sii.uk

1. Christopher Bond MSI Senior Adviser to SII on Compliance Presentation on MiFID to the Greek Branch of the Securities & Investment Institute 28 June 2006 www.sii.org.uk

2. “ This [MiFID] proposal is a cornerstone of the Financial Services Action Plan. If we want a true internal market in financial services, with all the enormous benefits that will bring, we need investors large and small to be able to invest across borders easily and with confidence “ Fritz Bolkstein EU Internal Markets Commissioner on MiFID in November 2002 when the proposal was launched.

3. 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 UK Financial Services Authority’s (FSA) MiFID Conference on 15 May 2006.)

4. Scope of MiFID increased e.g. Investment advice Conduct of Business e.g. home country rules (separate slide) Regulated Markets and Alternative Trading Systems e.g. MTFs MiFID Internal Organisation e.g. Conflicts of Interest (separate slide) MiFID at a Glance

5. Implementing Directive/ Regulation Framework Directive Regulatory Convergence Monitoring & Enforcement Level 4 Level 1 Level 2 Level 3 Implementing Measures MiFID Directive Member States FSA Rules Ongoing April 2004 July 2006 From May 2006 Lamfalussy Process

6. Draft EU Commission Level 2 Directive and Regulation Who? • Level 1 (High Level Directive) • Level 2 (More detailed Directive and • Regulation explaining Level 1) • Level 3 ( EU Commission ensuring • consistent adoption of Directive by • different countries) • Level 4 (Implementation of MiFID by • each country) Why? • ISD Firms new activities eg • Advice and additional instruments eg • commodity derivatives, - some • carveouts eg group firms EU Commission Level 2 What? When? • 31 January 2007 – the Transposition Date • for each country finalizing detailed rules • for its Firms • 1 November 2007 – the Implementation • Date for each country to have new Rules • in force. (EU Parliament and ESC to vote on • Level 2 in mid July 2006). • Internal requirements for Firms eg under • Article 13 • Relations with customers and • counterparties eg under Article 17 • Regulation of exchanges, multilateral • trading facilities (MTFs) and Systematic • Internalizers (broadly OTC market makers)

7. Draft EU Commission Level 2 Documents Progress since February Draft

8. The Possible Impact of MiFID Struggle to meet extra IT regulatory costs Struggle to meet extra IT regulatory costs Absorb extra IT and Regulatory costs No savings but less expenditure than mid-sized No savings if no international operations Save cost of complying with 26 different Business requirements Decide whether to start/ expand EU cross-border business to make up for new competition Decide whether new competition likely to damage retail customer Use market making to challenge traditional exchanges If so, change business model, sell out or join network If decide not to do so, need to narrow focus and expand in areas of strength If not, do nothing? Largest Firms Midsized Firm Smaller Firm

9. Larger IT and Regulatory Costs Larger Firms absorb costs and target first institutional and later retail customers in larger EU markets Smaller firms reduce revenues and profit Smaller firms narrow scope of business to areas of strength, or merge with larger firms or networks Investors receive better service and lower costs The Possible Impact of MiFID

10. Moderate Outsourcing Risk Management Safekeeping Assets Record Keeping Client Reporting Information to Clients Inducements Transaction reporting High Client Classification PA Dealing Conflicts of Interest Suitability Internal Audit Appropriateness Best Execution Low Client Order Handling Marketing Compliance Internal Audit Regulatory Impact Analysis

11. MiFID for Investment Managers – Relations with Customers Frequency eg quarterly Best Execution responsibility Permitted investments including limits Transaction execution details eg venue Method and frequency of valuations Break down of commission fees and charges Investment Management Objectives and permitted levels of risk Information on corporate actions No prescription on content or frequency for professional clients Reporting percentage of loss Retail Customer Agreements Reporting to Retail Customers

12. New client agreement eg best execution Restrictions on execution only eg derivatives New client classification eg experts Order handling eg exposure of limit orders to market New best execution test eg including transaction costs New definition of investment advice Pre trade price transparency and obligations to deal on Systematic internalisers New definition of investment research Appropriateness test Reporting to customers eg execution venue Post trade pan Europe price transparency MiFID for Brokers – Relations with Customers and Counter Parties

13. Which Regulated Firms come under MiFID? Investment Banks Many Commodities Firms Corporate Finance Regulated Exchanges Multilateral Trading Facilities Funds and Some Fund Operators Most Brokers Life Companies Financial Advisers without client assets Authorized Professional Firms Some transmitters of buy/sell orders Investment Managers NOTE: The country regulator can decide if firms below the line can opt out of MiFID. They are not MiFID firms but will still be regulated. Some MiFID rules may apply to them e.g. in Conduct of Business

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

15. Conflicts of Interest Independence of Risk Function Independence of Compliance Function Outsourcing Restrictions MiFID Independence of Internal Audit Internal Organisation e.g. Operational Risk Systems and Controls

16. What is the new approach to internal systems and controls? • Establish effective systems and controls • Periodically review them • Allocate responsibility to individual managers • “Material” outsourcing • Separate front and back office • NB More detail on a few areas such as money • laundering Current Approach of SYSC under Chapter 3 (FSA Rules) Future Approach under Article 34 (CAD) and Article 22 BCD (together CRD, and under Article 13 of MiFID.) • Robust Governance • Internal Controls • Administration and Accounting • Sufficient capital for risks, and effective risk • management • Manage Conflicts of Interest • Business Continuity • Outsourcing controls • SM responsible for internal audit, compliance and risk

17. MiFID – IT/Operations Perspective Account opening eg new client classifications Best Execution venue analysis and monitoring Post trade reporting including new products IT/Operations Instrument data problem eg ISIN contrast RIC 5 year record keeping – 1year phone recording Pre-trade price reporting for equities from S.I.s and MTFs Increased product scope eg OTC Derivatives Order execution and routing systems NOTE: The Capital Requirements Directive preparation is at the same time.

18. Clients Professional Retail Eligible Counterparty Clients References to clients and to professional clients include eligible counterparties

19. What is Best Execution? • Best Result for client taking into • account: • Price (including disclosed charges) • Speed • Likelihood of execution and settlement • Size • Nature of investment and of client New Factors under MiFID Level 1 Article 21

20. Best Execution Affects buy side and sell side Evidence of achievement of Policy Applies to new and existing ISD instruments Applies to agency and principal dealing Effectiveness of Policy Best Execution Firms must have “Execution Policy” with chosen execution venues Duty is owed to Professional and Retail Clients Execution Policy disclosed to Clients

21. Some Best Execution Questions • How do investment managers satisfy their duties to clients if categorized as Eligible Counterparties by executing firms? • Can a firm direct all its trades to one execution venue or dealer? • What sources of price comparison do you use in markets without public data e.g. OTC markets?

22. Do you start, or do you wait for more? “ The area of where significant change (to the Level 2 EU Commission MiFID documents) is likely are now few and we all need to start preparing for MiFID now. ” (John Tiner’s Speech to the FSA’s MiFID Conference on 15 May 2006.)

23. Start Now! • GAP Analysis/Implementation plan • Budget (HR and IT) • Review client • classifications • agreements • information held • information provided • Plan communication with clients • Review internal policies and procedures