MiFID – The Roadmap to April 2007 Business and Systems Aligned. Business Empowered. TM What investment firms need to be doing now Alan Jenkins 2 December 2005 October ?

1 Who and What is impacted by MiFID Focus - Market transparency, and Protection for the Retail investor 73 articles - impact all kinds of players, and many functions within firms 17 change drivers for IT (next slide), plus topics such as — conflicts of interests, business continuity, internal systems, outsourcing, compliance obligations, execution only services, safeguarding of client assets, and record keeping (possibly including voice recording) 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 EU-wide MiFID) It’s big and scary

2 MiFID will have a massive impact in the Trading Room Know Your Customer Treating Customers Fairly Know Your Market Pre Trade n Seller needs to know the buyer and their motives n Offer appropriate products to the client for where they are in their lifecycle n Information on risks of investments provided to clients n New client documentation required in all cases n Record interactions with customers n Firm quotes published throughout the business day with no ability to alter per customer n Execute and retain orders in a consistent manner no matter how received n Separated and delayed internal use of research material n Transparency on calculation of price (esp. derivatives) n Classification of customer, by product, size and type can be overridden by the customer at any time (opt-out) n Display client limit orders and allow fulfilment n Predefined execution venues published annually n Must show multiple prices per instrument for each execution venue n Provide transparency of execution transaction fees and settlement costs n Public visibility of all trades undertaken in any market Post Trade n New post trade reporting requirements n Publish to the public full details of most trades within 3 minutes max of execution (with exceptions) Source: MiFID JWG, IT subgroup

3 MiFID Articles impacting on Risk (- handout) Article 13 – Organisational requirements — 13.2 Compliance — 13.3 Conflicts of Interest — 13.4 Systems, resources and procedures — 13.5 Risk Assessment — 13.5 Firms to avoid undue risk in case of outsourcing — 13.7 Safeguarding clients assets Article 19 – Conduct of business obligations — 19.1 Portfolio management, and Order reception and transmission — 19.2 Marketing information and other Client communications — 19.3 Minimum information to clients — 19.4 Suitability — 19.8 Reporting to clients Article 27 – Systematic internalisers — Obligation for investment firms to make public firm quotes

4 If it is two years away why worry now ? The impact may be large — Business model — Branch operations — Key systems (critical path ?) Investment firms need to understand the impact as soon as possible — anticipate the requirements — plan and budget for the expected changes required Yes, the requirements are a moving target — CESR’s Level 2 Advice (as published 3 May 2005) — European Commission draft Level 2 Regulations — Transposition of MiFID into national law and regulations in each of the 25 Member States (Level 3, was expected June 2006) But there will not be enough time downstream

5 What should firms be thinking about now ? Gain a good understanding of the requirements surrounding the Directive. Evaluate areas of impact within your organisation. These will differ for each type of organisation or line of business, and will vary upon location and regulatory jurisdiction under which the investment services and activities are conducted. Opportunities - Understand which elements of the directive can be taken advantage of in terms of business growth opportunities and cost saving opportunities; for example Passporting may lead to product expansion cross border and/or consolidation of product offering functions into a central hub location; increased price transparency may impact investment services provided to clients — Understand and evaluate your organisation structure and see if it is optimally structured to take full benefit of Passporting as clarified in the “Directive”. — Understand the impact on operations and technology especially relating to best execution, client onboarding and reporting, system internalising, pre and post trade transparency, etc. Begin to plan and secure technology and resource budgets for 2006 and — Assess impact on existing projects underway and see if changes to scope need to be made and can be re-aligned in order to incorporate elements of the “Directive” requirements. — Start discussing with system vendors what changes they will be applying as well as the consultation and evaluation process they are going to go through. Engage in the consultation process with the relevant authorities and identify areas that require further clarification for your organisation.

6 Points to remember Some new products and business services are now within the scope, and will therefore need to comply with the Directive — MTFs, Commodities, Systematic Internalisers, Investment Advice Firms should view MiFID from a competitive perspective — not ‘merely’ compliance — review Business Model and propositions Impacts will differ — by line of business, and — by geography /jurisdiction Key Impacts will require a specific Programme — budget — resources — which is why Investment firms need to get started NOW There will be significant Technology Impacts — Best Execution, Client liaison, pre and post trade transparency, Voice, etc.

A suggested approach for getting to grips with MiFID within a Financial Services organisation Business and Systems Aligned. Business Empowered. TM

8 MiFID Mobilisation and Impact assessment Firms should be initially focusing on Mobilisation — Communication plan on how the effects and impacts of MiFID can be effectively communicated across the organisation Engage all stakeholders Raise awareness — Governance model approach for overseeing ongoing compliance with the requirements surrounding MiFID Setting direction to an end point Ensuring the right level of commitment within the organisation Current State Assessment Prioritization Roadmap Identification of Gaps Development of Solution Strategies and Impact assessment…

9 MiFID Impact assessment Conducting a detailed impact assessment ensures an awareness of the impact MiFID will have and enables the identification of key areas and factors that are affected within the organisation. The assessment also provides an understanding of the effort and timeframe required to implement the specific requirements surrounding MiFID. Objectives Identify key requirements surrounding MiFID Prioritise and establish solutions to address those requirements Develop a road map to achieve compliance with MiFID by April 2007 This approach determines both the gap and the implementation strategy. Current State Assessment Prioritization Roadmap Identification of Gaps Development of Solution Strategies

10

MiFID – any questions ? Business and Systems Aligned. Business Empowered. TM What investment firms need to be doing now Alan Jenkins +44 (0)

12 Key themes of MiFID Scope increase Firms who provide Investment services and activities - Investment advice services falls within the scope and all the Conduct of Business rules will apply. Firms that only provide “ancillary services” such as financial analysis and research are outside scope. MTF – Multilateral trading facilities such as ECN’s and ATSs, are considered Investment services. Commodity derivatives are now a financial instrument for the purposes of MiFID but not all firms trading commodity derivatives are within the scope of the directive. Conflicts of interest Firms must have effective systems and controls to prevent conflicts adversely affecting clients interests and ensure that clients interests will not suffer should adequate arrangements not be in place. Firms must demonstrate management of conflicts of interest e.g. Chinese walls and disclosures. Clients must be notified of conflicts. Conduct of business Firms are required to conduct a full suitability test on clients when they are providing investment advice or portfolio management. This test is not required for execution-only business where the firm is providing the service for "non- complex" instruments at the request of the client and has given the client adequate warnings. Best Execution Firms' best execution obligations are to ensure the best possible deal for their clients taking into consideration not just price (as today), but other factors such as cost, speed and likelihood of execution and settlement. Passporting rights MiFID improves and simplifies the operation of the single passport for investment activity and clarifies where the regulatory oversight responsibilities lie for cross border services provided by branches in other member states. This different approach to cross border regulatory regime may impact the way some firms are organised internally especially with regard to local compliance functions.

13 Key themes of MiFID (cont….) Investor classification MiFID establishes a common EU framework for classifying counterparties between professional clients, market counterparties and retail clients. Regulators may have to adjust their counterparty classification system to the new framework in a number of areas resulting in Firms’ client agreements and system classifications having to change. Outsourcing Outsourcing of important operational functions must not impair significantly the quality of its internal control and the ability to monitor the firm’s compliance obligations, as well as ensuring no undue additional operational risk. The requirements also apply to intra-group outsourcing arrangements. In addition firms must have a comprehensive exit strategy and the regulatory authorities must be notified of outsourcing arrangements. Outsourcing functions included in the scope are: accounting, back office, information technology and information system management and maintenance, marketing and research, and services related to the internal audit, compliance and risk control functions. Pre-trade transparency Minimum standards established of pre-trade transparency for instruments traded on regulated markets and Multilateral Trading Facilities (MTFs). Firms that are 'systematic internalisers' must provide definite bid and offer quotes in liquid shares for orders below 'standard market size'. The exact nature of the obligation has been established at Level 2. Post-trade transparency All types of trading in instruments, whether on regulated markets, MTFs or OTC, are subject to a post-trade transparency obligation. This may result in the increase in trade reporting obligations, starting with Equities. Exemptions for block trades and the mechanics of publication have been established at Level 2.

14 Key documents referenced General Norton Rose – MiFID – The devil in the detail Reference Data Review Issue 27 –- MiFID: Will Firms be Ready by April 30, 2007? City Compass – The CEO has spoken! MiFID will affect you all! UK Financial Services Authority FSA – MiFID Implementation timetable FSA – MiFID FAQs FSA – Markets in Financial Instruments Directive – Executive Summary Committee of European Securities Regulators (CESR) First set of Mandates CESR/05-024c -CESR’s Technical Advice on Possible Implementing Measures of the Directive 2004/39/EC on Markets in Financial Instruments 1st Set of Mandates - January 2005 CESR/05-023b - Admission to Trading (Art. 40) – Second set of Mandates Advice – , CESR/05-290b European Commission BearingPoint MiFID Key Impacts – first published at City Compass briefing, Preparing for MiFID (White Paper), announced … and more to come !