MiFID General Awareness Training

Part 1 – Overview of the changes Part 2 – MiFID in more detail Part 3 – Economic Impact

Part 1 – What are the big recent and new changes?

2007 at a glance MiFID Risk – based Supervision (already in) Capital Adequacy Directive Principles-based Regulation 2007

Responsibility of Firms and Senior Managers FSA’s Principles based Rules Senior Management Deliver Authority and Risk based Supervision Firms and Senior Management ResponsibilityOutcomes

Changes More Principle-based Regulation The eleven FSA principles e.g. Treating Customers Fairly Outcomes rather than detailed rules More senior management responsibility Predictability of FSA policy at time of decision More informal guidelines e.g. sector newsletters Trade body guidelines e.g. MiFID Connect

More Principles-based Regulation- Example A firm had inadequate and incomplete compliance policies and procedures e.g. no up to date compliance manual and no regular visits to its branches. Reporting to management was informal: it was not clear if senior management was aware of key problem areas. It did not follow some of its own procedures which were sometimes above FSA Rule Standards. The firm (Carr Sheppard) was fined £500,000 for breach of Principle 2 (firm must conduct its business with due skills and date) and Principle 3 (A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems).

Changes The Risk-based Approach By FSA of firms e.g. ARROW II By Senior Management within Firms Within FSA e.g. allocation of resources Applies to amount of capital required by firms

Changes The Risk-based Approach – Example from the firm’s [Risk Map] [Here put in Excerpt from the Firm’s Risk Map, Risk Register or ICAAP]

Changes New Capital Adequacy Calculations – the Impact on the Firm [Put in key points of change between current and future calculation of capital adequacy of firm]

Part 2 MiFID

MiFID MiFID was conceived for the noble purpose of opening up Europe’s Capital Markets by improving price transparency of traded financial instruments while making it easier to execute trades across borders. FT

MiFID Alarm over financial instruments directive EU plans attacked by banks and investment firms FT

Which Firm Functions are affected? MiFID Front Office e.g. Sales, Trading and Investment Management e.g. Conduct of Business Operations e.g. trade reporting I.T. Technology e.g. data collection Internal Audit e.g. authority Compliance Legal e.g. Client Agreements Senior Management HR e.g. Training

MiFID at a glance MiFID Relationships with Clients Internal System and Controls Equal treatment of Exchanges and Multilateral Trading Facilities and price transparency Equivalent Conduct of Business Rules in all EEA Countries

MiFID What is the scope and impact of MiFID A broad range of requirements - best execution, pre- and post-trade transparency, client disclosure and reporting… Affecting most areas of a firm - senior management, managers, client services, trading, custody… Affecting many types of buy-side and sell-side firm - Traditional and electronic exchanges, banks, asset managers, issuers, brokers, systematic internalisers...

MiFID What is the scope and impact of MiFID? (Cont.) Most financial instruments are within scope - equities, fixed interest, derivatives, stock lending, OTC trading… - Commodities The impact of MiFID will vary - between firms (depending how well prepared they are) - between lines of business (some more affected than others) - and between jurisdictions (depending on current national market practice, relative to the level playing field of EEA-wide MiFID)

Appropriate ness/ Suitability Best Execution Inducements Complaint Management Conflicts of Interest Outsourcing Terms of Business Client Categorisation Client Reporting ResearchProduct information Docu - mentation/ Archiving Pre-/Post- Trade Trans - parency Design productsAcquire clientsAdvise clientsExecute businessReporting MiFID

Robust Financial and Operating Controls under MiFID and Capital Requirements Directive Risk identification and management e.g. Risk Maps and ICAAP capital allocation Assessment of exposures e.g. for financial crime and market abuse Corporate Governance e.g. proper job descriptions, Management Information to Board, Record Keeping etc

Robust Financial Systems and Controls under MiFID – Examples [Extract from the Firm’s Financial Crime Risk Assessment including management of the risk.]

Relationships with Clients under MiFID (and other changes) A new shorter Conduct of Business Rulebook The overriding ‘Client’s Best Interests’ Rule Categorisation of new and existing clients Account Opening procedures including more KYC Change Terms of Business Duties of Suitability and Appropriateness to retail and professional clients Order execution and trading including best execution Trade and Periodic Reports

Relationship with clients under MiFID and other changes - Examples Some new clients who would be Intermediate Customers under current rules may be Retail Clients under new rules Firm must consider all venues including electronic order matching systems offering “best possible outcome” for execution policy Pre-trade and post-trade price transparency information for liquid equities

Markets Exchanges The end of the Concentration Rule Multilateral Trading Facilities and Systematic Internalisers Separation from transaction Reporting (and sale of data) Publication of Pre-Trade and Post-Trade equity prices

Markets - Example There is a Client Order for a UK equity Currently main market is LSE and Plus Markets Firm can choose which to use In future Firm’s Execution Policy will look at these and electronic order matching systems e.g. Chi-x, and, if traded outside UK, at other exchanges and markets

Best Execution To produce “best possible outcome.” Many factors of which price is important for retail Applies to agency and principal Client Orders Duty is owed to Professional and Retail Clients Client negotiating on Quote requested by it excluded from the duty Execution Policy summary to Clients Client Instructions override the duty Order Transmitters have same but less responsibility

Best Execution – Example [Extract from the Firms Best Execution Policy]

Cross-border services and branches under MiFID Passporting Cross border sales under Home State Regulators Rules Uncertainties over who regulates branches for third country business Systems and Controls under Home State Regulators Rules Simpler notification procedure

Cross-border services and branches under MiFID - Example UK Firms solicits business from individuals resident in Italy Currently very difficult because Italian Conduct of Business Rules restrict sales to the “public” by non-Italian regulated Firms In future cross-border sales can be made under FSA COB Rules and not local rules Sales by Italian Branch still under local rules. Unclear whose rules apply to branch’s third country sales

The new Approved Persons (AP) Regime FSA has withdrawn plans to remove wholesale customer-facing and corporate finance persons from the AP regime The merger into a single controlled function for each of management, finance and customer facing roles Approved Individuals moving within new Customer Controlled Function (CF30) need no FSA approval, but the Firm must assess them as “competent “

Training and Competence New Rule The “competent employee” rule i.e. the skill, knowledge and expertise for the job (SYSC)  No compulsory examinations for wholesale  Examinations from FSSC recommended list taken into account by the FSA in the knowledge component of competence  Firms must meet “competent employee” Rule Employees must remain competent No annual fixed time target For firm and individual to decide CPD should be recorded For retail Compulsory examinations remain Responsibility of firm to assess competence in change of job within the same Controlled Function Ethical behaviour part of competence Training and Competence

Changes to a Firm’s Policies and Procedures Account Opening Conflicts of Interest Suitability and Appropriateness Execution Policy Training and Competence Record Keeping

Changes to a Firm’s Policies and Procedures - Example [Give example of changes to a specific policy of the firm such as conflicts of interest.]

MiFID and other changes Part 3 Economic Impact

The Possible Impact of MiFID European markets for customers More competition to exchanges driving better prices Cross-border investment costs reduce Outsourcing opportunities increase Firms provide better service at lower cost

Economic Impact on Firm? [Examples relating to the firm such as the following] Any changes to business strategy Will the firm have Retail Clients? Will it opt up individuals to become elective Professional Clients? To whom will the firm give Best Execution (where there is a choice)?

The Challenge and Opportunity of MiFID The clear cost of implementation of MiFID will only prove justified if firms take the opportunities generated to raise revenues. John Tiner’s Speech to the FSA’s MiFID Conference May 2007