In May and June this year, the European Securities and Markets Authority (“ESMA”) updated a number of its Q&A regarding the Markets in Financial Instruments Directive (recast) – Directive 2014/65/EU (“MiFID II”) and Markets in Financial Instruments Regulation – Regulation 600/2014 (“MiFIR”), specifically:
- Q&A on investor protection and intermediaries topics;
- Q&A on transparency topics;
- Q&A on MiFIR data reporting; and
- Q&A on markets structures topics
On May 15th 2017, the CSSF also added a new question and answer regarding post-trade transparency under the CSSF Q&A on MiFID II and MiFIR.
We will focus here on just a few of the updates to the Q&A on investor protection and intermediaries topics.
ESMA has clarified a number of points on client categorisation. As to when an investment firm should assess whether a private individual investor may be treated as a professional client under Section II of Annex II of MiFID II, ESMA explains that the request must be made by the client in writing at its own initiative and that written statement must be separate from other agreements and terms of business. The client must specify whether it wishes to be treated as a professional client generally or just in respect of a specific transaction. ESMA stresses the importance of investment firms refraining from any form of practice that induces or incentivises clients to request to be treated as a professional client.
As to how an investment firm should assess whether a private individual investor may be treated as a professional client under Section II of Annex II of MiFID II, ESMA explains that firms must avoid relying solely on the self-certification by the client and should consider obtaining additional evidence to support the client’s assertions. Investment firms should also maintain adequate reporting and retention requirements in order to demonstrate to their competent authorities, compliance with the procedure under Section II of Annex II of MiFID II.
To assess whether transactions are of a significant size in accordance with the first limb in the fifth paragraph of Section II.1 of Annex II of MiFID II, ESMA explains that firms must take into account the size of the transactions on the relevant market and should consider whether the transactions are individually large enough to enhance the client’s knowledge and expertise to the extent required in view of the envisaged transaction or service.
ESMA confirms that a private individual client who has been trading on the relevant market for less than a year, cannot meet the conditions under the first limb in the fifth paragraph of Section II.1 of Annex II of MiFID II, because the investment firm cannot review the trading history for the past four quarters.
Finally, ESMA confirms that if an investment portfolio contains leveraged financial instruments, the net equity of the specific position or positions should be used to determine the size of a financial instrument when assessing the size of a client’s financial instrument portfolio in accordance with the second limb in the fifth paragraph of Section II.1 of Annex II of MiFID II.