Intermonte SIM and MiFID II

Passed into law in June 2014, the legislative package comprising the revised Markets in Financial Instruments Directive and a new Regulation - the Markets in Financial Instruments Directive 2014/65/EU (“MiFID II”) and Markets in Financial Instruments Regulation (EU) 600/201 (“MiFIR”, together with MiFID II, the “MIFID II new rules”) - sets new rules for the structure of markets and the trading of financial instruments, and prescribes conduct of business standards for the provision of investment products and services. A central theme of the MiFID II reforms is increased transparency. Whilst MiFID I focused on opening up markets to greater competition, MiFID II seeks to shine greater light on business practices, and bring more trading activities on to transparent organised trading venues. In doing so, MiFID II seeks to directly address some of the shortcomings revealed by the financial crisis, such as opacity in derivatives and other over-the-counter markets. MiFID II must be implemented by January 2018. Intermonte SIM is an Investment Firm and as such subject to MIFID II/MiFIR requirements.

Client Classification
The revised Markets in Financial Instruments Directive (MiFID II) and the Markets in Financial Instruments Regulation (MiFIR) use the above client categories to recognise that clients may have different levels of expertise, knowledge and experience, and therefore regulatory protections are tailored accordingly. Retail Clients are afforded the broadest range of regulatory protections, followed by Elective Professional Clients, Professional Clients, and then Eligible Counterparties. Such differences in the regulatory protections under MiFID II cover a broad range of areas including disclosure requirements, obligations when executing client orders, and assumptions which firms can make regarding their clients. Intermonte only has relationships with "Eligible Counterparties" and "Professional Clients". In particular the latter must be aware of the risk affecting the financial instruments negotiated by Intermonte on their behalf (as described in annex 1 and provide information enabling Intermonte to assess the suitability of possible investment advice.

Best Execution
MiFID II rules pertaining to best execution are not entirely new to EU investment firms. Best Execution had already been introduced to the EU investment landscape by the first Markets in Financial Instruments Directive (MiFID) in 2007. Best execution rules are however yet another topic Brussels has put on the agenda of MiFID’s regulatory over-haul. Best execution means achieving the best possible result for customers when executing their orders via execution venues or OTC. The second Markets in Financial Instruments Directive (MiFID II) aims at achieving extensive transparency over investment firms’ order execution modalities. Moreover, investment firms are soon required to install thorough reporting and monitoring mechanisms in order to evaluate whether the execution quality achieved corresponds to the quality promised in their best execution policies. The realm of the existing MiFID regime is significantly broadened. In accordance with MiFID II and the implementing measures, Intermonte SIM is required to take all sufficient steps to obtain the best possible result for clients when executing orders (or receiving and transmitting orders) on their behalf, taking into account factors such as price, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order (execution factors). On January 3, investment firms will need to demonstrate that they have taken all sufficient steps to obtain the best possible result for their clients when executing orders, across all asset classes, including OTC derivatives. Information about Intermonte’s Execution Policy can be found in annex 2.

Post-Trade Transparency
MiFID II will introduce significant changes to the pre- and post-trade transparency regime for EU financial markets. As part of MiFID II’s enhanced transparency requirements, the responsibility for post-trade publication of trades executed away from a Regulated Market (RM), Multilateral Trading Facility (MTF), Organised Trading Facility (OTF), or Systematic Internaliser (SI) rests with the selling investment firm. PTT provision will require investment firms to make public disclosure of the volume and price of transaction and their time of execution for equities, “equity like” instruments and non-equities. For equities and equity-like instruments, MiFID investment firms will be required to disclose post trade information as close to real-time as possible (i.e. as close to real-time as is technically possible and in any case within 1 minute of the trade time – reduced from 3 minutes under MiFID I). For Bonds, SFPs, Emission Allowances and Derivatives, post-trade information shall be made available as close to real-time as is technically possible, and in any case: a) Until 3 January 2021, within 15 minutes after the execution of the relevant transaction; b) Thereafter, within 5 minutes after the execution of the relevant transaction.


Transaction Reporting
In accordance with MiFID II and the implementing measures, Intermonte SIM will be required to report details of such transactions to the national regulators. Transaction reporting is required by all MiFID-regulated firms for all financial instruments admitted to trading or being traded on an EU trading venue; for which a request for admission to trading has been made; or for financial instruments having an underlying financial instrument traded on an EU trading venue. This is true in each case, even if such transactions are conducted away from a trading venue or on a non-EU (third country) trading venue. The definition of trading venue includes MTFs and RMs. With respect to Intermonte SIM’s relationship with its clients, the following should be noted:
Transaction reports: where two investment firms trade with each other, each will make its own transaction report that reflects the transaction from its own perspective. For most sell-side firms, this is nothing new. However, the new rules mean that investment firms that may have been previously exempt from reporting, including many asset managers, will now have to report (UCITS and AIFMD managers are out of scope for transaction reporting).
Reporting chains: the requirement that transaction reports reflect the transaction from each investment firm’s perspective means it is imperative that the reports by Investment Firm A and Investment Firm B mirror each other, otherwise the transaction reporting chain breaks and does not provide the regulator with visibility of the whole transaction.

Record Keeping

To satisfy MiFID II record keeping requirements, Intermonte SIM will enhance timestamps on relevant records in accordance with millisecond granularity.

Conflict of Interest
MiFID II contains detailed provisions dealing with the identification and ongoing management of conflicts of interests. A concise report on the procedure for the management of conflicts of interest is included in annex 3.