MiFID II Compliance 

Monitoring Plan

June 2018

ALCO - Working Group 51

Vincent Salzinger

Président ALCO

Vincent Salzinger

Président ALCO

In the aftermath of the financial crisis, the European Commission has revised the global regulatory framework applicable to markets in financial instruments in the European Economic Area by the adoption of new rules. These consist of new legal instruments that apply from 3 January 2018. The main documents are:

- Directive 2014/65 on markets in financial instruments (MiFID II)

- Regulation 600/2014 on markets in financial instruments (MiFIR).

 

Comprehensive online libraries of European and Luxembourg rules and supporting documents are published by:

- ESMA 

- CSSF 

 

Aiming at strengthening investor protection and transparency of the financial market, these legal instruments:

- ensure that organised trading takes place on regulated platforms,

- introduce rules on algorithmic and high frequency trading,

- improve the transparency and oversight of financial markets – including derivatives markets - and addressing some shortcomings in commodity derivatives markets,

- enhance investor protection and improving conduct of business rules as well as conditions for competition in the trading and clearing of financial instruments,

And set out requirements on:

- disclosure of data on trading activity to the public,

- disclosure of transaction data to regulators and supervisors,

- mandatory trading of derivatives on organized venues,

- removal of barriers between trading venues and providers of clearing services to ensure more competition,

- specific supervisory actions regarding financial instruments and positions in derivatives.

 

"The purpose of the working group, composed of ALCO members, was to issue practical guidelines in the form of a table, that would assist Compliance Officers to implement MiFID II monitoring plans in investments firms"

In Luxembourg, the 2018 Law amended the law of 5 April 1993 on the financial sector (the «LFS») and the Law of 13 July 2007 has been replaced by the Law of 30 May 2018 on markets in financial instruments. In addition, the Grand-ducal Regulation of 30 May 2018 on the protection of financial instruments and funds belonging to clients, product governance obligations and rules applicable to the reception of fees, commissions or any monetary or nonmonetary benefits replaced the Grand-ducal Regulation of 13 July 2007 on organisational requirements and rules of conduct in the financial sector.

 

The Commission de Surveillance du Secteur financier (CSSF) had already published the Circular 17/665 on ESMA Guidelines for the assessment of knowledge and competence on 31 July 2017. The purpose of the working group, composed of ALCO members, was to issue practical guidelines in the form of a table (the MiFID II Compliance Monitoring Plan) that would assist Compliance Officers to implement MiFID II monitoring plans in investments firms. It has been split into four sub-working groups:

 

Sub working group I:

Topics: Suitability (including investor profile) & appropriateness (including complex and non-complex products), inducements & investment research, classification of clients.

 

Sub working group II:

Topics: Corporate governance (including management bodies (ref CRD IV)), remuneration & conflicts of interest (including underwriting & placing), personal transaction, complaints handling, staff knowledge & competence, independent advice and non-independent advice.

 

Sub working group III:

Topics: Product governance (manufacturer / distributor: target market), best execution and client order handling, record keeping / recording of phone conversations and electronic communications, safekeeping of client assets.

 

Sub working group IV:

Topics: Client information, client reporting, costs & charges, transaction reporting. The MiFID II Compliance Monitoring Plan is not intended to cover all MIFID II topics but focuses on its main or most relevant topics helping investment firms to choose and determine the controls to be performed by theme in order to ensure regulatory compliance. It does not contain a full analysis of the applicable rules nor does it constitute an opinion of ALCO members. Furthermore, this document has not been vetted by the competent authority. It is each investment firm’s responsibility to establish the relevant set of controls and to adapt its control plan with regard to its activities, size, structure and organisation.

Finally, the table does not aim to cover all MiFID II controls: considering the characteristics of the Luxembourg market and the time schedule available for performing this exercise, the following topics have not been covered in this control plan: systematic internalize regime, direct market access, algorithmic trading, pre and post trade transparency and derivatives (including commodity derivatives).

 

As the Luxembourg legislation was not implemented when this report was being drawn up, the legal references are based on the European legislation and regulation hereinafter detailed in the table by the following acronyms. The table also lists related existing regulation: (see table)

 

Some provisions mentioned in the report might be amended or clarified by the Luxembourg legislation.

"The working group has been working

on key controls to avoid key compliance risk"

The proposed controls with a detailed description have been defined in the two columns «Purpose of controls» and «Description of control (details) ». Depending on the organisation, the list of the controls can be performed by the Compliance function or by another department (probably a 2nd Line of Defense depending on the size and structure). Whatever the function/department in charge of carrying out these controls, it is up to the Compliance function to ensure that all the necessary controls have been put in place, to analyse the results of these controls, to put in place the relevant measures, to mitigate the risks, to track progress made based on raised issues and to report to its management bodies.

The working group has been working on key controls to avoid key compliance risk, but it is up to each’s investment firm’s business model and exposure to such topics to find its own appropriate risk rating.

 

The working group did not propose a frequency for these controls, which remains at the discretion of each investment firm and which should be performed on a risk based approach.

 

Sponsor of the ALCO working group: Vincent SALZINGER.

 

For Working Group 51,

Nuno CASAL,
Emmanuelle CAUMONT,
Inida CELOMEMAG,
Sylvain DALLE,
Béatrice DEBARNOT,
Karelle ENCLOS,
Alexander ENDRIKAT (co-chairman),
Oumarou IDE (cochairman), Alexandra MELIS,
Christiane SCHON,
Céline TROQUET.