MiFID Firms & Services

The Malta Investment Services Act does not include a definition of what an “investment” is. Instead it includes a list of Investment Services or Markets in Financial Instruments Directive (MiFID) Services as well as a list of Instruments. The provision of an Investment Service in relation to an instrument triggers a requirement for the obtainment of an Investment Services Licence from the MFSA.

Investment Services Instruments

The “instruments” listed in the Second Schedule to the Act are the following:

1. Transferable Securities

Classes of securities which are negotiable on the capital market and include:

2. Money Market Instruments

Those classes of instruments which are normally dealt in on the money market, such as treasury bills, certificates of deposit and commercial papers and excluding instruments of payment.

3. Units in collective investment schemes

Any representation of the rights and interests of participants in a collective investment scheme.

The ISA provides that a ‘collective investment scheme’ means any scheme or arrangement which has as its object or as one of its objects the collective investment of capital acquired by means of an offer of units for subscription, sale or exchange and which has any of the following characteristics: -

• the scheme or arrangement operates according to the principle of risk spreading; and either
• the contributions of the participants and the profits or income out of which payments are to be made to them are pooled; or
• at the request of the holders, units are or are to be re-purchased or redeemed out of the assets of the scheme or arrangement, continuously or in blocks at short intervals; or
• units are, or have been, or will be issued continuously or in blocks at short intervals:

Provided that an alternative investment fund that is not promoted to retail investors and that does not have the characteristic listed in paragraph (a) shall only be deemed to be a collective investment scheme if the scheme, in specific circumstances as established by regulations under this Act, is exempt from such requirement and satisfies any conditions that may be prescribed.

The ISA establishes the below legal forms when structuring a Malta UCITS Scheme:

1. An investment company with variable share capital (SICAV);
2. A Limited Partnership (LP) whose share capital is divided into shares;
3. A Unit Trust in terms of the Trusts & Trustees Act; or
4. A Contractual Fund, otherwise referred to as fond commun de placement in Civil Law jurisdictions.

Malta UCITS Schemes may also be set up as Incorporated Cells (ICs) within a Recognised Incorporated Cell Company (RICC). Should this be the case, the UCITS IC may benefit from the flexibility of such a platform as outlined by the Companies Act (Recognised Incorporated Cell Companies) Regulations of the Laws of Malta.

4. Derivatives for the transfer of credit risk

A financial instrument whose characteristics and value depend upon the characteristics and value of an underlying financial instrument such as a bond, share or currency. Futures and options are examples of derivatives. Professional investors may purchase or sell derivatives to manage the risk associated with the underlying financial instrument, to protect against fluctuations in value, or to profit from periods of inactivity or decline. Derivatives are complicated and risky, and not usually available to retail investors.

5. Rights

Rights under a contract for differences or under any other contract the purpose or intended purpose of which is to secure a profit or avoid a loss by reference to fluctuations in the value or price for property of any description or in an index or other factor designated for that purpose in the contract.

6. Various types of derivatives

Options, futures, swaps, forward rate agreements and any other derivative contracts relating to securities, currencies, interest rates or yields, emission allowances or other derivative instruments, financial indices or financial measures which may be settled physically or in cash.

Options, futures, swaps, forwards 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 other than by reason of default or other termination event.

Options, futures, swaps, and any other derivative contracts relating to commodities, that can be physically settled provided that they are traded on a regulated market, within the meaning of the Financial Markets Act a Multilateral Trading Facility, or an Organised Trading Facility, except for wholesale energy products traded on an Organised Trading Facility that must be physically settled.

Options, futures, swaps, forwards and any other derivative contracts relating to commodities, that can be physically settled, are not for commercial purposes, are not included in the aforementioned paragraph, and, which have the characteristics of other derivative instruments.

Options, futures,  swaps,  forward  rate  agreements  and  any other derivative contracts relating to climatic variables, freight rates 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 other than by reason of 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 Schedule, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are traded on a regulated market, OTF, or an MTF.

7. Certificates

Certificates or other instruments which confer property rights in respect of any instrument falling within the First Schedule of the Investment Services Act (‘ISA’).

8. Foreign exchange acquired or held for investment purposes

Foreign Exchange is also known as ‘FOREX’, ‘FX’ or ‘the currency market’ and is the market in which all world currencies are traded. The foreign exchange market is “decentralised” meaning that it is an international network with no fixed, physical location. It is an over-the-counter (OTC) market where brokers and dealers (‘intermediaries’) negotiate directly with one another.

What is MiFID? And what is the difference between MiFID I and MiFID II?

The Markets in Financial Instruments Directive (2004/39/EC), or as commonly known as MiFID, is a European legislative framework that aims to ensure a high degree of harmonised protection for investors in financial instruments and to improve the functioning of financial markets in a more efficient and transparent manner by creating a single market for investment services. The Directive has been applicable across the European Union since November 2007, replacing the Investment Services Directive. It is interesting to note that MiFID’s requirements apply to EU based firms, no matter where their clients are located and irrespective of where the relevant instrument may be listed or traded. In this respect, MiFID is refreshingly non-extraterritorial and its conduct rule protection measures do not apply even to business conducted by non-EU branches of EU firms.[1]

MiFID sets out the following:

• conduct of business and organisational requirements for investment firms;
• authorisation requirements for regulated markets;
• regulatory reporting to avoid market abuse;
• trade transparency obligation for shares; and
• rules on the admission of financial instruments to trading.

In 2011, the European commission sought to revamp MiFID I which took the form of a revised Directive 2014/65/EU (MiFID II) and the Regulation on Markets in Financial Instruments (MiFIR). The latter two legislative instruments were both published in the EU official Journal in June 2014, and have since repealed the MiFID I upon entering into force in January 2018.

Together, both legal instruments form the legal framework governing the requirements on product governance and independent investment advice to strengthen investor protection applicable to investment firms, regulated markets and data reporting services providers. New reporting requirements and tests increase the amount of information available and reduce the risk of dark pools and Over-The-Counter (OTC) Trading.

[1] Only in exceptional circumstances does MiFID deliberately change this position, for instance, MiFID requires non-EU branches of EU investment firms to submit transaction reports to EU regulators.

MiFID II applies to investment firms, market operators, data reporting services providers and third country firms providing investment services or performing investment activities through the establishments of a branch in the union. Moreover, the Directive also establishes requirements in relation to the following:

• authorisation and operating conditions for investment firms;
• provision of investment services or activities by third-country firms through the establishment of a branch;
• authorisation and operation of regulated markets;
• authorisation and operation of data reporting services providers.

Maltese legislation has transposed the MiFID II directive in the Investment Services Act (Chapter 370 of the Laws of Malta) (ISA) and its respective Rules and Regulations. The ‘Investment Services Rules for Investment Services Providers, Part BI: Rules Applicable to Investment Services Licence Holders which Qualify as MiFID Firms’ lays down prudential and organisational requirements together with regulating record keeping, reporting and disclosure conditions.

The application process usually commences with a formal meeting with the MFSA in order to discuss the projected application before the formal submission of the application documents. The Application process and the ongoing requirements to which licences issued under the

ISA are subject can be divided into three stages:

1. The Preparatory Stage – including a meeting with the Authority, submission of a draft Application Form & supporting documentation, review by the MFSA, delineation of the Standard License Conditions to be applied to that particular Applicant by the Authority;
2. The Pre-Licensing Stage – issuance of an ‘in principle’ approval for the license by the Authority, incorporation of the corporate vehicle, submission of final & signed application form & supporting documentation, other documents arising during the application process; and
3. The Post-Licensing/Pre-Commencement of Business Stage – satisfaction of ad hoc requirements arising post licensing but pre-commencement of business.

Investment Services Licence Categories

How can CSB Group help?

CSB Group provides clients with professional assistance with the requirements emanating from MiFID. As leaders in the Financial Services sector, we provide comprehensive consultancy and support service throughout the entire application procedure, establishment of the appropriate company/ies required to conduct the operation/s in Malta and post-licensing support.