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  • TheInvestmentAssociation 1

    MiFID II Repapering seminar

    24 March 2017 1

    24 March 2017

    Brexit Town Hall

    WHATARETHENEWMIFID IIREQUIREMENTS?

    24 March 2017 2Brexit Town Hall

    ROSSBARRETT,CAPITALMARKETSSPECIALIST

    JESSFOULDS,POLICYADVISER

    ADRIANHOOD,REGULATORY&FINANCIALCRIMEEXPERT

    FLORIANVANMEGEN,RETAILMARKETSSPECIALIST

  • TheInvestmentAssociation 2

    MIFIDIIREPAPERINGSEMINAR

    24 March 2017 IA Clifford Chance Bloomberg Repapering Seminar 3

    FocusAreas:

    Research

    BestExecution

    Clientclassificationandcommunication

    KEYCONSIDERATIONS:

    Multidirectionality

    Transparency

    LimitedGrandfatherProvisions

    ResourceConstraints

    MiFIDI/EMIRVMRepapering

    NonEUClients&Counterparties

    BESTEXECUTIONANDREPAPERING

    Brokers

    Understanding algos

    Agreement to provide necessary information

    Clients

    Information on Execution Policy

    Information on Placement Policy

    424 March 2017 IA Clifford Chance Bloomberg Repapering Seminar

  • TheInvestmentAssociation 3

    CLIENTCATEGORISATIONANDPRODUCTGOVERNANCECOMMUNICATION

    5

    * per se classification of certain clients will change (e.g. local authorities)

    consequences to existing contracts and information requirements

    requirement for opting up clients that want to treated as professional

    * Target Market definitions need to be made available to intermediaries

    agreements regarding enhanced MI might become necessary - this might additions to distribution agreements

    Costs and Charges information about products and services will need to be made available (channels unclear, existing documentation might be affected)

    24 March 2017 IA Clifford Chance Bloomberg Repapering Seminar

    Repapering MiFID2 Legal Checklist

    24 March 2017

  • TheInvestmentAssociation 4

    Clifford Chance

    Indicative timeline for repapering project

    7Repapering MiFID2 Legal Checklist

    June, 2017Finalising FCA Handbook expected

    Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

    Key Phases:

    Dec

    Scoping requirementsLegal draftingSending out documentationMonitoring and recording

    Notes:Implementation Phases need to impose internal deadlines to keep the process on track. Some phases will overlap.Likely to take much longer than anticipated what is the plan if documentation needs a two way signature and does not come back in time?Variables: number of documents, number of clients, resources, responsiveness of clients.

    Scoping: Approx 4 - 5 months

    Drafting: Approx 4-5 months1 month*

    Monitoring and recording: 3 months

    Gain Summer?

    * Documentation should be sent in September at the latest. You may choose to send it in August so as to gain an extra month

    Clifford Chance

    ExamplesNew requirementse.g. Prohibition on title transfer collateral arrangements with retail clients:Article16(10) MiFID2 and 5(5) the MiFID2 Delegated Directive. This may require a redraft of collateral provisions in documentation, either to delete references to title transfer arrangements or to replace these with equivalent security collateral provisions.

    Modified requirementse.g. Complaints handling: Article 16(2) MiFID2 26 MiFID2 Delegated Regulation. Requirement previously only applied to RCs

    Issues to consider

    Type of consentSome provisions are mandatory that client agreement is required but do not specify how that agreement needs to be obtained. Other provisions mandate prior express consent.

    Obtaining information Some provisions will require the firm to get more information from clients e.g. for municipalities. For new clients, this may be reflected in the client onboarding documentation but is not strictly a requirement as such. Getting such information from clients is part of documentation process.

    Explanatory materialsThere will also need to be a range of explanatory materials for clients explaining or summarising the implications of the changes to the documentation and also explaining other changes to the way in which the services are provided or reporting takes place. This will have to be dealt with as part of documentation process.

    Identify MiFID2 documentation requirements

    8Repapering MiFID2 Legal Checklist

    The starting point is to identify the requirements that could impact client-facing documentation in the primary and secondary legislation (L1, L2 of MiFID2) and the draft UK implementing legislation.

    New or Modified? The requirements could be entirely new or modified from MiFID1.

    Specific to client classification? Do the requirements apply to retail or professional clients, or eligible counterparties?

    Consent? Is express consent required?

    The focus should be on provisions which require information to be provided to clients or agreed with clients. A similar analysis is needed for other documentation with third parties e.g. product manufacturers, distributors, or service providers.

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    Clifford Chance

    Examples of some issues to consider

    Complaints handling16(2) MiFID2 and 26 MIFID2 Delegated RegulationDISP 1.1A.10 EU in FCA CP 16/19 July 2016

    All firms must have complaints handling policies and procedures and must publish details of the process to be followed when handling a complaint. This information must also be provided to clients on request.

    Client documentation (i.e. contractual) terms are unlikely to be directly impacted, however if existing agreements refer to the complaints handling process and the firm may wish to update this.

    Impact on client types: All - requirement previously only applied to Retail Clients

    Client asset and client money rules

    Consent for the reuse of financial instruments16(8) MiFID2 and 5(1) the Delegated Directive

    Explicit client consent is required for the reuse of the client's financial instruments (securities financing transactions etc) for the account of the firm or any other person. Any re-use will be restricted to the specified terms to which the client consents.The Client's/Counterparty's affirmative execution by signature or equivalent is required.

    Impact on client types: All

    Areas in client facing documentation most likely to be impacted by MiFID2 requirements(1)

    9Repapering MiFID2 Legal Checklist

    Areas of potential impact Organisational requirements e.g. Complaints handling; notification

    regarding telephone recording

    Client asset and client money rules Removal of title transfer collateral Consent for reuse of assets Disclosures re title transfer and third party security interests

    Direct electronic market access Requirement to document terms Explicit retention of MiFID2 regulatory responsibility Controls around clients use and access

    Information/Reporting to clients Greater scope of disclosure requirements Agreements with Professional Clients/ECPs to restrict scope of

    requirements where allowed

    Clifford Chance

    Examples of some issues to consider

    Conflicts of interest 23(2) MiFID2 and 34(4) MiFID2 Delegated RegulationSYSC 10.1.8 in FCA CP 19/19 July 2016

    MiFID2 imposes enhanced requirements on the content and detail of disclosures.

    Firms must ensure that disclosure to clients is a measure of last resort that shall be used only where the effective arrangements established by the firm to prevent or manage its conflicts of interest are not sufficient to ensure that risks of damage to the interests of the client will be prevented.

    There might be no direct impact of this upon client documentation, unless existing documentation refers to general disclosures and procedures that are no longer appropriate.

    Impact on client types: All

    Areas in client facing documentation most likely to be impacted by MiFID2 requirements(1)

    10Repapering MiFID2 Legal Checklist

    Areas of potential impact Conflicts of interest e.g. Conflicts disclosures Assessment of suitability and appropriateness e.g. For provision of

    services in non-complex instruments Market transparency/Transaction Reporting

    Confidentiality waivers Information access Contractual right to refuse to transact without information

    Market action/Product intervention Force majeure type clauses to prevent firms from being

    contractually obliged to breach these actions

  • TheInvestmentAssociation 6

    Clifford Chance

    Determining preferred approach

    11Repapering MiFID2 Legal Checklist

    Pros and Cons

    Timing replacing all client documentation with new documentation would be a cleaner solution but may take longer. Consider using a MiFID2 compliant Annex as a short term solution?

    The MiFID2 Annex with legacy documentation will be an imperfect solution. However, as a short to medium term measure, it may help to achieve the balance of complying with MiFID2 obligations, pending the renegotiation and wholesale repapering of legacy client documentation (which may be a significant, costly and time consuming exercise which, in many cases, firms will not be able to complete prior to the coming into effect of MiFID2).

    There are different ways to approach the repapering: Create an entirely new document which is MiFID2 compliant?

    Amend existing documentation? Annex to some/all existing client documentation?

    A combination of the above?

    A decision on how best to approach the project should be made after consideration of the pros and cons of each option.

    Also beneficial to leverage off industry association initiatives where possible.

    Are there any special issues for retail clients Client outreach and communications?

    Clifford Chance

    Contact details

    12Repapering MiFID2 Legal Checklist

    Kikun AloLawyerT:+ 44 20 7006 4067E: [email protected] Chance, 10 Upper Bank Street, London E14 5JJ, United Kingdom

    Monica Sah PartnerT:+ 44 20 7006 1103E: [email protected] Chance, 10 Upper Bank Street, London E14 5JJ, United Kingdom

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    Clifford Chance, 10 Upper Bank Street, London, E14 5JJ Clifford Chance 2016Clifford Chance LLP is a limited liability partnership registered in England and Wales under number OC323571Registered office: 10 Upper Bank Street, London, E14 5JJWe use the word 'partner' to refer to a member of Clifford Chance LLP, or an employee or consultant with equivalent standing and qualifications

    MIFID II REPAPERING

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    CHALLENGESSell Side Approach 10 top tier Sell side firms polled by Bloomberg in January 2017 plan to transfer ~2,500,000 documents to counterparts in

    order to be MiFID II compliant

    Each Sell side organisation is employing dedicated teams of up to 30HC to conduct this outreach and anticipate this number increasing over 2017

    Demonstrating regulatory compliance and delivering good client experience are key objectives

    Buy Side Approach Less than a third of Buy sides polled by Bloomberg were employing dedicated teams to receive and process these

    documents

    Most were focused on Transaction reporting, Transparency and Research components of the regulation

    Concerns regarding paperwork: 1) suboptimal routing of requests across organisations

    2) managing the consistency of response

    WHAT IS THE CONCERN?

    16

    MiFID II Regulation

    MiFID II Regulation

    RULE INTERPRULE INTERP

    MANUAL EXCHANGE OF DATA AND DOCUMENTSMANUAL EXCHANGE OF DATA AND DOCUMENTS

    TRADING LINESTRADING LINES

    READY TO TRADE

    READY TO TRADE

    ELIGBILITYELIGBILITY

    DOC REQUIREMENTSDOC REQUIREMENTS

    REF DATAREF DATA

    Manual therefore error prone

    Lack of visibility

    Poor version control

    Stale reference data

    Storage & document retrieval

    Poor client experience

    Internal stakeholder management

    Demonstrating regulatory compliance

  • TheInvestmentAssociation 9

    WHAT NEXT?

    Understand the types of documents that will be transferred under MiFID II and the consent required

    Plan resources accordingly

    Integrate the repapering requirement into your project plan and timeline, considering: Audit trail Clearly defined workflow

    Visibility into progress for all internal stakeholders requests received/sent

    Issue management

    Review vendor options that could automate elements of the process

    Integrate & Deliver

    SEE DATA DIFFERENTLY.EXTRACT VALUE FROM VOLUME.

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