With EU contribution Arrangements and procedures on the

With EU contribution “Arrangements and procedures on the sales of financial products” (VS/2010/0737 )” The magma of Mi. FID 2: financial crisis and regulatory remedies Domenico Iodice – APF FIBA Research Dept. 1

We are on the mouth of the volcano • The optimism about the functioning of markets, able to regulate themselves, is the postulate of Mi. FID • The EU governance model gives emphasis on the "shareholder value". It has failed the objective of risk control and promotion of sustainable This philosophy has been refuted by the facts: with the global financial crisis still going on, it collapsed the development in the long term. context of Mi. FID, which is based 1. • The EU company law, in particular based on "soft law" in the regulation Domenico Iodice – APF FIBA Research Dept.

Mi. FID 2: Exogenous and endogenous causes • The profound changes that have occurred just after the date of entry into force of Mi. FID is due to causes entirely exogenous (the crisis) but also endogenous (model inadequate development): • The basic objectives were the transparency, efficiency and cost reduction. The current system is We do not talk so to reform the securities, transparent in its intricacies, it does not but markets give efficient application in the light of Domenico Iodice – APF FIBA Research Dept.

Mi. FID 1 was born already old • When Mi. FID came into force, financial markets were substantially transformed by technological development, new types and trading venues and innovative products that are soon revealed gaps and inconsistencies in the application of the Directive across the European Union Domenico Iodice – APF FIBA Research Dept.

• The liberalizations have failedof concentration in regulated The Mi. FID has abolished the requirement markets, has introduced new forms of exchange (MTFs and systematic internalisers), has redesigned the obligations of execution of customer orders at the best (best execution), requiring the intermediary: a) a greater knowledge of the customer (customer profiling), b) based on the risk profile of each customer, to assess the best approach to investing c) a greater effort to achieve transparency. The primary objective of the Mi. FID Directive, enacted just to break the monopoly of traditional exchanges and to provide investors with more efficient prices, has not been fully achieved. Besides, several Italian banks are not connected with alternative platforms. • The reason is that in Italy the stock market already offers traditional transaction cost competitive, so for intermediaries is not worth it to connect with the alternative lists. They had to Domenico Iodice – APF FIBA Research Dept. reduce transaction costs and allow

"Every man for himself" is the concern of the Commission • With Mi. FID 2 we will try to fill the pockets of dis-harmonization that has left the Mi. FID 1. Action is necessary because the legal system of the Mi. FID is older than the great financial crisis • The concern of the Commission is the risk that issues of individual member states do on their own, without legislation to comply Domenico Iodice – APF FIBA Research Dept.

The craters and the cracks of the volcano • The "best execution" has never been applied, because the brokers do not make hardly any sales channels available to customers • The "execution only" does not quite get over the hurdle of the classification as "advisory" and thus excludes legal indemnification for companies. • In reality, the alternative stock, the in the The truth is that traders do not yet have full confidence reliability of the prices of the MTF. Multilateral trading facilities (MTF), are Domenico Iodice – APF FIBA Research Dept. born in all countries, but not entirely

The Community legislative framework • This review comes on the eve of the transposition of Directive UCITS IV (should be 1 July 2011). It profoundly reforming Community legislation on UCITS (undertakings for collective investment in transferable securities). Member States must implement it at national level by 1 July 2011. • There is a substantial difference: the UCITS IV Directive creates a common market funds, while Mi. FID 2 still talks Domenico Iodice – APF FIBA Research Dept.

What's happening? • Consultations have been undertaken for a Mi. FID 2. There actually only the first reflections of a consultation document (submitted in December by the EU Commission), which calls for a revision of the directive, but we are still in the prodromal phase. • In this first solicitation many people have responded: the treasure of English, German or French have already done. According to rumors, there would be disclosed the • Brussels has to relateyet behind this decision the not directly to the national choice of the regulator government of participants in identityand only after the Community legislature consultations, but neither the Domenico Iodice – APF FIBA Research Dept. Department of 'Economics or the

What will happen in Italy and anywhere else. . . ? • The Council will then, to call into question directly to the Italian state and, therefore, the other European actors involved. Although it must be said that Italy seems to be an advantage on some issues because the holes left by the MIFID 1 were closed for a few verses from the legislation of the second level, namely by implementing regulations. • Elsewhere it was not so. The system SOCALLED "Mi. FID-compliant", not developed “We do not believe that increased usage of dark in other national laws, has left the market pools entirelyimpedes markethimself. we have postuled to fend for quality and Domenico Iodice – APF FIBA Research Dept. that it may improve market efficiency… ”.

The emergency plan (out of time) • Recently (December 8, 2010), the European Commission Internal Market and Financial Services has launched a consultation process, presenting its proposals for revision of Mi. FID, three The plan is divided into several years after its entry into force. points, in response to various critical • Proposals for legislative review are expected in the first half of 2011 Domenico Iodice – APF FIBA Research Dept.

a) Market transparency • Transparency understood as availability of market data (including data pre-and posttrade) is considered crucial question: All participants must have equal access to information, to evaluate objectively and in conditions of equal trading opportunities • This transparency also facilitates the formation of prices and promotes market liquidity • Currently, the Mi. FID transparency rules Domenico Iodice – APF FIBA Research Dept. cover only those actions. The

b) Commodity derivatives market • The Commission asked what measures could be taken to mitigate the concerns regarding the functioning of derivatives markets and their impact on the volatility of commodity derivatives prices. • It also asks how to improve information flows, such as reporting requirements may be needed. • The revision of the Mi. FID is also designed to complement other ongoing Domenico Iodice – APF FIBA Research Dept.

c) Investor protection • There also a number of proposed changes to the business obligations. These include the fact that not all the UCITS will be automatically classified as non-complex products in the future. • The Commission seeks to impose a more precise definition of what constitutes "non-complex" in the only execution system (execution only). • With regard to investment advice, Domenico Iodice – APF FIBA Research Dept.

d) Supervision • Finally, the Commission seeks the implementation of various activities and supervision of participants and emphasizes the role of ESMA (European Securities and Markets Authority) to ensure better control of the markets. • ESMA is an independent European Union that helps to safeguard the stability of the financial system of the Domenico Iodice – APF FIBA Research Dept. European Union, ensuring the integrity,

The consultancy. Proposals and questions • Among the topics touched by the review of Mi. FID (market and intermediary) is the subject of consultation. • The European Commission appears to establish in these early reflections that we can talk only if an independent consultancy, that is to say that the guarantor can not demand incentives of any kind. The only compensation permitted is what the customer is willing to pay. In short, from Domenico Iodice – APF FIBA Research Dept.

Consequences. The Italian experience • It is proposed to affect the rules on agents' behavior, in particular, to distinguish independent financial advice that relates to the products of the house broker. Paid by the intermediary, then, is proposed to introduce a principle of liability for damage caused by the noncompliance with Mi. FID rules. • Italy on this issue seems an advantage because the holes left by the MIFID 1 have been closed by the Domenico Iodice – APF FIBA Research Dept. legislation of the second level, ie by

New services. . . but regulated • Current solutions relate to the regulated markets (objectively less and less used), multilateral systems (some of which in fact turned into a sim such as managed investment services) and internalisers systematic, transparent and just generally preferred for their ability to manage warehouses domestic securities, which are generally unlisted and carriers of potential conflicts of interest. Domenico Iodice – APF FIBA Research Dept.

New platforms • From now on, the operator of a crossing network will be subject to transparency requirements and, at the end of the day, should at least exhibit number, value and volume of trade. More generally Organised trading facilities will become an investment service, subject to specific authorization • The goal is to reduce the fragmentation of the equity trading triggered by Domenico Iodice – APF FIBA Research Dept.

Not markets but… Global services • The draft directive does not assume as markets but as investment services, licensed for single sim, so as to monitor the transparency and force them to turn to when markets do not have adequate storage. • By contrast, the OTC markets (especially those for derivatives) are waiting rules delegated longer to FSB than to Mi. FID. It is so harmless a Domenico Iodice – APF FIBA Research Dept. regulation that is not the global

The rules of the HTF • In the same direction are also new rules on High Frequency Trading (ie automated orders generated in large numbers from a computer via an algorithm). • Currently, high-traders are not subject to certain limitations • • With Mifid 2, passed a threshold of exchanges will be subject to specific regulation. Must retain control systems to mitigate risks and to notify authorities of the algorithms used. . The aim is to introduce rules when volumes rise beyond default quota. In this way, transparency will be given to so-called "dark pools" of liquidity, including in recent years have grown particularly the Domenico Iodice – APF FIBA Research Dept. "crossing networks" that escape any detection (intermediaries are

HFT: Commission proposals • - All those involved in HFT should be approved and monitored under the Mi. FID (currently applies a derogation from the Directive); - Companies involved in all forms of automated trading tools should have risk controls to reduce the possibility of system failures or rogue algorithms and filters to detect errors or attempted misuse of the facilities; • -Trading venues should strengthen Domenico Iodice – APF FIBA Research Dept.

A Stock for SMEs. • A news is also represented by the French proposal for a specific segment of the Stock Exchange for small and medium-sized enterprises, with fewer regulatory burdens • It seems difficult to the effective development of an enlarged market for SMEs, now lying assumptions for over 20 years and never implemented in terms of efficiency. Domenico Iodice – APF FIBA Research Dept.

To align organizational requirements • Another objective: align the organizational requirements of the MTFs to those (higher) of the regulated markets. • In this way the European Commission intends to correct a difference in treatment complained several times from the bags. With the same purpose, the consultation paper proposes that as much The proposed revision of the Mi. FID Directive aims to eliminate as possible the use of transparent the so-called Specialization exemption. platforms Domenico Iodice – APF FIBA Research Dept. market for trade outside the

The Compliance function • - The three functions of internal audit should report directly to the board of directors; - The removal of officials responsible for internal control functions should be subject to prior approval by the Board; - Must be provided for the specific involvement of the compliance function in the process of managing customer complaints, and in particular: ---- A periodic report of the compliance function must summarize the complaints made by customers and their treatment, and --- based on the evaluation of the functioning of internal policies and procedures, including assessment of staff behavior, the periodic report should also contain proposals to remedy any deficiencies - Rules should be introduced for the management of derivatives. According to the Commission, due to the growth of derivatives and commodity derivatives in particular, increased vigilance is needed in this area. This means that the authorities will be given the power to intervene at any time during the life of a derivative contract. Domenico Iodice – APF FIBA Research Dept.

The powers and tools • The depth and breadth of operational powers proposed to be given to the Commission or ESMA, must be considered carefully. In particular, the opportunity to be assessed: • a ban on the provision of investment services and investment activities for the realization of certain financial instruments. Domenico Iodice – APF FIBA Research Dept.

the penalties • When the Commission considers that the competent national authority has taken steps to address a threat to the orderly functioning and integrity of financial markets or the stability of all or part of the financial system, from the distribution of a product or This proposal for devolution of power from service of an activity, or that the Member States to the European institutions may measures taken do not give sufficient also raise constitutional issues (due to excessive limitation of state sovereignty). answers to the threat, a mechanism will be established at EU level may Domenico Iodice – APF FIBA Research Dept. temporarily prohibit the distribution

The other side of the coin • While waiting to know in the coming months, the provisions contained in the final version of the above proposals and to identify the exact scope of application, you can assume that, if on the one hand, outlined the new framework will have the positive effect of Domenico Iodice – APF FIBA Research Dept. reducing the risk