MIFID II WITHIN THE CMU

LANDSCAPE

Josina Kamerling, Head of Regulatory Outreach, EMEA

CFA Institute

19th of June

National Bank of Romania

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CHALLENGES FOR CMU & ASSET

MANAGEMENT

TRUST IN THE FINANCIAL INDUSTRY (EDELMAN

2016)

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TRUST IN THE FINANCIAL INDUSTRY (EDELMAN

2016)

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TRUST IN THE FINANCIAL INDUSTRY (EDELMAN

2016)

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TRUST IN THE FINANCIAL INDUSTRY (EDELMAN

2016)

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CAPITAL MARKETS UNION; A

FRAMEWORK FOR MIFID?

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Source: Fleishman Hilliard

REGULATORY AVALANCHE POST CRISIS

Citizens buy financial products mainly in their home country

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Source: http://ec.europa.eu/finance/capital-markets-union/index_en.htm

FINANCIAL MARKETS FOR INVESTORS

Where does the average EU family invest its money?

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Source: http://ec.europa.eu/finance/capital-markets-

union/index_en.htm

WHY A CAPITAL MARKETS UNION?• Capital markets have expanded in the EU over recent decades:

1. €8.4 trillion total stock capitalization (around 65% of GDP) by end 2013 versus €1.3 trillion in 1992 (22% of GDP).

2. Total value of outstanding debt securities exceeded €22.3 trillion (171% of GDP) in 2013, compared to €4.7 trillion (74% of GDP) in 1992.

Stock market capitalization (2013)*

*as % of GDP

Source: http://ec.europa.eu/finance/capital-markets-union/index_en.htm

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• Nonetheless, European market remain underdeveloped in comparison with other jurisdictions

BARRIERS TO THE DEVELOPMENT OF EU

CAPITAL MARKETS (CMU 2015)

65%63%

49% 48%47%

27%

0%

10%

20%

30%

40%

50%

60%

70%

Differences intaxation treatmentacross jurisdictions

Differences in legalframeworks

surrounding theownership and

transfer of securities

Protectionist policiesinhibiting cross-

border mergers andacquisitions

Administrativeburdens associatedwith the issuance ofsecurities (includingprospectus and filing

requirements)

Insufficientsecondary market

liquidity in corporatedebt markets

Lack of investordemand for SMEs

% Barrier (Top Two Box 4 + 5)

Q: To what extent are each of the following a barrier to the development of EU capital markets?

Scale: Please rate each on a 1 to 5 scale, where 1 means it is not a barrier at all and 5 means it is a huge barrier.

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CFA INSTITUTE’S RESPONSE TO THE EUROPEAN

COMMISSION GREEN PAPER ON RETAIL

FINANCIAL SERVICES (FINANCIAL PRODUCTS)

• CFA believes that high professional standards of ethics, knowledge andcompetency for investment management professionals help to reduce the risksof mis-selling and ensure that client interests.

• Role for EU-wide regulation on product governance through conduct ofbusiness rules (I.e. MiFID) and through product disclosure standards

- PRIIPs Regulation to ensure product transparency, comprehensibility, andcomparability

Past performance exclusion is alarming

• Overall, the combination of high industry standards and production regulation,for example on the PRIIPs KID, should combine to provide the best outcomesfor retail investors.

• CFA Institute believes that the full implementation of PRIIPs KID in the MemberStates will improve the transparency and comparability of financial products inthe EU.

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• Several challenges related to cross-border financial services can be over with

digitalization and FinTech.

- Support of EC proposal on EU prospectuses digital database

- Overcoming lack of knowledge

• Financial services industry will increasingly use ‘robo-advisers’.

- Overcoming barriers such as cost of investment advice, access to products,

and physical or geographic human advice.

• CFA Institute conducted a member survey on automation in financial advice

and other FinTech issues in 2016. It offers important confirmation of some of

the potential benefits of automated financial advice.

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PROMOTING GREATER LIQUIDITY IN

CORPORATE DEBT MARKETS (CMU 2015)

72%70%

65%

50%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Greater standardisation ofissuances to facilitate

secondary market trading onelectronic platforms

Greater price transparency Establish common standardsfor private placement markets

Reduce regulatory burdenplaced on banks (dealers)

% Necessary (Top Two Box 4 + 5)

Q: How necessary, if at all, are each of the following measures to promote greater liquidity in corporate debt markets?

Scale: Not necessary at all 1 2 3 4 5 Very necessary

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RETAIL INVESTORS

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HOUSEHOLDS FINANCIAL ASSETS IN THE EU & US

(%TOTAL ASSETS; AVERAGE 2007 – 14)

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MATCHING HOUSEHOLDS & GOVERNMENTS’

ASSETS AND NFC LIABILITIES: THE BALANCE

SHEET OF THE (FINANCIAL) ECONOMY (€BN;)

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EQUITY HOLDING BY TYPE OF HOLDER (€MN;

AVERAGE 2010-14)

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Citizens buy financial products mainly in

their home country

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Source: http://ec.europa.eu/finance/capital-markets-union/index_en.htm

FINANCIAL MARKETS FOR INVESTORS

Where does the average EU family invest its money?

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Source: http://ec.europa.eu/finance/capital-markets-

union/index_en.htm

EUROPEAN COMMISSION’S ACTION PLAN FOR

RETAIL FINANCIAL SERVICES

• The EU has already taken a number of measures to achieve a Single Market in consumerfinancial services (I.e. Payment Accounts Directive, Digital Single Market Strategy).

• In the CMU action plan, the Commission committed to developing stronger capital marketsacross the EU and also on how to improve access to retail investment products.

• The Action Plan seeks to open national barriers as only 7% of consumers currently buyfinancial services from another EU Member State.

• The Commission has identified three main strands of further work to move a step closer to agenuine Single Market for financial services:

o Increase consumer trust and empower consumers.

o Reduce legal and regulatory obstacles affecting businesses.

o Support the development of an innovative digital world.

• Consumer protection is a national competence remit.

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CFA INSTITUTE’S RESPONSE TO THE EUROPEAN

COMMISSION GREEN PAPER ON RETAIL FINANCIAL

SERVICES (FINANCIAL PRODUCTS)

• CFA believes that high professional standards of ethics, knowledge and competency for

investment management professionals help to reduce the risks of mis-selling and ensure that

client interests.

• Role for EU-wide regulation on product governance through conduct of business rules (i.e.

MiFID II) and through product disclosure standards

o PRIIPs Regulation to ensure product transparency, comprehensibility, and comparability

Past performance exclusion will be confusing for investors.

• Overall, the combination of high industry standards and production regulation, for example on

the PRIIPs KID, should combine to provide the best outcomes for retail investors.

• CFA Institute believes that the full implementation of PRIIPs KID in the Member States will

improve the transparency and comparability of financial products in the EU.

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• Digitalization & FinTech create challenges related to cross-border financial services.

o Support of EC proposal on EU prospectuses digital database.

o Overcoming lack of knowledge. Financial education needs to be taken into account.

• Financial services industry will increasingly use ‘robo-advice’.

o Overcoming barriers such as cost of investment advice, access to products, and physical or

geographic human advice.

o Downside is related to fiduciary responsibility to investors.

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CFA INSTITUTE’S SECONDARY

CORPORATE BOND MARKET

LIQUIDITY SURVEY (2016)

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• Respondents from AMER & EMEA report that over the last five years:

- A decrease in the liquidity of high yielding & investment corporate bonds (no

change for government bonds)

- A decrease in the number of active dealers making markets

- An increase in the time taken to execute trades & a lower proportion of

bonds being actively traded

- A higher proportion of unfilled orders.

• Notably bank capital and liquidity regulations have had a significant impact

on bond market liquidity.

• Respondents from APAC report had entirely different observations.

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CFA INSTITUTE’S GLOBAL FINTECH

SURVEY (2016)

Key findings:

- 70 % of the respondents think mass affluent investors to be positively affected

- 89 % of the respondents think there is a positive impact on costs for

consumers

- 62 % access to advice will be improved

- 55 % product choice will increase

- 54 % of the respondents believe that Asset Management would be the sector

most influenced

- EU respondents place greater weight on Banking than on Asset Management

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MIFID II OVERVIEW

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Transparency

Integrated & Efficient Markets

Improved Market Access

Single Rulebook

Level Playing Field

Reduced costs

Improved supervision

MiFID II

OBJECTIVES

MIFID II OVERVIEW

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Knowledge & Competency

rules

Trade transparency

Market microstructure

aspects

Conduct of business

MiFID II

• Best interests of client

• Best execution

• Reporting to client

• Client categorisation

• Suitability and appropriateness

• Product governance

• Inducements (commissions, advice, research)

• Provisions on automated trading

• Market making requirements

• Exchange and trade venues

system requirements

• Algo trading and registration

• New standardized tick size framework

• Obligation to display prices & volumes

• Extension of transparency to non-equities

• Double volume cap for dark pools

• Trading obligation

• Transaction reporting

• Data publication and access

• Staff must acquire appropriate

knowledge AND have

appropriate experience

• Applies to anyone giving

investment advice

• Firms must develop training to make

up for any shortfall

• Member States will set their own

assessment standards

MARKETSINVESTORS

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INVESTOR PROTECTION

NEW KEY INVESTOR PROTECTION ELEMENTS

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Portfolio Management

• Ban of inducements for portfolio management

Two types of investment advice

• “Independent” advice

• “Non-independent” advice

Reporting to clients

• New definition of cost (incl. transaction cost & performance fee

• Aggregation of all costs at point-of-sale

Product Governance

• Products classified to be sold “execution-only’ have been narrowed down

• Target market assessment (manufacturers and distributors)

Independent advice

• Ban of inducement

• Sufficient number of

financial instruments to be

provided

• Financial instruments

offered must not all be “in-

house”

Non-independent advice

• Inducements still

allowed

• But stricter test of

“quality enhancement”

PORTFOLIO MANAGEMENT INDUCEMENTS – INVESTMENT

RESEARCH

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Concerns

How are client commissions being spent?

What constitutes “research”?

Availability of research linked to trading volume?

Insufficient transparency and

accountability, conflicts of interest?

Solutions under MiFID II

Research budgets established up front and agreed with client

Asset managers operate Research Payment Accounts or

pay for research themselves

Commission unbundling, price for research, more

value for clients

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FINDING FROM “RESTRICTING SALES

INDUCEMENT” REPORT (2014)

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What are the most important reforms needed to combat mis-selling?

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In your opinion, what are the main causes of mis-selling?

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If commission payments by product producers are banned completely, what

consequences, if any, do you see occurring as a result?

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MARKETS

MARKETS

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Key topics include:

• Pre- and post- trade transparency in equity and

non-equity markets

• Microstructure issues (HFT, market-making requirements,

order-to-transaction ratios, trading venue fees, tick sizes)

• Data publication and access (consolidated tape,

trade reporting)

TRADE TRANSPARENCY

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Equity Markets:

• Refinement of pre-trade transparency waivers (recalibration

of applicable size thresholds)

• Double volume cap mechanism to limit dark trading

Non-equity Markets:

• New pre- and post-trade transparency requirements

• Calibration of transparency according to “liquid market”

definition and applicable size thresholds

FIXED INCOME MARKETS

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• For bonds deemed to be “liquid,” pre-trade transparency

requirements (i.e. publication of bids and offers) apply to

trading on an organised venue

• Waivers from these requirements for:

o Orders “large in scale” (LIS) compared w/ normal mkt size

o Orders held in an order management facility

o Actionable IOIs in RFQ and voice trading systems above

“size specific to the instrument” (SSTI)

o Bonds that do not meet the liquid market definition.

FIXED INCOME MARKETS

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• On post-trade, details of transactions (i.e. prices and sizes) in

liquid bonds must be disclosed as close to real time as possible

• Deferred publication possible for:

o LIS trades (relating to trading on an organised venue)

o Trades above SSTI (trading on RFQ and voice trading)

Complex Balance between

Transparency and Liquidity

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