The European trading landscape has seen significant changes following the implementation of MiFID II. Eight months into its introduction, MiFID II is still in its infancy yet we feel it is an appropriate time to reflect on the journey travelled so far and where we are headed. While the necessary one year delay helped to ensure a smooth migration, market participants continue to adjust their modus operandi to be compliant with the directive.
We will tackle a few of the salient themes that we feel MiFID has impacted significantly upon.
The Introduction of LEIs for entities
The introduction of the Legal Entity Identifier (LEI) was a necessary implementation to a more precise standard for identifying legal entities. The unique alphanumeric code is aimed at up keeping the integrity of financial institutions. This information about entities is publicly available and becomes part of a global directory for the sake of transparency. While entities are often registered on a local register within the country they are formed in, the LEI code is an international code which comes in a standardised format across borders. This code is aimed at facilitating cross-border transactions. This identifier is not a solution-provider; due diligence and knowing your customers and business requirements remain critically important.
The Reporting Aspect
The meticulous reporting obligations that have come into play with the directive, apply to all investment firms and investment managers. Any trade pertaining to a MiFID II financial instrument must be reported. With the introduction of MiFID II, the reporting has been extended to include ‘periodic communications’, taking into account the complexity and type of the financial instruments involved, as well as the nature of the service being provided to the client.
Another important requirement obliges portfolio managers to notify clients as soon as their portfolio value drops by 10% from the last reporting period, and in multiples of 10% thereafter. Moreover, the reporting of holdings to customers should occur at quarterly intervals as a minimum, both for retail and professional clients. In the case of Portfolio Management, this needs to include all the activities undertaken during the given period as well as the portfolio’s performance, unless the investment firm is sending regular contract notes to the investor.
In short, the obligations on investment firms in view of the reporting aspect have increased significantly.
Best Execution – Investor Protection
The ‘best execution’ which was introduced under MiFID I has been enhanced under MiFID II. Investment firms are required to take “all sufficient steps” in order to obtain the best possible outcomes for their clients’ investments. On an annual basis, investment firms will now also have to publish their top five execution venues for the previous year. Publishing of data requirements also include information about execution quality, such as speed and costs amongst others.
Firms that ‘manufacture’ investment products are now required to identify a target market and take reasonable steps in distributing the product. Whilst a product approval process needs to be in place, the performance of the investment products offered must also be reviewed periodically together with the relative target audience. Investment firms need to ensure that the distributors have sufficient understanding of the said products in order to be able to sell to their own target market.
Experience is teaching us that MiFID is a journey not a destination; an ongoing compliance challenge with the aim of enhancing customer protection. Changes are being instituted by the rules and accompanying regulations. Some might argue that MiFID II has brought about a costly implementation. In reality, only time will tell whether the imposed requirements will in fact prove beneficial in providing enhanced investor protection. On the other hand, the opportunity lies in the hands of the firm, whereby client relationships can be enhanced in the process of implementation of the regulations in question.
From a BOV perspective, the implementation of MiFID II allows us to continue focusing on nurturing our long term mutually beneficial relationships aiming for positive outcomes for our clients.
This will be the topic of discussion at an event – ‘MiFID – An Ongoing Implementation Journey’ which is being organised by Bank of Valletta p.l.c. in collaboration with Thomson Reuters, Swedbank and Caixa Bank. The event will focus on what has worked to-date, the grey areas which need further interpretation and the possible solutions going forward with input from industry players across Europe and regulators. The event will take place on Wednesday 19th of September 2018. Registration for this event is free of charge, however places are limited and are on a first-come-first served basis
More information on this event can be accessed via this link or contact us on firstname.lastname@example.org.
Aldo Scardino – Executive, BOV Wealth Management at Bank of Valletta