Following on from the first checklist – which you can view here – The Trade has compiled a second checklist based on the recent MiFID II delegated acts. Here is a summary of the key areas of which firms need to be aware.
CUSTODY & COLLATERAL
- Title Transfer Collateral Arrangements (TTCAs) are not to be made with retail clients.
- Firms need to assess the appropriateness of the use of TTCAs and document the assessment process. They then need to show why its use is appropriate.
- Clients need to be explicitly advised of the risks of TTCA on assets.
- Clients need to give explicit consent to enter into a TTCA and indicate that they understand the potential consequences.
- Fund firms have responsibility to ensure borrowers of client assets supply sufficient collateral and that they monitor the appropriateness of the collateral continuously.
- Fund firms have an obligation to regularly review third party accounts being used on behalf of clients.
- Client funds should be placed with more than one firm to safeguard clients’ rights and minimise risk of loss.
- National regulators can request formal explanations as to why client funds are inadequately diversified.
- A limit has been set on the percentage of client funds that can be deposited with an intra-group credit institution. National authorities are encouraged to probe reasons for lack of diversification.
- Risk disclosures need to be drawn up for clients to make them aware of any potential issues relating to where assets are held.
RESEARCH & FEES
- Firms providing execution and research services need to price each service separately.
- Research payment accounts should only be funded by a specific research charge to the client.
- Client charges should be based on budgets set by the investment firm.
- Client charges for research should not be linked to the volume and value of transactions.
- Firms should draw up a governance document, which outlines specific requirements on research spending.
- Reports from third parties, paid for by a corporate issuer to promote a new issuance is permitted as a minor non-monetary benefit. This needs to be disclosed to clients.
- Third parties allocating “valuable” resources to an investment firm for research purposes is not permitted.
- Records must be available at any time to show the exact assets held on behalf of clients, in specific client accounts.
- Records must be accurate, documenting specific financial instruments and funds held, with a complete audit trail.
- Firms must have regular reconciliations between internal accounts and third parties managing client funds.
- Client funds must be held separately from those of the investment firm.
- Client funds held by a third party must be easily identifiable from the financial instruments belonging to the investment firm.
- Firms must put in place adequate organisational arrangements to minimise the risk of the loss of client.
- Information on client assets and client investments in financial instruments must be immediately available to regulators and insolvency practitioners on request.
- Records should include internal accounts, documents about where client funds are held, details of accounts with third parties, details of companies conducting outsourced activities. Contact details for individuals handling client accounts at third party companies.
- Firms must not use financial instruments on behalf of clients in a country that does not regulate the safekeeping of assets.
- Client funds have to be deposited with a central bank, credit institution, authorised bank or recognised money market fund.
- Clients must give consent to have their funds placed in a money market fund.
- On 20% of client funds can be placed with subsidiaries of the same financial group.
- One individual should be appointed with overall responsibility for compliance obligations relating to client assets.
- External auditors should review the systems and procedures in place at least once a year.
- Clients have to give express permission to entering into securities financing transactions with their own financial instruments in writing with a signature.
- Clients financial instruments can only be used as specified in the signed agreement.
- Fund firms must monitor the success rates and accuracy of declared settlement dates.
- Firms manufacturing financial instruments must ensure their product does not adversely affect end clients or lead to issues with market integrity.
- Staff manufacturing financial instruments should have sufficient experience to assess and evaluate the likely performance of the product.
- Management should commission compliance reports on financial products with information on the distribution strategy.
- Specific target markets for each financial instrument must be identified before marketing begins. This report should detail client groups for which the product is unsuitable.
- New financial products should be ‘stress tested’ for poor outcomes in different market scenarios.
- Products should be able to perform even if the product manufacturer experiences financial difficulties.
- Products should be tested for their sustainability if they become commercially unviable.
- Products should be tested against a higher-than-anticipated demand.
- Products should have a charging structure which is appropriate to the target market.
- Charges for products should not impede return expectations.
- Charging structures of products should be completely transparent.
- Information on how products are distributed should be made available.
- Firms are required to conduct a review of the financial instruments they manufacture on a regular basis, with an additional review of individual products before any re-issue or re-launch.