MiFID II Transparency

ESMA updates guidance on investor protection and MiFIR data reporting

The European Securities and Markets Authority (ESMA) updated its guidance on transparency for both MiFID II and MiFIR in mid-November. Here we take a look at some of the changes and what they mean, in time for the compliance deadline of 3 January 2018.

Investor protection guidance has been updated to cover post-sales reporting and inducements. ESMA has introduced enhanced clarity on inducement restrictions. For example, payments made, or benefits provided to, third parties by investment firms in connection with the provision of investment advice on an independent basis or of portfolio management do fall within the scope of Article 24(9), which covers fees, commissions and benefits. The guidance also makes clear that fees, commissions or any monetary benefits received from a third party, or their agent, must be fully transferred to the client, as laid out in Article 12(1), and while held by the firm they are considered a liability of the firm.

Further, when investment firms are drawing up contract terms with a client, the terms should include how they treat inducements and the documentation system that will be in place to track this, in accordance with Article 12(1). The terms should make explicit what the legal status of fees, commissions and benefits are in the case of insolvency and how the firm will transfer monies to the client, the latter being a regulatory obligation.

There are significant and wide-ranging updates to the guidance on transparency for package orders and transactions, and firms would be well advised to read through these carefully. Here are a few examples. A firm must be a systematic internaliser in all financial instrument components of the order for pre-trade transparency obligations to apply. Transparency obligations  for package orders that are not liquid can be waived by systematic internalisers under Article 18(2) of MiFIR, but transparency obligations for liquid-only packages are subject to Article 18(1).

Under Articles 2(1)(49)(b) and 2(1)(50)(b) package orders and package transactions can include instruments from more than one trading venue, or traded OTC, as long as the transaction or order complies with the conditions. They cannot, however, include instruments that are not admitted to trading or traded on a venue.

Where there is a chain of transmission of orders, EU investment firms that are part of that chain must ensure that trades they undertake in shares take place on a regulated market, MTF, systematic internaliser or equivalent third country venue, as set out in Article 23(1), and they must  ensure that the ultimate execution of the orders complies with the Article’s requirements.

ESMA has also updated its guidance under MiFIR on reporting corporate events. These are reportable when they don’t fall within the list of exclusions under Article 2(5), although confusingly they often do not need to be reported because many such events take place under the mandatory issue of an intermediary instrument. Events must be reported, however, when the investor has an opportunity to make an investment decision, as this is regarded as a standing instruction where the investor can change their mind and revoke the instruction or choose not to. Do note that any transactions resulting from an event should be reported, however.

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