2. Compliance with New MiFID II extends
beyond EU Financial Institutions…
Deadline for compliance with MiFID II is looming (January 3, 2018).
Financial institutions with European clients will be required to comply
with the regulations.
The highlighted changes include:
• (1) Re-categorization of local authorities and municipalities
• (2) Legal Entity Identifier (LEI) is now mandatory under
Transaction Reporting obligations (TR)
• (3) Product Classifications definition of “financial instrument”
updated and expanded affecting ISO classifications
• (4) Suitability & Appropriateness
• (5) Direct Electronic Access clients
• (6) Transaction Reporting
3. Re-categorization
Re-categorization of local authorities and municipalities clients under the
existing CLIENT CATEGORIZES
- Eligible Counterparty (EC),
- Professional Client (PC) and
- Retail Client (RC)]
from PC or EC to RC or opting to be treated as Elective PC (EPC).
Financial institutions will have to:
1. Review existing client data to identify all local authority and
municipality clients that may need to be remediated and reclassified;
2. Reach out to each of these affected clients to notify them of the
reclassification; and (provided they meet the requisite knowledge and
experience criteria);
3. Obtain written consent documents (signed, returned and processed) if
they elect to change from RC or opt to be treated as EPC.
4. Legal Entity Identifier
A Legal Entity Identifier (LEI) will now be mandatory
under Transaction Reporting (TR) obligations whereas
they were only recommended under the existing
European Market Infrastructure Regulation (EMIR)
and Market Abuse Regulation (MAR).
Financial institutions will need to obtain LEIs for
clients that trigger a TR obligation BEFORE providing
services to those clients.
Failure to do so will result in submitted transaction
reports without LEI data being rejected by authorities.
5. Product Classifications
The definition of “financial instrument” has been
expanded.
The Classification of Financial Instruments (CFI) code
is a mandatory field in transaction reporting and must
follow the ISO 10962 standard.
Financial institutions will need to map their existing
product list to the updated ISO 10962 code which
includes the newly covered products (cash-settled
commodity derivatives, physically settled commodity
derivatives, etc.)
6. Suitability & Appropriateness
Financial Institutions have an obligation to properly categorize clients
as EC, PC, RC, depending upon their clients’:
- Knowledge,
- Experience,
- Ability to bear losses,
- Risk tolerance
Financial institutions are required to determine and document if
investment advice is being provided to clients and if so then whether
the financial institution is complying with the regulations regarding
suitability and or appropriateness.
Suitability of a product for a client involves determining and or
evaluating the clients’ knowledge, experience, financial situation and
investment objectives.
7. Direct Electronic Access (DEA)
MiFID II now includes DEA clients within the scope of regulatory
compliance. This means financial institutions will now be required to have
written agreements in place between each financial institution and the DEA
client.
Financial institutions will now have to:
- Perform due diligence reviews on each DEA client (similar to the
KYC refresh process) at inception and performed at least ANNUALLY
regardless of the client’s risk rating;
- Perform an assessment of suitability;
- Preset trading and or credit thresholds;
- Enter into mandatory binding written agreements with DEA
clients
8. Transaction Reporting
Transaction reporting requirements have been
expanded to include a wider range of financial
instruments.
Transaction reporting will require the disclosure of
additional mandatory data including new venues,
identity of the client, identity of the individual trader of
the transaction, etc.
Financial institutions will need to update their systems
that capture data to include these new data points,
clients, and wider range of financial instruments
affected by the new regulations.