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Living with MiFID II, 8 months on

Europe’s trading land­­scape has been signifi­cantly changed following the implementation of Markets in Financial Instruments Directive (MiFID) II. Eight months into its introduction, MiFID II is still in its infancy but this is an appropriate time to reflect on the journey travelled so far and where we are headed. While the necessary one-year delay helped 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 necessary for a more precise standard to identify legal entities. The unique alphanumeric code is aimed at safeguarding the integrity of financial institutions. This information about entities is publicly available and forms part of a global di­rectory for the sake of transparency. While entities are often registered on a local register in the country they are formed in, the LEI code is an international code that 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 per cent from the last reporting period, and in multiples of 10 per cent 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.

Product governance: Firms that ‘manufacture’ investment products are now required to identify a target market and take reasonable steps in distributing the product. While 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 aimed at positive outcomes for our clients.

This will be the topic of discussion at an event entitled ‘MiFID – An Ongoing Implementation Journey’ that is being organised by Bank of Valletta in collaboration with Thomson Reuters, Swed­bank and Caixa Bank. The event will focus on what has worked to date, the grey areas that need further interpretation and the possible solutions go­ing forward with input from industry players across Europe and regulators.

It will take place on September 19. Registration for this event is free of charge, however places are limited and are on a first-come, first-served basis.

More information on the event can be accessed by clicking here or e-mail us on mifid@bov.com

Aldo Scardino is executive, BOV Wealth Management, at Bank of Valletta.

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