EU: The Markets In Financial Instruments Directive Flashcards
What is the ISD and what did it create?
Investment Services Directive
- Created a “single passport” under which an authorised firm (usually authorisation is obtained from the home regulator) incorporated in one EU member state can engage in investment services throughout the European Economic Area (EEA)
- Separate authorisation by other EU member states (host) is not needed
- The passport allows a firm to provide investment services authorised by its HOME member state in a HOST member state
In the UK, the ISD was superseded by what?
- MiFID in Nov 2007 - Markets in Financial Instruments Directive
- Has the same basic purpose as ISD but, changed the regulatory framework to reflect developments and financial services and markets.
MiFID widened the range of “core” investment services and activities that can be transported. What are these?
- Upgraded advice which involves a personal recommendation to be a core investment service that can be transported on a standalone basis. (Offering personalised recommendations to clients without approvals)
- Clarified that operating a MTF is covered by the passport. (MTF in one EU country can offer its services in another EU country without setting up new entities in the host country)
- Extended scope of the passport to cover more products: commodity derivatives, credit derivatives and financial contracts for differences.
MiFID II was implemented in Jan 2018. What were the key changes that were introduced as part of this?
- Strengthening transparency requirements that apply before and after financial instruments are traded.
- Limiting size of positions held in commodity derivatives to reduce speculation and basic products such as agriculture.
- New Regulated trading venue, OTF to capture unregulated trades that are executed on a non-regulated platform
- Rules to avoid risks and creation of disorderly markets from increased use of technology
- Investor protection to safeguard clients interests by providing client with increased information on products and services.
MiFID II distinguishes between “investment services and activities” and “ancillary services”. Explain this further
- If a firm performs investment services and activities - subject to MiFID in respect of both these and also ancillary services. (Rules should be followed for both investment services & activities and also ancillary services it provides)
- If a firm only performs ancillary services - not subject to MiFID and cannot benefit from the MiFID passport.
What are the nine main services and activities in MiFID II?
- Reception and transmission of orders in relation to one/ more financial instruments.
- Execution of orders on behalf of clients.
- Dealing on own account. (Firm trading on its own money)
- Portfolio management (manages client investments)
- Investment advice.
- Underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis (guarantees to buy/sell new shares when issued)
- Placing of financial instruments without a firm commitment basis (helps buy/sell shares but no guarantee on whether it’ll buy any itself)
- Operation of an MTF. (Non-exchange trading)
- Operation of an OTF. (For non-equity instruments like bonds/ derivatives)
The services and activities in MiFID II relate to a wide range of financial instruments than under the original MiFID. What are these?
PART 1
- Transferable securities.
- Money-market instruments.
- Units and collective investment undertakings
- Options, futures, swaps, forward rate agreements and any more derivative contracts relating to:
A. Securities
B. Currencies
C. Interest rates or yields.
D. Emission allowances or other derivative instruments.
E. Financial indices or financial measures.
The services and activities in MiFID II relate to a wide range of financial instruments than under the original MiFID. What are these?
The below are for Options, futures, swaps and forwards and any other derivative contracts relating to commodities
PART 2
- that must be settled in cash/ may be settled in cash at the option of one of the party as long as it’s not due to a problem or contract termination
- That can be physically settled, provided they are traded on:
A. Regulated market
B. MTF
C. OTF - That can be physically settled (and not mentioned in 6) which have characteristics of other derivative financial instruments
- Derivative instruments for the transfer of credit risk
- Financial contracts for differences.
The services and activities in MiFID II relate to a wide range of financial instruments than under the original MiFID. What are these?
The below are for Options, futures, swaps and forwards and any other derivative contracts relating to:
PART 3
- A. Climatic variables, freight rates or inflation rates
B. Other official economic statistics that must be settled in cash/ may be settled in cash as long as there’s no problem and no termination event
The services and activities in MiFID II relate to a wide range of financial instruments than under the original MiFID. What are these?
PART 4
(Ancillary services under MiFID II)
- Emission allowances consisting of any units recognised for compliance with the requirements of Directive 2003/ 87/ EC (Emissions Trading Scheme)
A. Safekeeping and administration of financial instruments for clients accounts including custodianship and related services e.g. cash/ collateral management
B. Granting credits/loans to an investor to allow them to execute a transaction where the firm granting the credit/ loan is involved in the transaction
C. Giving Advice to undertaking on capital structure industrial strategy and related matters
D. Giving advice and services relating to marriages and the purchase of undertakings
E. providing foreign exchange services where these are connected to the provision of investment services
F. Undertaking investment research and financial analysis or other forms of general recommendation relating to transactions in financial instruments.
G. Providing services relating to underwriting.
H. Providing investment services and ancillary services related to the underlying of derivative instruments covered by MiFID.
With regards to authorisation under MiFID II, when is it/ not granted?
- Authorisation for investment firms may cover one/ more of the ancillary services
- Authorisation will NOT BE granted solely for the provision of an salary services
- A firm seeking authorisation to extend its business to additional investment services or activities or ancillary services (not provided in its initial authorisation) should submit a request for extension of its authorisation.
Briefly explain MiFIR
- Markets in Financial Instruments Regulation
- Does not need to be implemented into national law.
- Set out reporting requirements in relation to disclosure of trade data to public and competent authorities.
- Covers more asset classes so, more firms will be caught by reporting obligations
- Discretionary portfolio managers will need to report in their own name to the FCA under the MiFIR
