MiFID

1. MiFID General Awareness Training

2. Part 1 – Overview of the changesPart 2 – MiFID in more detailPart 3 – Economic Impact

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

4. 2007 at a glance MiFID Principles-based Regulation Capital Adequacy Directive 2007 Risk – based Supervision (already in)

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

6. 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

7. 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).

8. 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

9. 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]

10. 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]

11. Part 2 MiFID

12. 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

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

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

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

16. 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...

17. 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)

18. Appropriate ness/ Suitability Docu -mentation/ Archiving Product information Client Reporting Research Best Execution Inducements Conflicts of Interest Terms of Business MiFID Complaint Management Outsourcing Pre-/Post-Trade Trans -parency Client Categorisation Design products Acquire clients Advise clients Execute business Reporting

19. 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

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

21. 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

22. 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

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

24. 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

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

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

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

28. 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

29. 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 “

30. Training and Competence • 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 • New Rule • The “competent employee” rule i.e. the skill, knowledge and expertise for the job (SYSC) Training and Competence • 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 • Employees must remain competent • No annual fixed time target • For firm and individual to decide • CPD should be recorded

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

32. 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.]

33. MiFID and other changes Part 3 Economic Impact

34. 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

35. 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)?

36. 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