NICSA Members Prepare for MiFID II

Author: NICSA

The Jan. 3, 2018, launch of the second version of the Markets in Financial Instruments Directive (MiFID II) is just on the horizon, and those seeking to sell funds in Europe are on notice.

“MiFID II is a significant legislation that will fundamentally reshape European financial markets,” Sarah Cardmarker, EMEA Regulatory and Market Change Associate at BNY Mellon, said to NICSA members on #WebinarWednesday. “It has an impact on our products and services provided, but also on the relationships between market participants.”

Cardmarker moderated the Dec. 6 discussion, which featured insights from global industry experts on how to prepare for the upcoming legislation. MiFID II, Cardmarker said, is already a game-changer for the financial industry as a whole.

“For non-EU organizations, it’s worth nothing that while MiFID II is a European legislation, it has global reach,” Cardmarker said. “Non-EU organizations are indirectly in scope if they are trading on EEA trading venues or with EEA counterparties, as well as if they market their funds through EEA distributers.”

Florence Stainier, Partner, Investment Management at Arendt & Medernach, the largest law firm in Luxembourg, said that MiFID II is aimed at improving transparency and reducing risk in financial markets. “Market participants should be ready to act and be organized in line with the principals of MiFID II,” Stainier said.

Olivia Tournier-Demal, Conducting Officer, Fund Management Solutions at MJ Hudson, expressed concerns over the misconception on the part of some fund managers who feel they are not within the scope of the legislation. “MiFID II has indirect, strong impacts on entities which are not subject to MiFID II,” she said.

Stainier agreed. “Based on what we have been discussing with clients, even in cases where funds or management companies are not necessarily subject to MiFID—because they are not investment firms—since they want their products to be sold and since they interact with intermediaries setting the product, they need to enter into that dialogue with the distributor,” she said.

Best Practices
Stainier also provided guidelines on product governance and investment research: “One of the best practices we see in terms of product governance is defining the whole; defining who needs to be in charge of the target market, and also entering into that discussion with intermediaries in order to know what kind of information distributors and intermediaries would need going forward to have the target market in line with the distribution channel.”

Stainier added that investment research should not be considered an inducement if the firm pays directly for it out of its own resources. “MiFID II provides that these investment research costs would need either to be paid by the investment firm itself—in most instances the investment manager—but it may also be invoiced to the client according to very strict conditions.”

In the case that a U.S.-based asset manager acting for a Luxembourg fund uses an EU broker, and that EU broker applies MiFID rules, the U.S. manager would face the obligation to make a distinction between transaction costs and research costs, Stainier said.

When it comes to concrete impacts on product manufacturing and distribution, Stainier pointed to “the need for a fund management company to assess whether they indeed are under the obligation to define a target market.”

From an operational perspective, Olivia Tournier-Demal noted that MiFID II will have an impact on the oversight duties of management companies (ManCos) when it comes to the distribution channel.

“Make sure that your distributors know the rules, understand the target market and are ready to comply with the legal documents of the fund—with the target market, but also in general with the rules of MiFID, especially the governance rule,” she said. “In terms of oversight, ManCos can’t say, ‘I’m not a MiFID firm, that’s not my business. It is the duty of the ManCo.’”

Tournier-Demal said that ManCos and distributors must work together to ensure that data flow properly and are shared throughout the distribution channel so that the end investor at the point of sale receives correct information.

When asked about the biggest challenges asset managers will face with the advent of MiFID II, Stainier pointed to competition. “The operational constraints and the need to have systems in place to add control will increase the governance burden to some extent, but also have some effect on costs.”

NICSA thanks ALFI for sponsoring this webinar. To view the archived webinar for additional insight, visit here and be sure to share your thoughts with us.

 



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