Ludovic Aigrot Chair, MiFID Task Force, Federation of European Securities Exchanges Bürgenstock, 6 September How Does Europe’s New MiFID Regime Affect Derivatives Markets?

Outline of Presentation Introduction to FESE MiFID: A Snapshot The Impact on Derivatives Markets  New scope  Exemptions  Key features affecting derivatives markets  Reviews/reports Q&A

Introduction to FESE Whom do we represent? Established in Full Members, 6 Corresponding Members Representing 36 Securities Exchanges All the countries of the EU, Iceland, Norway and Switzerland What do we do? Interest representation Forum for dialogue and cooperation Statistics and Market research Sponsorship of research and conferences How are we organised? Secretary General: Judith Hardt Secretariat in Brussels, Belgium Member groups bringing together relevant expertise MiFID Task Force: Representatives from all FESE members Meeting on an ad hoc basis Chair: Ludovic Aigrot (Euronext)

FESE Members  24 Full Members  36 exchanges  6 Corresponding Members

Key figures  Market Value > 10,000 billion EUR  Turnover 1 > 17,000 billion EUR 1 Annual equity turnover Liquidity pool

MiFID: A Snapshot Structure: Level 1 + Level 2: Binding Level 3: Non-binding Level 4: Jan/Nov 2007 Key Concepts: Single passport for investment firms (including one set of conduct of business rules, capital adequacy rules, rules for reporting to clients, client order handling rules, and a new regime of best execution) New client classification system Market operator and RM/MTF rules Level playing field for three types of execution venues (including transparency/reporting rules)

New Scope: Commodity Derivatives Are In… 1Financial derivatives, e.g. derivatives with securities, currency, interest rate etc. as underlying. These are included in the scope automatically, whether they are cash or physically settled. 2Commodity derivatives which must be cash settled or may be settled in cash at the option of one of the parties. These are also covered automatically, unless the cash settlement is by reason of a default or other termination event. 3On-exchange commodity derivatives that can be physically settled. These are automatically included if they are admitted to trading on a RM or MTF. 4Other commodity derivatives that can be physically settled, provided they have certain characteristics defined at Level 2, i.e. within the technical measures. As described in Section C(7) of Annex I, these derivatives must have the characteristics of other derivative financial instruments, “having regard to whether, inter alia, they are cleared and settled through recognized clearing houses or are subject to regular margin calls”. 5Exotic derivatives with underlying such as climactic conditions, freight weights, emissions, etc. which must be cash settled. As with commodity derivatives which must be cash settled, these derivatives are also automatically covered. 6Other types of commodity or exotic derivatives not captured above, provided they have certain characteristics defined at Level 2. As described in Section C(10) of Annex I, these derivatives must have the characteristics of other derivative financial instruments, “having regard to whether, inter alia, they are traded on a regulated market or an MTF, are cleared and settled through recognised clearing houses or are subject to regular margin calls.”

Exemptions Regime For whom? Group undertakings Those dealing on own account, Those doing ancillary business. Defined where? Defined in Article 2 of the Directive Clarified further in the Level 2 measures. The Directive specifies that by April 2008 the Commission shall, on the basis of public consultations and in the light of discussions with competent authorities, report to the European Parliament and Council on the continued appropriateness of the exemptions based on the activity carried out by the undertakings. ! ! ! If you are exempt from MiFID, you can still be subject to national rules… Being excluded from the scope of the Directive ≠ Being exempt from all regulation. When one is outside the scope of MiFID, national rules will apply.

Tailoring MiFID to Derivatives Business… Best execution Level 1 and Level 2 measures together are rather explicit in many aspects of best execution How this obligation will apply to derivatives is a matter for Level 3 (supervisory guidance to be issued by CESR) and for local transposition. The differences between equity and (bond and) derivative markets will likely be the focus of discussion when this subject is addressed next. Pre- and post-trade transparency rules Apply to all execution venues For the moment limited to equities Could be extended in one form or another to derivative instruments following a report to be prepared by the European Commission by November 2007 – Call for Evidence Other issues (e.g. admission to trading)

Offering derivatives products and services to investors Investment firms can offer one of the following three: (1) assess the suitability of investment services and financial instruments to a client when it is providing investment advice or portfolio management, as described in Article 19(4); or (2) if it is not offering these investment services, to assess the appropriateness of an investment service or product as described in Article 19(5) of MiFID; or (3) if certain conditions are met (e.g. that the service be initiated by the client), to offer the product on an execution-only basis subject to Article 19(6) of the Directive. Importantly, Article 19(6) applies only to “non-complex” products. Level 2 measures specify that all derivatives products will be deemed to be “complex” for the purposes of execution-only services and thus can only be offered by using the suitability or the appropriateness test.

What’s in story for the future?  Level 3  Reviews/reports  Conclusion and Q&A  For any questions or inquiries related to the impact of the exchange industry please feel free to contact us at FESE!