IMC Chapter 2 - 2.2 - Markets in Financial Instruments Directive (MiFID)

Question 1

What is the UK regulatory framework influenced by?

Answer 1

UK and European Law.

Question 2

What is the aim of European law?

Answer 2

European law seeks to promote a single European marketplace.

Question 3

Who must agree to EU directive?

Answer 3

Member States of the EU

Question 4

What happens once an EU directive is agreed by member states?

Answer 4

It is incorporated into the local statutory frameworks.

Question 5

What are the 3 main objectives of the Markets in Financial Instruments Directive (MiFID)?

Answer 5

1) Increase post-trade transparency across the EEA
2) Ensure best execution of trades across the EEA
3) Ensure cost effective execution venues are available across the EEA

Question 6

Are EU regulations and directives still part of UK Law after Brexit?

Answer 6

All EU regulations and directives (including the Markets in Financial Instruments Directive (MiFID) have been onshored into UK law via the European Union (Withdrawal) Act 2018.

Question 7

What changes has Brexit made to the Markets in Financial Instruments Directive (MiFID)?

Answer 7

Before Brexit, the Markets in Financial Instruments Directive (MiFID) allowed investment services firms to be passported into the UK and throughout the EEA. Whilst EEA firms are still able to enter the UK under the Temporary Transitional Powers regime, there is no such reciprocal access for UK firms to passport into the EEA.

Question 8

Under the Markets in Financial Instruments Directive (MiFID), do investment businesses need to seek local authorisation when setting up branches in other countries in the EEA?

Answer 8

Under the scope of the Markets in Financial Instruments Directive (MiFID), investment businesses can set up branches in other countries in the EEA without having to seek local authorisation.

Question 9

Define ‘passporting’

Answer 9

Under the scope of the Markets in Financial Instruments Directive (MiFID), investment businesses can set up branches in other countries in the EEA without having to seek local authorisation. The arrangement is often known as ‘passporting’.

Question 10

Which areas comprise the EEA?

Answer 10

1. European Union (EU) countries
2. Norway
3. Iceland
4. Liechtenstein

Question 11

Under the Markets in Financial Instruments Directive (MiFID), how would a German stockbroker go about setting up a UK branch?

Answer 11

For example, a German stockbroker would be able to set up a UK branch by asking its local regulator, who would in turn contact the FCA, i.e. the firm requires permission from both its home state and the FCA.

Question 12

Name the directive and regulation released in January 2018 which made changes to Markets in Financial Instruments Directive (MiFID).

Answer 12

1. Markets in Financial Instruments Directive (MiFID) II

2. Markets in Financial Instruments Regulation (MiFIR)

Question 13

Name the 5 key changes made to Markets in Financial Instruments Directive (MiFID) in Jan 2018 since the implementation of key changes to Markets in Financial Instruments Directive (MiFID) II and key changes to Markets in Financial Instruments Regulation (MiFIR).

Answer 13

1. To regulate historically unregulated markets by creating organised trading facilities (OTF) to capture trades. These are specifically designed for bonds, derivatives and structured products. Organised trading facilities (OTFs) will exist alongside traditional stock exchanges and multilateral trading facilities (MTFs).
2. Rules to govern the use and transparency of algorithmic trading and ensure orderly markets can be maintained during high frequency use of algorithms.
3. Through these Organised Trading Facilities (OTFs) and through new rules on algorithmic trading, Markets in Financial Instruments Directive (MiFID) hopes to strengthen transparency before and after financial instruments are traded.
4. Establishing and applying position limits on the size of a net position which a person can hold at all times in commodity derivatives trade on exchange or over-the-counter.
5. Consumer protection through enhanced product disclosures and product governance, as well as looking at the way intermediaries are remunerated.

Question 14

Which firms does the Markets in Financial Instruments Directive (MiFID) apply to?

Answer 14

Markets in Financial Instruments Directive (MiFID) applies to any firm whose head office and registered office are situated in the same EEA state and which conducts investment services and activities, as defined by Markets in Financial Instruments Directive (MiFID).

Question 15

Name the 7 core activities as described by The Markets in Financial Instruments Directive (MiFID) .

Answer 15

1. Reception and transmission of orders in relation to one or more financial instruments
2. Execution of orders on behalf of clients
3. Dealing on own account
4. Portfolio management
5. Investment advice
6. Underwriting and placing of financial instruments
7. Operation of multi-lateral trading facilities (MTFs) or organised trading facility (OTF)

Question 16

Name 9 things included in the Markets in Financial Instruments Directive (MiFID).

Answer 16

Markets in Financial Instruments Directive (MiFID) instruments include:

1) Transferable securities, e.g. shares, bonds and CFDs
2) Money market instruments
3) Units in collective investment schemes
4) Derivatives relating to securities, currencies, interest rates or yields
5) Commodity derivatives (whether settled for cash or physically when traded on a regulated market, MTF or OTF)
6) Credit derivatives
7) Financial contracts for differences
8) Other derivatives (relating, e.g. to climate variables or other statistics)
9) Emissions allowances

Question 17

Does MiFID business cover the full range of business listed under the Regulated Activities Order (RAO)?

Answer 17

NO!

Question 18

List 4 business categories that are not MiFID business.

Answer 18

1. Retail products
2. Mortgage business
3. Insurance business
4. Pension business

Question 19

Is MiFID business covered in the Regulated Activities Order (RAO)?

Answer 19

Yes! MiFID business can be seen as a subsection of the business covered in the Regulated Activities Order (RAO).

Question 20

What determines if a firm is a MiFID firm?

Answer 20

The title ‘MiFID firm’ is determined by the business that the firm conducts and not by whether or not the firm has chosen to passport that business.

Question 21

Is a firm that carries out ancillary services only considered to be a MiFID firm?

Answer 21

Under MiFID, a firm which carries out ancillary services only will not be a MiFID firm and will, therefore, not be able to benefit from passporting its services into other member states.

Question 22

Are ancillary services passportable?

Answer 22

It depends! Ancillary services are deemed ‘passportable’ on the condition that they are accompanied by at least one core activity.

Question 23

List the 6 ancillary services.

Answer 23

1) Safekeeping and administration of financial instruments, including custody and related services
2) Granting loans to an investor (to carry out a transaction in which the firm is involved)
3) Advice to undertakings on capital structure and on mergers and acquisitions
4) Foreign exchange services
5) Investment research and financial analysis
6) Services related to underwriting

Question 24

Explain the difference between an EU Regulation and an EU directive.

Answer 24

Regulations are the most direct form of EU law - as soon as they are passed, they have binding legal force throughout every member state, on a par with national laws. Directives are addressed to national authorities, who must then take action to make them part of national law.

Question 25

Which regulator is a MiFID firm responsible to once it has passported its business.

Answer 25

Once a firm has passported its business, the firm has responsibilities to regulators in both
its home state and host state.

Question 26

Define ‘home state’

Answer 26

The home state is the state in which the firm has their registered office.

Question 27

Name 5 things the home state regulator takes responsibility for.

Answer 27

1. Authorisation
2. Prudential supervision, such as the capital adequacy rules
3. Conduct of business rules, when conducting business in the home states
4. Conduct of business rules, when conducting business in the host state from an office outside that host state (this is often
   referred to as cross-border selling)
5. Client asset rules, such as the custody rules and client money rules

Question 28

Define ‘host state’

Answer 28

The host state is the state into which the firm has passported their business.

Question 29

What are the 2 things the host regulator is responsible for?

Answer 29

1. Conduct of business rules, when conducting business in the host state from a branch office in the host state
2. Approval of controlled functions

Question 30

What do the FCA’s conduct of business rules state that EEA firms permitted to operate in the UK under the Temporary Transitional Powers regime (‘incoming firms’) must do?

Answer 30

Under the FCA conduct of business rules, EEA firms permitted to operate in the UK under the Temporary Transitional Powers regime (‘incoming firms’) must notify retail clients in writing regarding which rules are governed by the home state.

Question 31

What do EU Member States require of third-country firms under MiFID II?

Answer 31

Under MiFID II, EU Member States require third-country firms to establish a subsidiary in that state before being permitted to provide services to retail clients and certain professional clients. This means that UK firms wishing to provide services to these clients across the EU may be required to set up subsidiaries, and gain local authorisation for that subsidiary, in different Member States before they are able to provide services.