ESMA Clarifies MiFID II Investor Protection Rules
Law360, London (October 4, 2017, 4:38 PM BST) — The European Securities and Markets Authority has updated the reporting requirements for firms affected by massive trading reforms set to take effect early next year, including on the communications they must record for regulatory purposes.
ESMA added 12 sections to a guidance document on rules to protect investors on Tuesday, setting out the policies it expects firms to have in place on best execution, post-sale reporting, the disclosure of costs and charges information and how they categorize clients.
The document, issued in a question-and-answer format, is aimed at ensuring the revised Markets in Financial Instruments Directive, known as MiFID II, and the Markets in Financial Instruments Regulation are applied consistently across the European Union from Jan. 3.
One update expanded on a previous reminder from ESMA that firms must record all internal telephone calls and other electronic communications about transactions or execution of orders to meet its investor protection requirements.
The authority outlined the extent to which record-keeping requirements will apply to products and services. It said that MiFID II specifies the specific client order services offered by a firm that must comply with the rule, including those for financial instruments and transactions dealt on “own account.” But ESMA said these are minimum requirements only.
“ESMA notes that member states may also decide to extend the requirements further to other MiFID services or non-MiFID services and products,” the authority added.
The rules also require firms to record conversations and other communications that are “intended to result in” the provision of such services. “In practice, other investment services like investment advice may be provided at the point when there is an intention to provide a client order service. In this case, the content of the advisory service would need to be recorded,” ESMA said.
The update also included guidance for investment firms saying that so-called direct electronic access, or DEA, services provided by a broker should list the execution venues they use when they report to regulators.
Firms providing DEA, an arrangement in which a regulated business gives access to a trader, have a duty under MiFID II to carry out due diligence tests on prospective clients. Firms have been urged by regulators to work closely with their clients to make sure they are aware they need to be authorized under the new directive.
MiFID II, a massive legislative package that was passed in 2014 and comes into force at the beginning of next year, is expected to drastically alter how almost all over-the-counter derivative products are priced, traded and reported. It includes rules for trading, data recording and the need for firms to be transparent when disclosing research costs.
ESMA has said that making sure all member states implement MiFID II, in the same way, is its top priority for 2017: it aims to work to ensure the “consistent application” of the rules across the 28-nation bloc in its program for the year.
The securities authority has over the past few weeks published a range of guidance on the directive, including on the types of interest rate swaps and credit default swaps it intends to force onto regulated trading platforms under the so-called trading obligations in the regime.
ESMA also recently announced that it is unlikely to finalize the regulatory opinions needed on hundreds of applications from firms that want disclosure requirements waived before MiFID II comes into force.
The start date for the directive was initially January 2017. But the scale of the changes to the original 2007 law, which were driven by reform after the 2008 financial crisis, overwhelmed firms and even regulators, resulting in a postponement of the introduction by 12 months to January 2018.