Markets In Financial Instruments Directive II
1. What is MiFID II?
The Financial Instruments Markets Directive, commonly known as MiFID II, is based on the Community Directive 2014/65 / EC of 15 May 2014, which re-establishes the previous Directive 2004/39 / EC ( MiFID) relating to the markets of financial instruments. This legal instrument produced in a community framework entered into force on the day of January 3, 2018 and reflects changes in the persons and entities acting in financial markets. For more information, click here.
The main guidelines objectives are: first, to reinforce the protection of investors when contracting investment services; and secondly, to increase the transparency and quality of the financial market functioning.
In the light of the aforementioned guidelines, the main changes to be pointed out are the reinforcement of the duties of financial intermediaries and the amendments made to the commercialization rules of financial instruments, in particular:
Strengthen the level of Clients protection, especially for small investors, through additional requirements in the information collected from clients, to classify and evaluate their suitability to execute financial instruments or investment services, as to be more suitable to the Client’s profile. The MiFID II distinguishes between complex and non-complex products, defines the target market and certain information about the products and their corresponding risk notices.
Organize and control requirements, as well as the conduct rules that should be observed by financial intermediaries, in order to ensure that their actions are oriented towards obtaining the best possible results for their clients. Likewise, the rules concerning the prevention of conflicts of interest and the safeguarding of the clients’ assets have been reinforced.
In the context of client protection, new requirements have been issued, regarding the maintenance of all communications between the Clients and the financial intermediaries; therefore, communications recordings and transcription should be maintained, in accordance with the requirements of the new normative.
In order to continue to maintain a common and homogeneous regulatory base for financial services in all the member nations of the European Union, with extensive cooperation among the various entities performing supervision activities, new rules have been set on financial instruments creation and monitoring. For example, it is required to define a target market for the financial instruments distributed or produced by the financial intermediary.
There are new requirements regarding the Financial Advisory service and the Portfolio Management. The Financial Advisory service is provided independently by DIF Broker Sociedad Financiera de Corretagem SA.
2. Classification of Clients under the Directive on Financial Instruments Markets II (MiFID II)
As mentioned above, one of the main objectives of this new Directive MiFID II remains the protection of investors. Regarding this aspect, the DMiFID II sets different levels of protection and treatment in the provision of investment services, according to the characteristics presented by each Client.
According to the MiFID II, those entities that run financial intermediation activities are obliged to classify their clients according to a matrix that includes three decisive categories: Non-professionals, professionals and eligible counterparts.
The implication of these classifications will be reflected at the level of investors protection. In this sense, the lower the different levels of knowledge and experience of each client will be on markets and financial instruments, the higher their protection. Basically, the ability to assume and bear the risks derived from investment decisions made by the Client will vary, based on the profile of each client, so it is necessary to adjust that degree of protection base according to the evaluation of knowledge and experience.
In this area, DIF Broker makes an adequate classification of its clients, by attributing them their corresponding category and respective implications. As a general rule, Clients will always be classified as non-professionals (retailers).
Below, you will find information on the implications and rights derived from such classification, as well as the necessary conditions to request a modification of the category you were originally assigned.
2.1. Non-Professional Client
In this category, not all Clients (individuals and companies) do meet the requirements that characterize the categories defined below.
Regarding this category of Clients, the MiFID II considers them having limited knowledge of financial instruments, which justifies the attribution of a substantially higher degree of protection to these Clients.
In this area, it should be noticed that the MiFID II requires to this set of Clients the celebration, in written form, of a Financial Intermediation Contract, defining the scope of the relationship initiated between the entity performing an activity of financial intermediation and its client, in addition to the description of the rights and duties of both parties.
At present, any client with a financial instruments account and / or providing portfolio management or investment services, will be classified by default by DIF Broker, as non-professional clients. However, an exception to those provisions occurs, in case the Client requests to be qualified as a Professional Client, which will be demonstrated by verifying the necessary requirements to be reclassified.
2.2. Professional Client
According to this Directive, entities providing investment services, or carrying out investment activities, or large companies are part of this category, provided that, according to their latest individual accounts, they meet two of the following criteria:
Net situation of 2 million euros;
Total assets of 20 million euros;
Net turnover of 40 million euros. According to the guidelines set out in this Directive, these clients, provided with the necessary level of experience, knowledge and competence to make investment decisions and appropriately assess the risks related to such decisions, end up benefiting from a lower level of protection compared to non-professional clients.
In addition, the definition of Professional Clients refers to persons of legal age; Professional Clients may continue to be those making requests, as an exception, provided that they are able to demonstrate compliance with the following three criteria established by law, which are summarized in the following: a) having carried out transactions with a significant volume on the markets and with a frequency of 10 transactions per quarter during the last four quarters; b) having a financial instrument portfolio size greater than EUR 500,000, defined as cash deposits and financial instruments; c) the client has occupied or occupies a professional position for at least one year in the financial sector that requires knowledge of the transactions or services provided.
2.3. Eligible Counterpart
MiFID defines as eligible counterparts those entities with extensive knowledge of financial markets and their products and, therefore, the category with the lowest level of protection. The following entities are included in this category:
a. Credit Institutions;
b. Investment Companies;
c. Insurance companies;
d. Pension Funds and the respective Management Companies;
e. Other authorized financial institutions;
f. National governments and corresponding services
2.4. Alterations to the classification attributed to Clients
The MiFID II confers to the clients of financial intermediation entities the possibility to reques, through a formal procedure, a modification of their category, in which they have been classified after the evaluation made by the financial intermediation entity. At this point, there are two notes to qualify.
On the one hand, changing categories imply that the increase of the protection level conferred to the Client will not, in principle, be conditioned by the verification of any requirements. Category modifications resulting in a reduction of the protection level provided to the Client will be subject to compliance with strict requirements.
On the other hand, category change will depend on the Client signing a specific form for such purpose. In the light of the foregoing, it is possible to claim that in situations where the alteration intended by the Client is translated into a Passage from Eligible Counterpart into Professional Client or in a Passage from Professional Client into Non-Professional Client, that alteration will not be, in the end, subject to the verification of any specific requirement. In the same way, it is possible to declare that when the desired change requested by the Client involves the passage from Non-Professional Client to Professional Client, at least two of the following assumptions should be verified:
The Client has carried out transactions with a significant volume on the reference market, with an average frequency of ten operations per quarter during the last year;
The Client has a portfolio of financial instruments, including cash deposits, in excess of € 500,000.00;
The Client exercises or has exercised functions in the financial sector for at least one year, in a position that requires knowledge of the services or financial transactions in question.
3. Knowledge of Clients
As clients are concerned, the MiFID II continues adopting the KYC principle („Know Your Client”), according to which the financial intermediation entity should request information to the Client about their knowledge and experience in investments and their financial situation, as well as on the type of services, operations and financial instruments the client is familiar with. Also, it is important to clarify the nature, volume and frequency of the operations carried out within financial markets, as well as the qualification level of the professional activity developed by the Client.
In summary, the MiFID II requires the collection and evaluation of some information related to Clients, which allows to ensure a correct match between the products and services offered by the financial intermediation entity, and the needs and objectives of the Client.
One of the characteristic features of the MiFID II for the purpose of client protection remains the distinction between simple executive services and other financial services. Each service will require prior evaluation, but this will depend on whether it is about Financial Intermediation services (Brokerage) or other services such as Portfolio Management or, with this new Directive being implemented, Financial Advisory services.
As Financial Intermediation services (Brokerage) are concerned, their access is conditioned by the evaluation of the client’s characteristics, to ensure that the services and/or products may respond to the Client’s needs, and that such services/products are also convenient when related to the degree of knowledge and experience demonstrated by the Client.
In the case of the Portfolio Management and Financial Advisory services, it is necessary to evaluate the financial situation of the client, in addition to their knowledge and experience, to determine if the service / product is suitable for their financial situation and their investment objectives, as detailed below.
Within this framework, DIF Broker developed two surveys: the convenience test for the brokerage service and the suitability test for non-independent financial advisory services and discretionary portfolio management.
4. Convenience TestThis is a survey that the Client should complete before contracting the Brokerage service, and that translates into orders reception, transmission and execution. This survey is essentially based on the information collected about the knowledge and experience of the potential client in the financial markets field, and in relation to the financial instruments offered by the financial intermediation entity. On the basis of this test’s results, it will be determined whether certain products are convenient or not for the client. In the event that the client wishes to operate with products that DIF Broker deems as not convenient, the client will be informed about the risks he incurs by means of a Disclaimer in his trading platform, before performing those inconvenient operations.
5. Suitability testThis test consists of a survey carried out in the domain of the Portfolio Management and Financial Advisory services provision, which requires another type of information to be collected for potential Clients. Therefore, in order to determine the investment profile in the framework of these services, in addition to the investment knowledge and experience, the client’s financial situation and investment objectives, including the ability to withstand losses and risk tolerance, will be evaluated, too, to determine if the investment product or service is convenient or not. In no case, DIF Broker will offer portfolios that may not be suitable, according to the aforementioned test. This test will be updated periodically.
6 Financial AdvisoryThe MiFID II specifically requires to financial institutions to report on the area in which they provide Financial Advisory services. As already mentioned, DIF Broker provides Non-Independent Financial Advisory services. Prior to the provision of those services, the client completes the suitability test, based on the result of which the Advisory will be carried out, within the sphere of suitability of the Client.
7 Information made available to Clients.In accordance with the new regulation, that requires certain information to be made available to Clients, DIF Broker provides the Fundamental Information Documents „DIF” (or „KID” – Key Information Document), based on the Retail Investment Packages; and the Investment Products, based on insurances or „PRIIP” – Retail and Insurance Package-based Investment Products – and available on-line in the Homepage/ Menu.
Those documents are also available in the trading platform of DIF Broker. Each KID document allows the investor to know the characteristics of the product that it considers as transaction before contracting it. These documents include brief essential information related to each type of instrument, and in each document, the investor will be able to discover: the nature, the characteristics, the risk profile involved in each product, and therefore the possibilities of capital loss, the costs involved, and other relevant information.
The client will first need to read the KID, referring to the complex financial products he wishes to transact. The MiFID II, as mentioned, reinforces the pre-contractual and post-contractual information that should be offered to Clients about products and services, including, in addition, providing information on costs and fees.
8 Information regarding the Best Execution Policy (Best Execution)
The MiFID II requires to those entities providing services of orders reception, transmission and execution, to establish measures as to obtain the best possible result for its Clients. In terms of scope, this policy will only apply to Retail (Non-Professional) and Professional Clients, and not to Clients classified as Eligible Counterparts.
As an order receiver and transmitter, and in the best interest of the Client, DIF undertakes to perform the best service execution, in accordance with the criteria and factors that it considers relevant, such as: price, fast execution cost, volume, nature of the order, among others.
The importance of those relevant factors can be affected by the client’s classification (both professional and retail), the size and type of order, the characteristics of each financial instrument, the availability, liquidity and characteristics of the structures of instruments or trading platforms, for which the executive orders are transmitted. Therefore, for the purpose of the best possible result, DIF Broker may not consider, in certain situations, that some factors may be more relevant than others. However, DIF Broker will consider the orders received and transmitted, the classification resulting from evaluating the knowledge and experience of its clients, the type of service contracted and the client’s profile.
It is important to inform that DIF Broker does not execute orders directly, but only receives and transmits them to the trading platforms, maintained by regulated financial intermediaries; those are provided with an execution policy for their own orders, compatible with the company’s policy and with the MiFID II.
In this context, the main intermediary for sending executive orders is Saxo Bank A/S, the counterpart evaluated by DIF Broker in the framework of the counterpart’s knowledge. Your best execution policy can be read here: „Saxo Bank A / S Best Execution “. Within this policy, negotiation structures, or ” Execution Venues” are mentioned, which may include: regulated markets, multilateral trading systems (SMN), systematic internalizers („SI”); other suppliers and liquidity, and entities that cannot belong to the European Economic Area (EEA)..
When the client gives specific instructions to DIF Broker, these instructions will overlap the Order Execution Policy defined here; therefore, DIF Broker will transmit the order as received. If those orders are not possible to execute within the Client’s specifications, DIF Broker will inform the client of the impossibility of execution.
With regard to financial instruments and channels for receiving and transmitting orders, this policy applies to all types and financial instruments identified in this document. It will be applied independently to the channel through which the order is transmitted to DIF Broker, provided that this was established in the contractual conditions agreed with the Client.
In accordance with the foregoing, DIF Broker will transmit the orders received from Clients to other financial intermediaries for execution, and mainly, but not exclusively, to the counterparts established in the contract with the client; in particular, Saxo Bank AS will receive orders concerning all financial instruments, while Banco Inversis will receive investment funds orders. The execution policies of those intermediaries are compatible with the guarantee of the client ‚s best interest and conform to the MiFID II.
9. Information related to the Conflict of Interest Policy.
The Interests Policy of DIF Broker aims to, according to the „Internal Manual of Procedures”, establish the mechanisms that allow to effectively prevent any Conflict of Interest. This Policy is available for consultation under request of the Client and sets out in detail the performance principles of DIF Broker in this area.
As a Financial Brokerage Company, DIF Broker acts as a Client’s agent; thus, potential conflicts of interest relating to the provision of investment services or any scenario where potential conflict of interests may arise, could only occur if the operational counterpart of the Client was DIF Broker itself. Additionally, there could be autonomous interests with coworkers, managers, administrators, related agents or subcontracted entities that may reveal a Conflict of Interest. Situations of conflict of interest risk to be prejudicial for the impartiality and/or independence of DIF Broker’s performance, thus it is a priority to define procedures in order to identify, prevent and mitigate this type of situations of agreement. with the applicable legal and regulatory rules.
DIF Broker does not have an active portfolio of its own, nor does it act as a counterpart for the Clients’ operations, so that no interest of this nature may arise in the provision of investment services. DIF Broker approved a Conflict of Interest Policy, establishing general principles of conduct, earnest action, impartiality and professionalism, always in the best interest of the clients. In this sense, the electronic negotiation system available to the client guarantees an equitable treatment in the negotiation of financial instruments.
The client’s interests have priority over the interests of DIF Broker itself, of the companies controlled by DIF Broker, or where it has a financial group, of the holders of corporate bodies and of its coworkers. The employees of DIF Broker who work in areas that imply conflicts of interest, will act with the appropriate degree of independence and when, due to the size of the organization, they may not be totally independent, DIF Broker will apply the necessary control measures for the purposes of mitigating the impact of a possible situation that generates conflict. .
10 Safeguarding the Clients’ Assets
The aim of the safeguarding of assets is that institutions such as DIF Broker, which offers certain services, guarantee a clear distinction between their own assets and the assets belonging to the patrimony of each client, that is, the segregation of patrimonial assets, according to the current regulations.
To pursue this segregation, DIF Broker implements procedures, tools and controls that allow to ensure this distinction, so that in case of insolvency, recovery or sanitation of the company, the patrimony of its clients will not be affected.
The Financial Intermediary cannot, in its own interest or in the interest of third parties, dispose of any financial instruments of its clients, or exercise any inherent rights to such instruments, unless the holders agree. Likewise, investment companies cannot use the money they have received from clients in their interest or in the interest of third parties. In accordance with current regulations, the financial intermediary needs to comply with certain duties:
a. Keep the accounting records that may be necessary at any time and immediately, distinguishing the assets belonging to the patrimony of the clients from the individual ones and from those belonging to the patrimony of any other client, as well as of the assets belonging to its own patrimony;
b. Keep records and accounts organized, to ensure their accuracy and, in particular, their correspondence with financial instruments and the Clients’ money;
c. Perform, with the necessary frequency and, at least, with a monthly periodicity, reconciliations between the records of their internal accounts of clients and the open accounts of third parties, to deposit or register the assets of those clients;
d. Adopt all necessary measures to guarantee that all financial instruments of the clients, deposited or registered in a third party, are identifiable separately from the financial instruments belonging to the financial intermediary, through accounts opened on behalf of the clients or on behalf of the financial intermediary, with mention of being client accounts, or through equivalent measures that guarantee the same level of protection;
e. Take the necessary measures to guarantee that the clients’ money remains in a certain account or in accounts identified separately, which are different from any other account used by the financial intermediary; and
f. Adopt organizational provisions to minimize the risk of loss or diminution of the clients’ assets value or of the rights related to said assets, as a consequence of the abusive assets use, fraud, mismanagement, inadequate record keeping or negligence.
a. Observe the duties of due diligence and implement high standards of professional diligence in the selection, appointment and periodic evaluation of the third party, considering their technical capacity and reputation on the market; and
b. Weigh the legal or regulatory requirements and market practices related to the possession, registration and deposit of financial instruments by said third parties, that may negatively affect the rights of the clients.
DIF Broker considers it complies with the requirements defined for the Assets Safeguarding, since it has implemented all necessary procedures to guarantee the clear separation and segregation of those assets belonging to Clients from those belonging to its own assets, and to identify separately the assets belonging to each one of its Clients.
DIF Broker is audited annually by an external entity that issues an opinion on the procedures and measures adopted, within the framework of the regulatory dispositions reactive to the safeguarding of assets. This opinion and report, in compliance with art. 306 d CMV, is annually submitted to the CMVM – Comissão de Mercado de Valores Mobiliários (Portuguese Securities Market Commission). DIF Broker is a member of the Sistema de Indemnização ao Investidores (SII) (Investor Compensation Scheme ), which is a public legal entity created by Decree Law no. 222/99, dated June 22nd, and amended by Decree Law no. 252 / October 2003, with the objective of protecting small investors. SII works with CMVM. Its purpose is to ensure the protection of investors (Non-Professional Investors) in case of financial incapacity of financial intermediaries authorized to act in Portugal. In this way it allows to reimburse the investors or refund money or financial instruments that belong to them, guaranteeing the reimbursement of the amount owed to the investors regarding financial instruments and cash designated for purchase of such financial instruments.
The SII guarantees the reimbursement up to the limit of 25,000 euros for each Investor. You can find additional information about the SII here.
For further information, please check the pre-contractual information available on-line.