1. Markets in Financial Instruments Directive and its impact for the EU accessing countries Matjaž Albreht The Slovene Securities Market Agency VIII. Annual Conference of the Macedonian Stock Exchange Ohrid, 29 – 31 March 2007

2. Disclosure Any views expressed by an individual in this presentation do not necessarily reflect views of the Slovene Securities Market Agency.

3. Agenda  History of adopting MiFID  About MiFID  Why MiFID needs to replace ISD?  4 Levels of MiFID  Impact of MiFID  Key provisions of Level 1 MiFID  Key guidelines of Level 2 MiFID  MiFID vs. ISD  Impact of MiFID on the EU accession countries

4. History of legal framework 1993 April 2004 30.04.2006 31.01.2007 01.11.2007 ISD was adopted MiFID was adopted MiFID entered in force MiFID should be implemented by Member States MiFID measures should be applied by industry TIMELINE

5. VISION MiFID would play an important role in the wider European economic reform agenda given the contribution that deep and liquid capital markets can make to encouraging investment, innovation, growth and employment.

6. What is MiFID? It is a major part of the EU’s Financial Services Action Plan that sets out a comprehensive regulatory regime covering investment services and financial markets in Europe, containing measures that will:  change and improve the organisation and functioning of investment firms,  facilitate cross border trading, and thereby  encourage the integration of the EU capital markets,  ensure strong investor protection with a comprehensive set of rules governing the relationship, which investment firms have with their clients.

7. Why MiFID needs to replace the Investment Services Directive (ISD)?  The ‘passport’ system has to be updated in order to eliminate barriers to cross-border trading and thus inject more competition into the European investment services industry.  Investor protection needs to be enhanced in order to attract new investors to the EU capital markets. The "concentration rule" poses a barrier to the emergence of an integrated and competitive trading infrastructure and so needs to be amended.  New services, such as investment advice, and new financial instruments, such as derivatives, need to be brought within the scope of European legislation in order for these products to circulate freely.

8. MiFID comprises of four levels LEVEL 1: EU decision making Directives adopted by the European Parliament and the Council by co-decision procedure. LEVEL 2: technical implementing measures Adopted by Commission after having been submitted to the ESC by Level 3 Committees (CESR). LEVEL 3: non-binding guidelines and recommendations adopted by CESR. LEVEL 4: enforcement of Community law.

9. Customers and small investors  They will have a bigger choice of investment service providers who will be required to conform to high standards of behavior to their clients. This should allow them to seek out services of the best quality at the cheapest price.  Firms will be subject to greater competition forcing them to be more responsible vis-à-vis their clients and to offer a better level of service. Small (retail) investors will have a bigger choice of products and services.  Consumers will enjoy the same level of protection whether they choose a domestic service provider or a foreign one (from another Member State).  When executing client orders, firms will have to take reasonable steps to deliver the best possible result ("best execution").

10. Overall effects of MiFID The MiFID will:  significantly reduce the barriers to cross-border trading of shares and cross-border provision of investment services;  end the monopoly which certain stock exchanges have had on the trading of securities;  create new opportunities for firms, markets and indeed consumers.

11. Effects of MiFID depend on...... the extent to which the various players are prepared to seize the opportunities on offer. If they are prepared to do so, there could be:  a significant increase in competition among exchanges and between exchanges and other trading platforms;  a big increase in stronger cross border trading, and a significant decrease in the cost of capital – benefiting the overall economy and investors;  lower costs for issuers and investors of accessing capital markets and give investors a far greater choice of equities, bonds, etc. to invest in.

12. Provisions of Level 1 MiFID  It abolishes the so called “concentration rule” so that Member States can no longer require investment firms to route orders only to stock exchanges. Therefore, exchanges will be exposed to competition from:  multilateral trading facilities (MTFs), i.e. broadly non- exchange trading platforms, and  ‘systematic internalisers’, i.e. banks or investment firms that systematically execute client orders internally on own account (rather than sending them to exchanges).  MTFs and 'systematic internalisers' will be subject to similar pre- and post-trade transparency requirements as the exchanges. This will ensure a level playing field between the exchanges and their new competitors – and full information on trading activity to the market.

13. Provisions of Level 1 MiFID (continuing) It updates the ‘single passport’ for investment firms, which was first introduced in the ISD and extends the list of services and financial instruments covered to bring it into line with the new market realities. Investment advice is covered for the first time. This reflects modern trends since more and more retail customers are investing in securities and seeking advice from their bank or their broker. This will allow investment firms to provide services across the EU on the basis of a single authorisation from their "home" Member State. At the same time, investor protection rules are strengthened and harmonized at a high level so that investors can feel confident in using the services of investment firms, wherever those firms originate from in the EU. Ensuring investor confidence is critical for pan-European trading to deepen.

14. Level 2 MiFID measures The Commission can only propose "level 2" measures in those areas where the "level 1" Directive specifically gives it the power to do so. The main areas covered are:  conduct of business requirements for firms - their obligation to divide their clients into different categories ("eligible counterparties", "professional" and "retail"), their obligations towards each category of client, their obligation to assess whether the products and services which they provide are "suitable" or "appropriate" for their client and their obligation to secure "best execution" for their clients (i.e. the best possible result with the emphasis on best price for retail investors).

15. Level 2 MiFID measures (continuing)  organisational requirements for firms and markets - compliance, risk management and internal audit functions that operate independently, identification and management of conflicts of interest and limitations on out-sourcing, especially to third countries;  transaction reporting to relevant competent authorities of buy and sell transactions in all financial instruments;  transparency requirements for the trading of shares (i.e. pre- and post trade transparency for regulated markets, MTFs and 'systematic internalisers') to ensure a level playing field between exchanges, MTFs and systematic internalisers for the trading of the most liquid shares in Europe.

16. MiFID vs. ISD Investment services and activities  Investment advice defined as provision of personal recommendations to a client about financial instruments (built in as an important element of investor protection).  Placing of financial instruments without a firm commitment basis.  Operation of Multilateral Trading Facilities – MTF`s (the purpose is to help facilitate competition and at the same time guarantee that all market places are governed by standards which seek to protect market integrity).

17. MiFID vs. ISD Auxiliary services  Investment research and financial analysis or other forms of general recommendation relating to transactions in financial instruments.  Investment services and activities as well as auxiliary services of the type included under Section A or B of Annex 1 related to the underlying of the derivatives included under Section C – 5, 6, 7 and 10 - where these are connected to the provision of investment or auxiliary services.

18. MiFID vs. ISD Financial Instruments  Options, futures, swaps, forward rate agreements and any other derivative contracts relating to securities, currencies, interest rates or yields, or other derivatives instruments, financial indices or financial measures which may be settled physically or in cash.  Options, futures, swaps, forward rate agreements and any other derivative contracts relating to commodities that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event).  Options, futures, swaps, and any other derivative contract relating to commodities that can be physically settled provided that they are traded on a regulated market and/or an MTF.

19. MiFID vs. ISD Financial Instruments (continuing)  Options, futures, swaps, forwards and any other derivative contracts relating to commodities, that can be physically settled not otherwise mentioned in C.6 and not being for commercial purposes, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are cleared and settled through recognised clearing houses or are subject to regular margin calls.

20. MiFID vs. ISD Financial Instruments (continuing)  Options, futures, swaps, forwards and any other derivative contracts relating to commodities, that can be physically settled not otherwise mentioned in C.6 and not being for commercial purposes, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are cleared and settled through recognised clearing houses or are subject to regular margin calls.  Derivative instruments for the transfer of credit risk.  Financial contracts for differences.

21. MiFID vs. ISD Financial Instruments (continuing)  Options, futures, swaps, forward rate agreements and any other derivative contracts relating to climatic variables, freight rates, emission allowances or inflation rates or other official economic statistics that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event), as well as any other derivative contracts relating to assets, rights, obligations, indices and measures not otherwise mentioned in this Section, which 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.

22. MiFID’s impact for the EU accessing countries  opportunity for domestic investment firms to act cross national borders using single passport;  competition between exchanges and other trading platforms will significant reduce transaction costs;  lower costs and cross-border trading will increase liquidity of domestic market;  learn on experiences and mistakes of EU Member States.

23. More information about MiFID  Directive 2004/39/EC on Markets in Financial Instruments  Commission Directive 2006/73/EC of implementing Directive 2004/39/EC as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive  Commission Regulation (EC) No 1287/2006 of implementing Directive 2004/39/EC as regards recordkeeping obligations for investment firms, transaction reporting, market transparency, admission of financial instruments to trading, and defined terms for the purposes of that Directive http://europa.eu.int/eur-lex/

24. Questions?