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Markets in Financial Instruments Directive

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  1. 1. MIFID 1MIFID 1 Markets in Financial Instruments Directive Helping you through the learning curve R.J. ClaessensR.J. Claessens && PartnersPartners 1
  2. 2. Goals of the European Directive •Enhance the protection of the investors •Assure the integrity of the markets •Assure the liberalisation of the financial markets •Guaranty the transparency of the markets Market integrity 2
  3. 3. 1. Customer segmentation 2. Product segmentation 3. Information to be received from the customer 4. Information to be provide to the customer 5. Adequacy test (suitability & appropriateness) 6. Best execution Market integrity 3
  4. 4. 1. Customer segmentation in three (3) formal categories: 1. Eligible counter parties 2. Professional customers 3. Retail customers Market integrity 4
  5. 5. 2. Product segmentation in two (2) formal categories: 1. Complex products (options, futures, warrants, forwards, structured products, private equity, hedge funds 2. Non-complex products (investment funds, shares, bonds, convertible bonds) Market integrity 5
  6. 6. 3. Information to be received from the customer 1. To allow for proper classification 2. To allow for proper matching of the customer profile and product profile 3. To allow for checking the suitability and trace-ability of the product Market integrity 6
  7. 7. 4. Information to be provided to the customer 1. General documentation 2. Documentation before the transaction 3. Documentation after the transaction Market integrity 7
  8. 8. 5. Product adequacy 1. Suitability test especially in case of providing advice 2. Appropriateness test when acting at the customer’s initiative Market integrity 8
  9. 9. Suitability Appropriateness Services Advise Customer’s request Products All products Complex products Customers Esp. Retail Retail Market integrity 9
  10. 10. Suitability Appropriateness Investment objective Conform customers objectives Knowledge Experience All products All products Financial capacity Professional and retail Professional and retail Market integrity 10
  11. 11. Action in case of negative tests: 1.Suitability PFS to abstain from recommending the product or the service to the customer + documentation of the negative test 2. Appropriateness PFS inform the customer + documentation of the negative test Market integrity 11
  12. 12. 6. Best Execution Factors to be taken into account: • Price • Transaction cost • Speed of execution • Probable execution • Seize and nature of the order • Any other relevant information Market integrity 12
  13. 13. 6. Best Execution Factors to be taken into account: Not required when customer provides for specific instructions, irrespective of the type of customer Market integrity 13
  14. 14. 6. Best Execution Goal is to protect the customers, therefore: • Orders need to be promptly registered • Execution of orders need to be done sequentially • Inform the customer of any problem related to the execution of his order • Prompt settlement • No abuse use of the information related to the transaction Market integrity 14
  15. 15. Conflict of interest • Procedures to avoid such a situation • Clear indication of the situation to the customer • Conflicting situations need to be documented • Special attention to transactions executed for the staff – need to declare transaction after the execution Market integrity 15
  16. 16. Conflict of interest When? • Between bank and customer • Between bank employee and the customer • Between different entities of the same organisation • Between the bank and its staff Market integrity 16
  17. 17. Conflict of interest Abuse! • A situation whereby the result of the operation executed by the PFS entails: - a significant disadvantage for the customer and as a counterpart - a significant advantage for the PFS, a member of its staff, another customer or any other party Market integrity 17
  18. 18. Summary MIFID redefines the operational framework of the trading of financial instruments whilst it: • Imposes new obligations to inform the customer • Enforces a customer segmentation obligation • Best principle execution • Best advise • Customer, product and transaction knowledge Market integrity 18