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MiFID II compliance

MiFID II Checklist: 5 Steps to Compliance

MiFID II compliance
MiFID II is coming January 1, 2018. Either that means nothing to you, or you’re scared right through to your bones. If it means nothing, don’t worry, it’s not some big scary asteroid, it’s the new round of European regulation, Markets in Financial Instruments Directive (MiFID).

If you’re still reading, then you’re probably a compliance officer or other financial institution (FI) professional responsible for ensuring that your FI is ready for the new MiFID II requirements. And, while no asteroid, your trepidation is natural; the latest Regulation Supplementing Directive is 98 pages long and, like any complicated bureaucracy legal document, is full of arcane details and specific requirements. Don’t worry, we won’t try to cover it all here, but rather, we’ll give you a checklist to help guide you on your path to compliance.

The Need for MiFID II

Perhaps obvious from its name, MiFID II provides further specifications and clarifications regarding MiFID.  There are three main areas:

  • Extending transparency requirements to equity-like and non-equity instruments and to more market players;
  • Amending requirements to ensure a level playing field regarding trading venues and technology;
  • Strengthening investor protection via stronger inducements, additional clients’ assets safeguards, rules on product governance, and intervention powers.

Five Steps to MiFID II Compliance

While there are many rules, many don’t apply directly to FI’s, but rather to regulators, trading venues and exchanges. For FI’s, here are some major criteria to consider:

1) Safeguard Client Assets

A FI can only deposit 20% maximum of a client’s funds at a third-party, within its own group. To exceed this limit, the FI must be able to demonstrate that it is appropriate for the particular client, based on their specific situation.

2) Unbundle Research Payments and Transaction Payments

Provisioning investment research by third parties should not be an inducement if it is paid for by the FI. Confidence in best execution requirements compliance should not be in any conflict with access to research.

3) Ensure Quality Enhancements Offer Direct Client Benefit

Service enhancements should be open to competition and transparent in pricing. The FI needs to focus on the benefit to the client.

4) Have the proper Third Country Firm setup

Does your firm do business in Europe, or have clients there? Depending on your type of business, type of customers, what countries you operate in, and other factors, you might have to have a physical branch. If this is the case, you’ll need to go through the local regulators and comply with their rules for FI branches.

5) Proper Record Keeping Systems and Practices

MiFID II brings more types of communications under the record keeping scope. Considering the proliferation of devices, communication channels and content, this step alone can be a major concern. Correct procedures require training, integration, implementation, supervision, operation and long-term retention.

While new regulations seem like an extra burden, many of these requirements are best practices to help maintain transparency and openness, avoid conflict of interest, safeguard customer assets, and good record keeping – all good practices – which should be in place anyways.

Rather than scrambling to get over the lowest bar of compliance, firms should develop solid, ethical systems and procedures that stand the test of time. Then, the next regulation update will be a walk in the park, not be a gut-churning experience!

 

The information in this blog is intended for public discussion and educational purposes only. It does not constitute legal advice.

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