ESMA Update on MiFID II and MiFIR: Clarification on Foreign Currency Disclosure

3rd January 2024

Introduction:

On 15 December 2023, the European Securities Market Authority (“ESMA”) updated the Q&As on MiFID II and MiFIR investor protection and intermediary topics (the “ESMA Q&A”) to include Q&A 9.35 clarifying on how investment firms should indicate parts of total costs and charges paid in or represented in foreign currency in ex-ante and ex-post costs and charges disclosure.

Understanding Disclosure Obligations under MiFID II and MiFIR:

Investment firms are under the obligation to disclose certain information under Markets in Financial Instruments Directive 2014/65/EU (“MiFID II”) and Markets in Financial Instruments Regulation 600/2014 (“MiFIR”) to ensure transparency.

Article 24(4) of MiFID II and Article 50(3) the MiFID II Delegated Regulation 2017/565 (“MiFID II Delegated Regulation”) require investment firms, as part of their regulatory disclosure obligations, to disclose specific information to clients and potential clients including all costs and related charges. Where any part of the total costs and charges is to be paid in or represents an amount of foreign currency[1], investment firms are required to provide an indication of the currency involved and the applicable currency conversion rates and costs. However, Article 50(3) does not specify how firms should disclose such costs, neither for ex-ante nor for ex-post disclosures.

ESMA Q&A – Disclosure of foreign currency:

The ESMA Q&A clarifies in Section 9 (“Information on costs and charges”) in Q&A 9.35 (“Foreign currency”) how ESMA expects investment firms to indicate the parts of the total costs and charges paid in or represented in an amount of foreign currency in their ex-ante and ex-post costs and charges disclosure:

  • Ex-ante disclosure of costs and charges: Investment firms are required to provide aggregated information that includes costs to be paid in or representing an amount of foreign currency and costs of currency conversion, where applicable. Investment firms should include these costs and charges in the ex-ante costs and charges disclosure in accordance with Q&A 9.13 of the ESMA Q&A. Additionally, investment firms should indicate the currencies involved, the applicable currency conversion rates, and currency conversion costs, irrespective of whether the client has requested an itemised breakdown.

 

  • Ex-post disclosure of costs and charges: Investment firms are required to provide to clients aggregated information at least on an annual basis about all costs and charges related to both the financial instrument(s) and investment and ancillary service(s). In compliance with this requirement, the costs paid in or representing an amount of foreign currencies, and the currency conversion costs incurred must be included by firms in the aggregated amounts of their ex-post cost and charges disclosure.

Please note that in the ex-post cost disclosure, investment firms are not expected to indicate the foreign currencies involved, nor to specify the applied currency conversion rates and costs. Only if clients request an itemised breakdown, firms should disclose the relevant foreign currencies, conversion rates, and related costs. ESMA notes that further information for each individual transaction is required by Article 59(4) MiFID II Delegated Regulation. This includes information on foreign currencies involved and the applicable currency conversion rates.

ESMA Q&A – Aggregation of costs and charges:

In addition, the ESMA Q&A updated Q&A 9.13 (”Aggregation of costs and charges”) outlining the disclosure requirements where firms use an all-in fee noting that the all in-fee should be disclosed under the relevant cost item (for example “ongoing charges”).

Assistance from Zeidler Group:

For comprehensive assistance in navigating these regulatory nuances and ensuring compliance, Zeidler’s Legal Team is available to address any queries or concerns.

Conclusion:

Staying updated on ESMA’s clarifications is crucial for investment firms to align with MiFID II and MiFIR disclosure obligations. Secure your path to compliance with a complimentary consultation led by our expert Legal Team.

[1] For the purpose of the ESMA Q&A, the notion of “foreign currency” depends on the currency of the account and/or the reference currency of the costs and charges disclosure.

Co-Author

Patricia Nitschke

Co-Author

Sabir Musthafa