LEGAL

MiFID II

Markets In Financial Instruments Directive II

1. What is MiFID II?

This Directive reinforces the duties of financial intermediaries, namely by:

• Increasing the degree of client protection, especially concerning small investors, by implementing additional requirements on the gathering of client information for their respective classification and for evaluating their adequacy in the investment on financial instruments or investment services, in such a way that assures their adequacy to the client profile. MiFID II distinguishes between complex and non-complex financial instruments and establishes the definition of target market and provides information on products and respective risk warnings.
• Sets requirements on organization and control, as well as rules of conduct that must be observed by financial intermediaries with the goal of guaranteeing that their conduct is oriented towards obtaining the best possible results for their clients. Rules on the prevention of conflicts of interest and the safeguard of client assets are reinforced.
• On the context of client protection, the Directive sets a number of requirements regarding the preservation of all communications between clients and financial intermediaries, establishing the duty of conserving recorded and registered communications according to the requirements set by the Directive.
• To keep a common and homogeneous regulatory framework for financial services across all member-states of the European Union, through extensive cooperation between the several supervisory bodies, there were established new rules on the creation, distribution and monitoring of financial instruments were established. Duties, such as the duty of setting a target market for the financial instruments distributed or developed by the financial intermediary, are required.

2. Classification of clients according to MiFID II

One of the main goals established by MiFID II lays on the protection of investors. Regarding this aspect, MiFID II sets different tiers of protection and treatment on the provision of investment services, according to the characteristics provided by each client.

By MiFID II, entities which carry out financial intermediation activities are required to classify their clients in accordance with three categories: Non-Professional, Professional and Eligible Counterparty.

The repercussions of such classifications will be reflected on the level of investor protection, corresponding the level of protection to a higher degree the lower the degree of knowledge and experience is held, by each client, on matters related to markets and financial instruments. The capacity to assume and endure the risks arising from investment decisions taken by the client will vary in accordance with each client’s profile, making it necessary to adjust the degree of protection based on the retrieved knowledge and experience evaluation.

2.1. Non-Professional Client

This category is composed of all clients (individuals and companies) which haven’t fulfilled the requirements characteristic to the subsequently defined categories.

On the scope of this category, all clients that are considered to hold limited knowledge in regards to financial instruments are included, being attributed a substantially higher degree of protection. By this classification results, namely, a demand for the written execution of a Financial Intermediation Contract which sets the scope of the initiated relation between the entity which exercises the financial intermediation activity and the respective Client, describing the duties and rights attributed to both parties.

2.2. Professional Client

This category is composed by all entities which provided investment services, entities which develop investment activities and big companies, as long as two of the following criteria, according to their most recent certified individual annual accounts, are fulfilled:

• Equity of, at least, 2 million euros;
• Total assets of, at least, 20 million euros;
• Net turnover of, at least, 40 million euros.

According to the guidelines set by this Directive, these clients, given that the necessary degree of experience, knowledge and competence for investment decision-making and for the adequate weighting of underlying risks is held, are attributed a reduced degree of protection when compared to Non-Professional Clients.

2.3. Eligible Counterparty

The following entities are included on this category:

• Credit Institutions;
• Investment Companies;
• Insurance Companies;
• Pension Funds and their respective Management Companies;
• Other authorized Financial Institutions;
• National Governments and corresponding services.

2.4. Changes to the classification attributed to Clients

MiFID II sets the possibility for the clients of financial intermediation entities to request, through a formal procedure, for the category under which they have been classified in, in virtue of the classification that had been attributed by the financial intermediation entity, to be changed. To this effect, it must be considered:

• Changes in classification that relate to an increase of the degree of protection attributed to the client are not, in principle, conditioned by any requirements; changes in classification that relate to a reduction of the degree of protection attributed to the client are subject to the fulfilment of rigorous requirements.
• Any change in classification is dependent on the signature, by the client, of a specific form for such effect.
• Considering the above, it’s possible to affirm that:
  • In situations where the desired change relates to the transition from Eligible Counterparty to Professional Client, or the transition from Professional Client to Non-Professional Client, such change is not, in principle, subject to verification of any specific requisites.
  • In situations where the desired change relates to the transition from Non-Professional Client to Professional Client, at least two of the following requirements must be fulfilled:
    • The Client must have performed transaction with a significant volume on the relevant market, with an average frequency of ten transaction per trimester during the previous year;
    • The Client must hold a financial instrument portfolio, including cash deposits, that exceeds 500.000,00€;
    • The Client must perform, or have performed, duties on the financial sector, for at least one year, on a role that requires knowledge of the services or financial transactions in question.

3. Client’s Knowledge

MiFID II, on matters concerning clients, adopts a KYC („Know Your Customer”) principle, under which the financial intermediary entity must request, from the client, information regarding their knowledge, experience and financial situation on matters of investment, as well as regarding the type of services, operations and financial instruments with which the client is familiar with. The nature, volume and frequency of the transactions carried on financial markets, as well as the degree of qualifications and professional activity performed by the client must be subject to collection and analysis. It is, therefore, possible to ensure the correct adequacy of products and services offered to the client.

MiFID II establishes, for the protection of the client, a distinction between execution-only services and other financial services. To each service there is a corresponding previous evaluation, which will vary depending on whether the product corresponds to a execution-only service (brokerage) or to services of, namely, portfolio management or investment advice:

• For execution-only, reception or order transmission services, access is conditional to an evaluation over the characteristics of the client, in such a way that ensures that the service and/or product is appropriate to the needs of the client and that the product/service is appropriate to the degree of knowledge and experience of the client. When providing reception, transmission, and order execution services, DIF Broker is not obliged to determine whether the operation is suitable for the client’s investor profile.
• For portfolio management and investment advice services, both an evaluation of knowledge and experience and an evaluation of the financial situation of the client are required to determine if the service/product is adequate to the financial situation and investment goals of the client.

4. Information concerning the Best Execution Policy

MiFID II requires entities that provide reception, transmission and execution of orders services to implement measures that allow for the obtaining of the best possible result for their clients, applicable both to Non-Professional and Professional clients.

DIF Broker does not execute orders directly, only receiving and transmitting orders to an external negotiation platform (held by a regulated financial intermediary). To this effect, the external negotiation platform that DIF Broker provides is property of Saxo Bank A/S, a counterparty evaluated by DIF Broker under the scope of knowledge of counterparties. Its Best Execution Policy may be read here: „Saxo Bank A/S Best Execution”.

5. Information regarding the Policy on Conflict of Interests

The DIF Broker Policy on Conflict of Interests has the goal of creating mechanisms that allow for the effective prevention of any conflicts of interest. This policy can be consulted by request of the client, establishing in detail the operating principles of DIF Broker on this domain.

Circumstances of conflict of interests are susceptible to jeopardize the impartiality and/or Independence of DIF Broker conduct, being therefore constituted as a priority to define procedures with the goal of identifying, preventing and mitigating this type of situations according to the applicable legal and regulatory rules.

DIF Broker does not have its own portfolio activity or act as a counterparty to the operations of its clients, which sets aside eventual conflicts of interest in the provision of investment services.

DIF Broker has adopted a Policy on Conflict of Interest that sets as general guidelines honest, impartial and professional conduct, always in the best interests of the clients.

6. Safeguarding of Client Assets

The safeguarding of assets has the goal of segregating own company assets and assets belonging to each of the clients (Article 306 of the Portuguese Securities Code – CVM). DIF Broker, while fulfilling such segregation, has procedures, tools and controls in place that allow for the assurance of such distinction in such a way that, in case of insolvency, company recovery or reorganization, such scenarios exert no influence over the assets of the clients.

The financial intermediary must not, on its own interest or on the interest of third parties, dispose of its clients’ financial instruments or exercise rights inherent to such instruments, unless explicit agreement by the holders. Likewise, investment companies must not use, on their own interest or on the interest of third parties, money received from clients.

For the fulfilment of the dispositions of Article 306 CVM, the financial intermediary must fulfil certain duties:

• Preserve the necessary accounting records so that, immediately and at any moment, the distinction between client’s assets, as well as own assets, is possible;
• Keep organized records and accounts, in such a way that ensures their precision and, in particular, their correspondence with financial instruments and clients’ cash;
• Undergo, with the necessary frequency and with, at least, monthly periodicity, registry reconciliations between the internal client accounts and the open accounts through third parties, for deposit or registry of such clients’ assets;
• Take the necessary measures to ensure that any clients’ financial instruments, deposited or registered through a third party, are separably identifiable from the financial instruments owned by the financial intermediary, through accounts opened on behalf of the clients or in behalf of the financial intermediary; such accounts must either be identified as clients’ accounts, or similar measures which provide the same degree of protection should be taken;
• Take the necessary measures to ensure that the clients’ cash is held on one account, or accounts separately identifiable from any accounts holding the financial intermediary’s cash;
• Implement organisational provisions in such a way that minimises risk of loss or reduction on clients’ assets worth, or reduction of rights associated with such assets, as consequence from abusive usage of assets, fraud, poor management, inadequate registry keeping or negligence.

As set by Article 306. A, the financial intermediary which wishes to register or deposit clients’ financial instruments, in one or several accounts opened through a third party, must:

• Observe a duty of care, setting high professional diligence standards on the selection, nomination and periodic evaluation of the third party, taking into consideration its technical capacity and its reputation on the market;
• Ponder the legal or regulatory requirements and market practises, in regards to the holding, registry and deposit of financial instruments by such third parties, susceptible of negatively affecting clients’ rights.

DIF Broker has implemented the necessary procedures to ensure the clear segregation and distinction between assets owned by clients from its own assets, having individually identified the assets owned by each of its clients.

DIF Broker is annually audited by an external entity, which issues an evaluation over the implemented procedures and measures, under the scope of the regulatory provisions related to the safeguarding of assets. This evaluation and report, in line with the provisions of Article 306 d) CMV, is annually submitted to CMVM – Comissão de Mercado de Valores Mobiliários (Portuguese Securities Market Commission). DIF Broker is a member of the Sistema de Indemnização aos Investidores (SII – Investor Compensation Scheme), a legal person ruled by public law, created with the purpose of protecting small investors. This entity ensures investor protection (Non-Professional Investors) under circumstances of financial incapacity by the financial intermediaries which have been granted authorization to develop their activities in Portugal, allowing for the restitution or compensation of cash and financial instruments owned by the investors and ensuring coverage of the due amounts owed to investors related to financial instruments and cash explicitly destined to their purchase.

SII ensures compensation to the maximum amount of 25.000 Euros for each investor. More information is available on the CMVM institutional website.

For more information, the Informações Pré-Contractuais (Pre-Contractual Information) should be read. Available on DIF Broker website.