities
MTFs
Importance of change
Importance of change
Suitability/appropriateness
New transparency for bonds
and derivatives
OTFs
Productintervention
Inducements
Positions limitson commodities
markets
Productgovernance
Section 1 – MiFID II Genesis
4th PwC MiFID II Breakfast • Delegated Acts/Level 2 – another milestone is reached
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MiFID I
MiFID II/MiFIR
PwC
May 2016
A specific context that made things even more difficult
• Pressure to move fast (G 20 in Pittsburg, Dodd Frank…)• Transparency rather than liquidity• Several moving parts (EMIR, PRIIPS, IDD…)• Temptation to split Markets and IP issues versus necessity to compromise
Political context:
2008 crisis but vivid memories of
MiFID I negotiations
• A European wholesale market?• Similar needs and similar solutions• But some important differences: sovereign debt…
• Differences in consuming retail investment products• Level of sophistication• Risk appetite• Distribution mode: integrated versus disintegrated
Economic context:
higher integration of wholesale
markets compared to retail markets
• Lack of efficient enforcement or failure of MiFID I?• Political sensitivity of retail investor protection issues at the national level• ESAs versus NCAs• Complexity versus risk• Digitalisation/Fintech• Appetite for more data but lack of existing data
Institutional and technological
context:
new forces in motion
Section 1 – MiFID II Genesis
4th PwC MiFID II Breakfast • Delegated Acts/Level 2 – another milestone is reached
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PwC
May 2016
Update on Level 2 RegulationSection 2
4th PwC MiFID II Breakfast • Delegated Acts/Level 2 – another milestone is reached
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PwC
May 2016
Delegated Acts/Level 2 timeline & outlook
Section 2 – Update on Level 2 Regulation
4th PwC MiFID II Breakfast • Delegated Acts/Level 2 – another milestone is reached
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2014
Q2 Q4Q3
2015
Q1 Q2 Q4Q3
2016
Q1 Q2 Q4Q3
2017
Jan
*Possibility of extension** Not all guidelines are expected to be ready by Q2 2016. ESMA will supplement its guidelines with
Q&A’s.
2018
Jan
LE
VE
L 1
LE
VE
L 2
LE
VE
L 3
Transposition period (national level) Transition period
Entry into force: 2 September 2014
04/2016Delegated Acts
Publication of ESMA final technical advice
ESMA RTS
Publication of Draft RTS 2nd Batch: Q4 2016*Q2/Q3 2016*
ESMA ITS
Publication of Draft ITS 2nd Batch: Q4 2016*Q2/Q3 2016*
ESMA guidelinesQ3 2016**
National transposition (Level 1)
Delay until 2018 officially proposed by E.C.
PwC
May 2016
Investor Protection Level 2 legislative structure leaves room for national ‘gold plating’ & interpretations
Section 2 – Update on Level 2 Regulation
4th PwC MiFID II Breakfast • Delegated Acts/Level 2 – another milestone is reached
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Delegated ActsDirective
Regulation
1. Scope2. Safekeeping3. Product
governance4. Inducements
1. Scope2. Organisational
requirements3. Operating
conditions4. Operating
obligations for Trading Venues
5. Reporting for commodity derivatives
6. Data provision obligations
Principles and rules subject to Member State transposition
Principles and rules NOT subject to Member State
transposition
PwC
May 2016
MiFID II Delegated Acts impacts summary
Section 3
4th PwC MiFID II Breakfast • Delegated Acts/Level 2 – another milestone is reached
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PwC
May 2016
MiFID II DA impact value chain and market interactionKey business impacts and challenges
Section 3 – MiFID II Delegated Acts impacts summary
4th PwC MiFID II Breakfast • Delegated Acts/Level 2 – another milestone is reached
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Idea DesignInvest-ment
Documen-tation
Marketing
Manufacturers Distributors
Trading Venues & B2B investors
Private Banking
Retail Banking / Execution Only
InsuranceB2B&
Nominees
Brokers &
Counter-parties
1
Product governance applicable to all FI placed in EU
2
FX trades (re-)defined and subject to distinct rules
4
Advice redefined and duties specified
SI rules subject to specific threshold test
3
5
Inducement rules scrutinise current distribution set-up
Insurance companies are at the melting point of IDD and MiFID II
6
PwC
May 2016
Business Challenge 1 – Product Governance
Section 4
4th PwC MiFID II Breakfast • Delegated Acts/Level 2 – another milestone is reached
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PwC
May 2016
Product GovernanceProduct governance rules are triggered for all FI in the EU
Section 4 – Business Challenge 1 – Product Governance
4th PwC MiFID II Breakfast • Delegated Acts/Level 2 – another milestone is reached
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Product manufacturers will have to:• Undertake a scenario analysis (compliant with PRIIPS) of
their financial instruments which shall assess the risks of poor outcomes for end clients posed by the product and in which circumstances these outcomes may occur.
• Determine whether a financial instrument meets the identified needs, characteristics and objectives of the target market.
• Consider the charging structure proposed for the financial instrument.
For product distributors, there is no more explicit requirementfor a distributor to enter into a written agreement with amanufacturer non-subject to MiFID or its agent to comply withthe duty to take all reasonable steps to obtain adequate and reliableinformation from the manufacturer
Key MiFID II requirements
Art. 9 & 10, MiFID II DD
DA acts final texts & highlighted changes
Product issuance approvalProduct documentation (i.e. KIID, PRIIPS, Term Sheet)Periodical product reviewProduct range assessment
Storage obligation
Product manufacturer:• Financial instruments: Annually (at least) and prior to any
further issue or re-launch if material changes
Product distributors:• Offered and recommended products: Annually• Services: Annually
Frequency
Medium
Low
High
2016
PwC
May 2016
Business Challenge 2 – FX TradesSection 5
4th PwC MiFID II Breakfast • Delegated Acts/Level 2 – another milestone is reached
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PwC
May 2016
FX TradesFX derivatives are exposing to SI rules and EMIR collaterisation
Section 5 – Business Challenge 2 – FX Trades
4th PwC MiFID II Breakfast • Delegated Acts/Level 2 – another milestone is reached
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• Definition of FX spot contract as a contract with delivery terms:(i) 2 trading days(ii) a period generally accepted as standard(iii) AND no ex-ante agreed ‘rolling’
• Derivative = FX forward contracts IF(i) exceeding 2 TD or market practice AND with at least on
major currency (USD, EUR, GBP, JPY, CHF, HKD, etc)(ii) NOT a ‘means of payment’ (i.e. settlement contract)
• Relevance for SI in case of admitted to trading on a trading venue (e.g. OTF)
• EMIR variation margin requirements apply above threshold of EUR 500.000 (minimum transfer amount)
Key MiFID II requirements
Art. 7 & 10, MiFID II DRArt. 1, 4 & 7,EMIR OTC Collaterisation
DA acts final texts & highlighted changes
• Ongoing trade reporting obligation (TD+1) – MiFID Trade Reporting only if admitted to trading on a trading venue
• In case of SI relevance, pre-trade & post trade transparency requirements
Storage obligation
• Ongoing review of positions (exposure) regarding variation margin requirements (EMIR)
• Market observation regarding ‘admission’ to trading venue of ‘standard FX forwards or FX swaps’ (i.e. CCPs)
Frequency
Medium
Low
High
2016
PwC
May 2016
Business Challenge 3 – SISection 6
4th PwC MiFID II Breakfast • Delegated Acts/Level 2 – another milestone is reached
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PwC
May 2016
Systematic InternaliserPotential impacts for all non-matched traded FI
Section 6 – Business Challenge 3 – SI
4th PwC MiFID II Breakfast • Delegated Acts/Level 2 – another milestone is reached
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• Firm which executes client orders OTC on frequent, systematic and substantial basis
• SI determination at the level of each financial instrument and expanded to non-equity
• Redefinition of thresholds for becoming SI for bonds, structured finance products, derivatives, emission allowances: exact percentage replaces range for frequency and substantial criteria
• Qualification of SI to the class of bonds/structured finance products issued by the same entity or by any entity within the same group
• Pre & Post trades transparency for instruments traded on trading venues within the same group
Key MiFID II requirements
Art. 12 to 17, MiFID II DR
DA acts final texts & highlighted changes
• History of OTC transactions and access to data on transactions executed in the UE on any trading venue or OTC on each FI (assessment of SI done a 6 months period). For which there is a liquid market (Art. 18 MiFIR). Currently all FX derivatives are deemed illiquid (Final Technical Report on RTS/ITS Sept 2015)
• Pre-trade prices reported to the market for all instruments
Storage obligation
• Develop quarterly process to monitor breaches of thresholds at Legal Entity level
• Notification of SI status to National Competent Authority (NCA)Frequency
Medium
Low
High
2016
PwC
May 2016
Business Challenge 4 – AdviceSection 7
4th PwC MiFID II Breakfast • Delegated Acts/Level 2 – another milestone is reached
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PwC
May 2016
Investment AdviceService level, information duties and responsibility increases
Section 7 – Business Challenge 4 – Advice
4th PwC MiFID II Breakfast • Delegated Acts/Level 2 – another milestone is reached
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Definition of advice/Service Level:1. Independent advice – some softening of obligations, but no
clarifications on key terms “adequately representative” or “proportionate to the scope”
2. Both independent and non-independent advice can be provided – firm cannot present itself as independent as whole (clear reference to independent services)
3. Advice addressed to the general public vs. personal recommendations via email or internet
Statement of Suitability: For every advice situation a statement of suitability needs to be provided ex-ante and clarification for automated or semi-automated advice (i.e. ROBO)Legal persons or joint accounts: Policy to determine representative account holder (contacting party/-ies)
Key MiFID II requirements
Art. 44 to 70, MiFID II DR
DA acts final texts & highlighted changes
• Service level per client• Product range (selection process and evidencing)• Suitability (suitability test and statements)• Recording (client interactions pertaining to order placement)
Storage obligation
• Information on advice: Ex-ante• Suitability Test/Statement: Ex-ante• Suitability Review: Ex-post (optional)• Permanent selection process for independent advice product
range (global or limited)
Frequency
Medium
Low
High
2016
PwC
May 2016
Business Challenge 5 – InducementsSection 8
4th PwC MiFID II Breakfast • Delegated Acts/Level 2 – another milestone is reached
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PwC
May 2016
InducementsProportionate, quality enhancing, recurring and disclosed
Section 8 – Business Challenge 5 – Inducements
4th PwC MiFID II Breakfast • Delegated Acts/Level 2 – another milestone is reached
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Quality Enhancing – unchanged:1. Definition of additional or higher level service, e.g. open
architecture, suitability review incl. asset allocation, tools for clients2. Proportionality principle linking the received inducement to the
quality enhancement3. Recurring inducement payments require a continuous quality
enhancement for the clientResearch – unchanged: research (except minor non-monetary) considered as inducementsDistribution chain – Requirements apply to all firms that are providing an investment or ancillary serviceDocumentation – Record fee flows and how fees enhance qualityDisclosure – ex-ante and ex-post annually (amount/generic descript.)
Key MiFID II requirements
Art. 11, 12 and 13, MiFID II DD
DA acts final texts & highlighted changes
• Retain documentation on inducement permissibility (quality enhancement test)
• Conflict of interest register
Storage obligation
• Permissibility: Ex-ante and ongoing• Disclosure: Ex-ante & ex-post
Frequency
Medium
Low
High
2016
PwC
May 2016
Business Challenge 6 – Insurance investment products
Section 9
4th PwC MiFID II Breakfast • Delegated Acts/Level 2 – another milestone is reached
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PwC
May 2016
Conclusions & Next stepsSection 10
4th PwC MiFID II Breakfast • Delegated Acts/Level 2 – another milestone is reached
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PwC
May 2016
C-Suite roadmap for 2016Key decisions and actions
Section 10 – Conclusions & Next steps
4th PwC MiFID II Breakfast • Delegated Acts/Level 2 – another milestone is reached
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1 2 3
Prepare implementation concepts & TOM(s)
• Perform detailed gap assessment
• Draft functional & technical specifications
Define, document and communicate on new service level to clients
This publication has been prepared for general guidance on matters of interest only, and does not
constitute professional advice. You should not act upon the information contained in this publication
without obtaining specific professional advice. No representation or warranty (express or implied) is given
as to the accuracy or completeness of the information contained in this publication, and, to the extent
permitted by law, PricewaterhouseCoopers, Société Coopérative, its members, employees and agents do
not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone
else acting, or refraining to act, in reliance on the information contained in this publication or for any
decision based on it.
© 2016 PricewaterhouseCoopers, Société Coopérative. All rights reserved. In this document, “PwC”
refers to PricewaterhouseCoopers, Société Coopérative which is a member firm of
PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.
Olivier CarréPwC Luxembourg, MiFID II Leader
400, Route d‘EschL-1471 Luxembourg
Telephone: +352 49 48 48 4174E-Mail: [email protected]
Join us on www.pwc.lu/mifid or www.mifid2.lu
PwC
May 2016
Appendix 1DA Impact Summary
4th PwC MiFID II Breakfast • Delegated Acts/Level 2 – another milestone is reached
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PwC
May 2016
Summary of key impacts
Appendix 1 – DA Impact Summary
4th PwC MiFID II Breakfast • Delegated Acts/Level 2 – another milestone is reached
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Topic Main key impacts from MiFID II DA
Safekeeping of clients assets
Investment firm have to only deposits financial instruments with a third party in a jurisdiction where the safekeeping of financial instruments for the account of another person is subject to specific regulation and supervision and that third party is subject to this specific regulation and supervision – Link to UCITS V
Best execution disclosure
Investment firms have to summarise and make public on an annual basis the top five investment firms in terms of trading volumes. The DA clearly exclude a look through until the trading Venue
Suitability on joint accounts
Investment firm shall establish and implement policy to determine who should besubject to the suitability assessment and how this assessment will be done in practice,including from whom information about knowledge and experience, financial situation andinvestment objectives should be collected.
Suitability on accounts managed by third party
The financial situation and investment objectives shall be those of the client, but the knowledge and experience shall be those of the person authorised to carry out transactions on behalf of the underlying client.
Suitability when Robo advisors/managers
When providing investment advice or portfolio management services are provided through anautomated or semi-automated system, the suitability assessment shall lie with theinvestment firm providing the service and shall not be reduced by the use of an electronicsystem.