EUROPE: MiFID classification of UCITS: Complex or Non-Complex instruments

Wednesday April 14 2010

CESR has published three consultation papers on its technical advice to the Commission in respect of reviewing MiFID. The review includes proposed technical advice by CESR on investor protection and intermediaries, equity markets and transaction reporting.

In its three consultation papers, CESR addresses areas of the MiFID legal framework where it has identified a need for improvement, including quality, cost and consolidation of post-trade transparency data and delays in the publication of such data.

Amongst the proposals contained in the set of consultations is that of amending the list of complex and non-complex financial instruments. Currently, Article 19(6) treats all UCITS as automatically non-complex. In this consultation, CESR has raised the question as to whether this remains a correct approach and asks the industry to comment on the necessity of legislation that will distinguish complex UCITS.

CESR acknowledges that making any definitive proposals on the UCITS category at present would be difficult. In response CESR says: “A possible solution suggested by a minority of CESR members would be to […] exclude from the automatically non-complex list of financial instruments in MiFiD those UCITS that use investment strategies or techniques that make it difficult for the client to understand the risks involved.”

This is relevant in terms of the “appropriateness test” which requires a firm to ask its client to provide information about their knowledge and experience relevant to the specific type of product or service in question, so that the firm can assess whether the product or service is appropriate for the client. A firm is required to determine whether that client has the necessary experience and knowledge in order to understand the risks involved in relation to the product or investment service offered or demanded, and to warn the clients if the firm determines that the product or service is not appropriate for them.

In addition, CESR is consulting on the key elements of a possible common EEA recording requirement for orders received or transmitted by telephone or through electronic communications.

CESR has also published advice on the rules covering regulated markets and Multilateral Trading Facilities (MTFs) given that that it may require color broker dealers that do not provide their best-priced orders for inclusion in the public consolidated quotation data to convert their crossing networks to MTFs.