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MiFID Man’s guide to MiFiD II: Something you must know if you’re trading in Exchange Traded Assets

There’s something every adviser should know: if you’re considering trading in Exchange Traded Assets (ETAs) next year, the rules are changing.

In a bid to reduce fraud and aid the overall security of investors’ assets, MiFID II, which is set to be introduced on 3 January 2018, will introduce a new set of standards for those investing into ETAs.

In particular, a ‘transaction reporting’ component of the new legislation states providers and platforms must capture both Legal Entity Identifiers (LEIs) and national identifiers for those trading in ETAs.

From a provider/platform point of view, it is important to know who the ‘beneficial owner’ of the ETA is, and who the ‘decision maker’ is in respect of the transaction. 

Where an adviser doesn’t have discretionary powers and is acting on behalf of a client, Zurich views the decision maker as the adviser’s client.

So, what do advisers need to consider?

Legal Entity Identifiers (LEIs)

Where an adviser holds discretionary powers in the same way as a DFM, MiFID II requires providers like Zurich to identify them as the ‘decision maker’ in relation to the trading of ETAs, if they have elected to use those FCA permissions with those clients.

This will require advisers with discretionary powers to obtain an LEI to enable Zurich and others to fulfil their obligations of correctly reporting the transaction to the regulator.

The good news is these are readily available from the London Stock Exchange; the bad news is they cost an initial £115 plus an annual licence fee of £70 (both exclusive of VAT).

National identifiers

The regulations also require providers to ask a client whether they have more than one nationality. This will be a mandatory question for Zurich (replacing the existing ‘nationality’ field), regardless of whether the client intends to invest in ETAs or not.

Whether the answer to the multiple nationality question is ‘yes’ or ‘no’, advisers may then have an optional question to complete which requests a prescribed national identifier for that client.

What is a prescribed national identifier, I hear you ask? Well, the truth is it will be different for each country. For example, it could mean advisers need to obtain a copy of a client’s national ID card. In the UK, the national identifier required is the client’s NINO and is already held by Zurich. For some nationalities, no further information may be requested.

If the national identifier questions are displayed on the platform, they are not mandatory and advisers will be able to skip the question, although they will be notified that their client will not be able to trade in ETAs until a national identifier is provided.

Trustee investments and National identifiers

  • Where the investment is from a SIPP provider the regulation requires providers to look through the SIPP to the beneficiary member. Therefore national identifiers will be required for the member.
  • Where the investment is from an existing family trust with individual trustees (not a corporate trustee), national identifiers will be required for each trustee.
  • Where the investment is from an existing family trust with a corporate trustee appointed to look after the settlor(s) affairs, a LEI is required for the corporate trustee.

Summary

The new requirements apply to existing as well as new investors, so advisers will need to update their platform with additional information to allow trading in ETAs to continue.

Zurich will be carrying out an exercise before the end of the year to request the information from any clients currently invested in ETAs, so that they will be able to trade seamlessly.

While this regulation appears onerous, currently less than 1% of clients hold ETAs on the Zurich Intermediary Platform. The 99% need not be concerned until the moment they wish to trade in ETAs.

Should existing clients decide to invest in ETAs in the future, advisers will need to answer the multiple nationality and national identifier questions before they can proceed.