Delegated Acts/Level 2 another milestone is reached · 4th PwC MiFID II Breakfast • Delegated...

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


2

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



3

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



4

PwC

May 2016

Update on Level 2 RegulationSection 2


5

PwC

May 2016

Delegated Acts/Level 2 timeline & outlook

Section 2 – Update on Level 2 Regulation


6

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


7

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


8

PwC

May 2016

MiFID II DA impact value chain and market interactionKey business impacts and challenges

Section 3 – MiFID II Delegated Acts impacts summary


9

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


10

PwC

May 2016

Product GovernanceProduct governance rules are triggered for all FI in the EU

Section 4 – Business Challenge 1 – Product Governance


11

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


12

PwC

May 2016

FX TradesFX derivatives are exposing to SI rules and EMIR collaterisation

Section 5 – Business Challenge 2 – FX Trades


13

• 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)


Art. 7 & 10, MiFID II DRArt. 1, 4 & 7,EMIR OTC Collaterisation


• 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


14

PwC

May 2016

Systematic InternaliserPotential impacts for all non-matched traded FI

Section 6 – Business Challenge 3 – SI


15

• 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


Art. 12 to 17, MiFID II DR


• 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


16

PwC

May 2016

Investment AdviceService level, information duties and responsibility increases

Section 7 – Business Challenge 4 – Advice


17

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)


Art. 44 to 70, MiFID II DR


• 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


18

PwC

May 2016

InducementsProportionate, quality enhancing, recurring and disclosed

Section 8 – Business Challenge 5 – Inducements


19

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.)


Art. 11, 12 and 13, MiFID II DD


• 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


20

PwC

May 2016

Conclusions & Next stepsSection 10


21

PwC

May 2016

C-Suite roadmap for 2016Key decisions and actions

Section 10 – Conclusions & Next steps


22

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

http://www.pwc.lu/mifid

http://www.mifid2.lu/

PwC

May 2016

Appendix 1DA Impact Summary


24

PwC

May 2016

Summary of key impacts

Appendix 1 – DA Impact Summary


25

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.

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Delegated Acts/Level 2 another milestone is reached · 4th PwC MiFID II Breakfast • Delegated...

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