On 3 October 2017, ESMA published an updated version of its MiFID II Investor Protection Q&A. ESMA has provided additional updates on a number of topics relevant to members, including:

• Best execution – ESMA has clarified that in the situation of a firm using DEA services provided by an intermediary, the firm should list the intermediary in their RTS 28 report. Acknowledging that the intermediary does not have an discretion as to the venue where the order is execution, it should classify such trades as ‘directed orders’ in its own RTS 28 report. ESMA has indicated that firms should include details of the venues they select in these circumstances, in the part of their RTS 28 report assessing the quality of execution they achieve, including details of any factors that impact their choice of venue.
• Record keeping – ESMA has provided some commentary on the scope of the recording of communications under Article 16(7). They have confirmed that the requirements under Article 16(7) and Article 76 of the Delegated Regulation apply ‘at least’ to the provision of (1) reception and transmission, (2) execution of orders, or (3) dealing on own account. However, the second subparagraph under Article 16(7) also requires ‘those conversations and communications that are “intended to result in” the provision of these services to be recorded. ESMA provides the example of the provision capturing conversations related to a different service being provided (e.g. investment advice), where it is intended to result in client order services.
• Post-sale reporting – In relation to 10% depreciation reporting obligation, ESMA provides that firms should be able to agree with the client that this assessment occurs on an aggregated basis, for example, on ‘the overall value of the portfolio’, or ‘the global value of all leveraged financial instruments or contingent liability transactions in the portfolio’. The client must provide express consent and have the capacity to terminate the agreement. ESMA states that firms cannot agree a higher threshold – it’s set at 10%.
• Costs and charges – ESMA has said that, in calculating ex-ante costs, firms should use actually incurred costs as a proxy for calculating expected costs and charges, but the firm should ensure those costs are an accurate representation of future costs taking into account expected changes in broker charging structures or changes in market liquidity that would impact ongoing transaction costs. Where actual costs are not available, firms should use a reasonable estimation and disclose the basis for the estimation to clients. ESMA gives the example of the PRIIPs method, but doesn’t prescribe it. There’s a number of additional Q&As on costs and charges, available from page 72 of the document, including (but not limited to): disclosure of mark-ups and structuring costs embedded I the transaction price; agreeing limitations to the cost transparency regime with professional clients and eligible counterparties; and the timing of annual ex-post disclosures to clients.
• Client categorisation – In relation to notifying clients of their categorisation, EMSA has clarified that this is only necessary for new clients or for those clients whose categorisation has changed under MiFID2.

If members have any questions, please contact Adam Jacobs-Dean, Oliver Robinson or Adele Rentsch.