MiFID II Workshop preparation
European Parliament: Thursday, September 15th 2016
IMPORTANT Articles in MiFID II / Investor Protection. The Authorities will see to it that national regulators enforce these articles and conclusion below in the smallest details. I invite you to consult these articles carefully.
Investor Protection "The risk profile of a financial instrument is to remain consistent with the target market while taking into account any event that could materially affect the potential risk to the identified target market."
Art. 9(11)
" determine whether a financial instrument meets the identified needs, characteristics and objectives of the target market, including by examining the following elements"
" the financial instrument’s risk/reward profile is consistent with the target market; and”
Art. 9(14)
" investment firms to review the financial instruments they manufacture on a regular basis, taking into account any event that could materially affect the potential risk to the identified target market."
" Investment firms shall consider if the financial instrument remains consistent with the needs, characteristics and objectives of the target market and if it is being distributed to the”
Art. 10(2)
" investment firms to have in place adequate product governance arrangements to ensure that products and services they intend to offer or recommend are compatible with the needs, characteristics, and objectives of an identified target market and that the intended distribution strategy is consistent with the identified target market"
Art. 10(5)
" shall require investment firms to review the investment products they offer or recommend and the services they provide on a regular basis, taking into account any event that could materially affect the potential risk to the identified target market”
" Firms shall assess at least whether the product or service remains consistent with the needs, characteristics and objectives of the identified target market and whether the intended distribution strategy remains appropriate"
Definition of Events in Investor Protection:
- price
- volatility
- liquidity
- events
- type of product
- market environment deterioration
- crossing of a threshold
- solvency / counterparts risk
- complexity / design / interaction
Art. 9(10)
" the market environment deteriorated”
" the manufacturer or a third party involved in manufacturing and or functioning of the financial instrument experiences financial difficulties or other counterparty risk materialises”
Art. 9(11)
" financial instrument design is driven by features that benefit the client and not by a business model that relies on poor client outcomes to be profitable”
Art. 9(14)
" investment firms to review the financial instruments they manufacture on a regular basis, taking into account any event that could materially affect the potential risk to the identified target market.”
Art. 9(15)
" shall also identify crucial events that would affect the potential risk or return expectations of the financial instrument"
" the crossing of a threshold that will affect the return profile of the financial instrument"
" the solvency of certain issuers whose securities or guarantees may impact the performance of the financial instrument”
Art. 10(5)
" Firms shall reconsider the target market and/or update the product governance arrangements if they become aware that they have wrongly identified the target market for a specific product or service or that the product or service no longer meets the circumstances of the identified target market, such as where the product becomes illiquid or very volatile due to market changes."
Art. 48 (2)
" the risks associated with that type of financial instrument including an explanation of leverage and its effects and the risk of losing the entire investment including the risks associated with insolvency of the issuer or related events"
" the volatility of the price of such instruments and any limitations on the available market for such instruments"
" for example as may be the case for illiquid financial instruments or financial instruments with a fixed investment term"
Art. 48 (4)
"Where a financial instrument is composed of two or more different financial instruments or services, the investment firm shall provide an adequate description of the legal nature of the financial instrument, the components of that instrument and the way in which the interaction between the components affects the risks of the investment"
Art. 55 (1)
"the nature and extent of the service to be provided and the type of product or transaction envisaged, including their complexity and the risks involved”
Conclusion:
If the risk profile of a financial instrument is to remain consistent with the target market Art. 9(11) Art. 10(2) while taking into account any event that could materially affect the potential risk to the identified target market Art. 9(14) Art. 10(5) - then it is a requirement for any event that could materially affect the potential risk profile of a financial instrument Art. 9(14) Art. 10(5) to be evaluated / assessed continuously.