London Compliance MiFID Overview BCS 25 th April 2005 Simon Barker Head of Regulatory Affairs BNP Paribas London branch

London Compliance 2 Disclaimer Any views are personal to the speaker and are not those of BNP Paribas

London Compliance 3 Summary Background to MiFID Impact Assessments Project teams Key issues

London Compliance 4 Background The Markets in Financial Instruments Directive (MiFID) introduces a consolidated regulatory regime across the EU for financial instruments MiFID impacts all areas of financial services businesses and will require significant work to implement MiFID will create significant operational impact but also strategic opportunities and threats MiFID must be implemented by 1 st November 2007 Level 1 passed in April 2004 Level 2 passed in August 2006 Member States had to transpose MiFID by 31 January 2007……. Level 3 currently underway

London Compliance 5 Background MiFID is a business issue: it is not just a Compliance or IT problem Issues such as best execution go to the heart of how the business operates: solutions must be business led and not Compliance or IT led Successful implementation depends on senior management support and commitment: senior management must assume responsibility for implementation and establish effective governance structure to deliver effective implementation

London Compliance 6 Impact Assessment Comprehensive impact assessment must be undertaken: identify gaps between current state and MiFID requirements completed on a front-to-back basis for each business area addressing impact on marketing, sales, trading and back office activities Assessment needs to include: Business processes Systems impacts Documentation requirements, including client documentation and internal policies and procedures Training and education

London Compliance 7 Mobilise Project teams Participation is required from all areas of the firm, including: Business Management IT Operations Legal Compliance Risk Management Internal Audit HR

London Compliance 8 Key impacts of MiFID Client classification: Clients to be classified as “Retail”, “Professional” or “Eligible Counterparty”. The level of protection a client receives depends on their classification. Impacts Re-classify clients (change existing flags) May need to capture new information on clients May need to feed client classifications to downstream systems Best Execution: Firms must obtain the ‘best possible result’ when executing client orders (with limited exclusions). Applies to all investments. Firms are required to put in place an execution policy and demonstrate compliance with the policy. Impacts Systems to comply with best execution policies Capture and retain information necessary to demonstrate compliance with policies

London Compliance 9 Key impacts of MiFID Pre-trade Transparency Applies to cash equities admitted to trading on a regulated market Systematic Internalisers to publish a firm quote in liquid shares Applies to orders up to standard market size Post-trade Transparency Applies to cash equities admitted to trading on a regulated market Firms must make public volume and price of transactions at the time they were concluded As close to real-time as possible Reasonable commercial basis Easily accessible to other market participants New ventures Project Turquoise Project BOAT Equiduct

London Compliance 10 Key impacts of MiFID Suitability: New requirements to assess suitability or appropriateness of products for clients in certain cases. KYC information will need to capture relevant information Impacts May need to capture additional information on clients May need to feed information to downstream systems to support advice/trading decisions Transaction reporting: Shifts emphasis to report to home/host state competent authority of the firm and not the regulated market and extends obligation to ANY product traded on a regulated market (includes off-exchange transactions) Impacts Change to content of reports Unique client identifiers Change to recipient of reports Identify securities to be reported

London Compliance 11 Key Impacts of MiFID Conflicts of Interest: Prescriptive requirements to identify, manage and disclose conflicts of interest Impacts New conflicts management systems Consider whether additional system access changes required Client information: More prescriptive requirements for information to be delivered to clients (best execution policy, conflicts policy) Impacts Web content Recording changes to documents on web

London Compliance 12 Key Impacts of MiFID Outsourcing: outsourcing of ‘critical’ or ‘important’ functions must not significantly impair firm’s internal controls or weaken ability to monitor compliance. Includes intra-group arrangements Impacts Outsourcing of IT functions may need to comply with new requirements Record Keeping: Prescriptive requirements to keep records for 5 years to demonstrate compliance Impacts Consider any systems that do not support a 5 year retention period Commodity derivatives: regulated under MiFID for the first time on a pan-European basis Impacts Consider whether commodities systems support requirements described above

London Compliance 13 Conclusions Key changes still to be settled Business opportunities ? FSA move to more principles based regulation