Complementary

Directive 2014/65/EU, commonly referred to as the Markets in Financial Instruments Directive II (MiFID II) aims to strengthen investor protection, highlighting, among others, the following measures:

• Strengthening the powers conferred on supervisory authorities with regard to the marketing of financial instruments;
• Mandatory registration and preservation of communications with customers in the negotiation of products;
• Imposing more detailed suitability tests prior to the marketing of more complex products and services; and
• Limitation of products considered as "non-complex”.

MiFID II covers the states of the European Union, Iceland, Norway and Liechtenstein.

You can consult the CMVM pages created for this purpose.

There are three categories of investors: Eligible Counterparties, Qualified Professional Investors and Retail Investors. Each category is subject to a presumption of knowledge and experience necessary to make decisions on investments in financial instruments, namely of the implicit risks. For this reason, the law determines the degree of protection in relation to each type of investor, especially regarding the information provided and the analysis of the suitability of the operations or services in relation to the investor. Retail investors enjoy a higher degree of protection and eligible counterparties a lower degree of protection.

Eligible counterparties – The following fall into this category:

• Credit institutions;
• Investment companies;
• Insurance companies;
• Collective investment institutions and their management companies;
• Pension funds and their management companies;
• Other authorised or regulated financial institutions, namely credit securitisation funds, their management companies and other financial companies envisaged by law, credit securitisation companies, venture capital companies, venture capital funds and their management companies;
• Financial institutions of States that are not members of the European Union that carry out activities similar to those referred to in the previous paragraphs;
• Entities trading in commodity financial instruments;
• National governments, central banks and public bodies that manage public debt, supranational or international institutions such as the European Central Bank, the European Investment Bank, the International Monetary Fund and the World Bank.

Professional investors - By default, the following fall into this category:

• Regional governments;
• Legal persons whose size, according to their last individual accounts, meets two of the following criteria:

a) equity of 2 million euros;

b)  total assets of 20 million euros;

c) net turnover of 40 million euros.

For the purposes of the activity of intermediation, persons providing investment services or performing investment activities consisting exclusively in dealing for their own account on forward or spot markets, in the latter case for the sole purpose of hedging positions on derivatives markets, or in dealing or participating in the formation of prices on behalf of other members of those markets, and which are guaranteed by a clearing member acting on those markets, when the responsibility for the execution of the contracts entered into is assumed by one of those members.

Retail investors – includes all investors who do not fit into the criteria defined for the other categories.

The retail client may request to be treated as a professional client. Satisfaction of such a request depends on a prior assessment of their knowledge and experience, which must meet at least two of the following requirements:

a) Have carried out operations of significant volume in the relevant market, with an average frequency of 10 operations per quarter, during the last four quarters;

b) have a portfolio of financial instruments, including also cash deposits, in excess of EUR 500,000;

c) They must work or have worked in the financial sector for at least one year in a position that requires knowledge of the services or operations in question.

In case the application is sent by a legal person, the requirements concerning knowledge and experience will be measured with respect to the respective person responsible for the investment decisions.

The Bank may, on its own initiative, treat any professional client as a retail client, and a professional client may also request to be treated as a retail client.

The Bank may also, on its own initiative or at the clients request, treat an eligible counterparty as a professional client or as a retail client.

For complex operations or services on financial market instruments, the Bank analyses their suitability to the clients profile.

In receiving and transmitting or executing orders, the Bank analyses knowledge and experience for complex financial instruments in which the client is classified as a retail investor.

Regarding portfolio management on behalf of a third party or investment advice activities, the Bank analyses, in addition to knowledge and experience of the services or financial instruments covered, information on the financial situation and objectives of the investment.

• Simple term deposits: deposits with a fixed rate or in which the variable rate is indexed in a simple way to money market indices;
• Structured (complex) term deposits: the remaining ones;
• Non-complex shares: those admitted to trading on a regulated market or on an equivalent market or in a multilateral trading facility, with the exception of shares in collective investment undertakings that are not harmonised and shares that incorporate derivatives;
• Complex shares: the remaining ones;
• Non-complex bonds: bonds or other forms of securitised debt admitted to trading on a regulated market or on an equivalent market or in a multilateral trading facility, excluding those that embed derivatives or whose structure makes it difficult to understand the risks involved;
• Complex bonds: the remaining ones;
• Non-complex investment funds: units and shares in undertakings for collective investment in harmonised securities, excluding undertakings for collective investment in structured harmonised securities;
• Complex investment funds: the remaining ones;
• Non-complex money market instruments: those which do not incorporate derivatives or whose structure makes it difficult to understand the risks involved;
• Complex money market instruments: the remaining ones.

EMIR is the EU Regulation No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (EMIR - European Market Infrastructure Regulation)

EU Delegated Regulations Nos 148/2013, 149/2013, 150/2013, 151/2013, 152/2013 and 153/2013 on regulatory technical standards entered into force on 15 March 2013.

The EMIR covers all financial companies authorised in the EU and non-financial companies established in the EU. It also covers non-financial companies established in third countries that would be subject to mandatory clearing if they were based in the EU.

The classification of counterparties in OTC derivative trading as Central Counterparties (CCP), Financial Counterparties (FC) or Non-Financial Counterparties (NFC);

Obtaining a Legal Entity Identifier (LEI) for financial and non-financial counterparties;

The obligation to clear all transactions in certain classes of derivatives;

The obligation to clear all transactions in certain classes of derivatives;

The conclusion of a written protocol between all covered counterparties on reconciliation and dispute resolution procedures;

The registration of all trading executed on derivatives in a trade repository approved by ESMA;

The existence of risk reduction procedures in derivative trading not subject to the Clearing obligation.

As the LEI system is not yet complete, it is possible to obtain a pre-LEI through the approved Local Operating Units (LOU) listed in the following link:

To assist you, a guide is available for requesting a pre-LEI through the LOU that Banco Carregosa used to obtain one.

Entities that interpose themselves in one or more markets, betwen the counterparties to the contracts traded, becoming the buyer to every seller and as seller to every buyer.

(i) investment firms authorised under Directive 2004/39/EC;

(ii) credit institutions authorised in accordance with Directive 2006/48/EC;

(iii) insurance undertakings authorised in accordance with Directives 73/239/EEC and 2002/83/EC;

(iv) reinsurance undertakings authorised in accordance with Directive 2005/68/EC;

(v) undertakings for collective investment in transferable securities and, where applicable, their management company authorised pursuant to Directive 2009/65/EC;

(vi) institutions for occupational retirement provision within the meaning of Article 6(a) of Directive 2003/41/EC; or

(vii) Alternative investment funds managed by a management entity authorised or registered in accordance with Directive 2011/61/EU.

All companies not considered as central counterparties or financial counterparties under EMIR established in the EU.

The process of establishing positions, including the calculation of net obligations, and ensuring the availability of the financial instruments, cash or both to ensure compliance with the exposures arising from those positions.

Regulatory technical standards are not yet fully finalised on clearing obligations. ESMA is expected to report on this issue by 15 September 2014.

For classes of derivatives subject to the clearing obligation, it will be necessary to clear all transactions entered into by a financial counterparty or by a non-financial counterparty that exceed the position threshold established for this purpose.

If a non-financial counterparty maintains positions in a class of derivatives, which exceeds the respective threshold, it will be obligated to clear its transactions. The thresholds currently defined by ESMA are as follows:

EUR 1,000,000,000 in Credit Derivatives

EUR 1,000,000,000 in Equity Derivatives

EUR 3,000,000,000 in Interest Rate Derivatives

EUR 3,000,000,000 in Foreign Exchange Derivatives

EUR 3,000,000,000 in Other Derivatives, namely Commodities

The relevant figure for this purpose is calculated as the average of the gross notional values, by class of derivative, over the last 30 days.

Within a class it is possible to exempt some positions, namely those intended to hedge risk, accounted for as such, or related to intra-group transactions, in accordance with the regulatory technical standards.

Under EMIR, counterparties to derivative transactions must establish written agreements specifying their capacity for the purposes of reconciliations. Under the agreement submitted, Banco Carregosa takes responsibility for sending the information and the client takes responsibility for reconciling the transactions reported against its internal records.

The minimum periodicity of the reconciliation depends directly on the number of transactions carried out by the client with Banco Carregosa.

The dispute resolution agreement establishes the relevant place for the purpose of determining the business day.

This agreement also sets out the contact details for portfolio information, reconciliation discrepancies and dispute resolution.

You can report it yourself or hire a third party to do it for you. If you choose the first one, you will have to hire a repository approved by ESMA. The annual costs of this service are high, so it may not be worthwhile for clients with few positions.

You can also delegate this task to Banco Carregosa or another entity that provides this service.

EMIR applies to financial and non-financial counterparties, i.e. companies established in the EU, when trading and maintaining positions in derivatives other than securities.

If you are covered by EMIR, both by its nature and its operations you should:

Sign the protocol for compliance with obligations regarding OTC derivatives;

Get a LEI;

Ensure that reconciliation and dispute resolution procedures are in place as well as risk reduction procedures.

It is a written agreement where:

• Procedures are established for reconciliation and dispute resolution between Banco Carregosa and the client;
• Whether it allows the delegation to Banco Carregosa of the obligation to report transactions and positions to the Trade Repository; and
• The Client indicates its LEI and its counterparty type.

By default, the contract states:

• The delegation of the reporting obligation;
• That the operations executed by the client are not directly related to its commercial activity or treasury management;
• Portugal, as the place for counting time limits relating to dispute resolution, with regard to time zones and business days; and
• The contacts for portfolio information and notification of discrepancies/resolution of disputes, such as the contacts indicated in the account opening process.
• Nevertheless, the client may define a different operation when filling in Annex I.
• The Guide for International Entity Identifier can be obtained here.

Counterparties with more than 500 open positions not cleared with a single counterparty will be obliged to have a portfolio compression analysis and execution procedure to be carried out every six months. Namely, this procedure includes the analysis of the closing out of long positions held in parallel with short positions.

The information provided by Banco Carregosa does not replace the need to consult  EU Regulation No. 648/2012,  or the Delegated Regulations and their regulatory technical standards.

CMVM and Banco de Portugal’s explanatory note on the EMIR, ESMA’s FAQs, and ESMA’s webpage on the EMIR ae available to you for consultation.

FATCA stands for Foreign Account Tax Compliance Act which was passed on 18 March 2010 as part of the Hiring Incentives to Restore Employment Act, and currently corresponds to Chapter 4 of the Internal Revenue Code of the United States of America.

The Final FATCA Regulations were published by the IRS on 17 January 2013.

The primary purpose of FATCA is the prevention of tax avoidance in respect of income earned outside the United States by US taxpayers who are not exempt from tax.

FATCA rules require that Foreign Financial Institutions (FFIs) make a formal commitment directly to the Internal Revenue Service (IRS), or indirectly via the national tax authorities (formalised by the signing of an Intergovernmental Agreement), and become a participating FFI, which entails identifying and reporting annually all the accounts of their clients who are US citizens or residents. Non-participating FFIs are subject to a penalty withholding payment.

FATCA came into effect on 1 July 2014.

Although Portugal has not yet signed the Intergovernmental Agreement (Model 1 IGA) with the US, it has agreed substantively to it, which means that Portugal does benefit from the same treatment as countries that have already signed the bilateral agreement.

This agreement simplifies the implementation of FATCA, removing most of the withholding obligations (maintaining the withholding only for payments made to non-participating FFIs) and facilitating the reporting obligations, which will now be made to national tax authorities, under yet-to-be-defined conditions.

Banco Carregosa will therefore have to classify its clients (individuals and companies) and their accounts, according to the categories set out under FATCA.

1. Opening New Accounts: During the account opening process, information will be requested to ascertain the FATCA status of clients and accounts. This information will complement information already collected through the Know Your Customer process.

2. Accounts opened before 1 July 2014: To ensure the correct classification of existing clients and accounts, it may be necessary to request clarification or additional information.

It should be noted, however, that only detailed information regarding accounts classified as US Accounts and Recalcitrant Accounts will be reported to the relevant authorities.

Definitions

• US Person: A US Person includes: 

US citizens, including holders of dual citizenship and US passports, even if they reside outside the USA.

Persons born in the USA, except those who have renounced their citizenship.

Permanent residents in the United States of America (including Green Card holders) or those who have a substantial presence in the USA (having resided there at least 183 days during the last 3 years, with specific rules for determination of residence).

Entities incorporated under US law.

•  US Account: A US Account is any financial account in which at least one of the holders is a US Person, even if the other account holders are non-US Persons.

In addition, any account held by a Passive NFFE with beneficial owners who are US persons and who directly or indirectly own 25% or more of the companys share capital (a Substantial US Owners) will also be treated as a US Account.

• Non-Financial Foreign Entity (NFFE): An NFFE (with some exceptions) is any non-US entity that is not an FFI. NFFEs are divided into:

• • Active NFFEs – Entities whose gross income earned in the previous year consists of less than 50% "passive income”, i.e., dividends, interest, rents and royalties (provided that rents and royalties do not arise from actively conducting an activity or business), or annuities - and where less than 50% of their assets generate or are deemed to generate passive income; and
  • Passive NFFEs – Entities where more than 50% of the gross income relates to passive income (i.e., dividends, interest, rents and royalties).

• US FDAP – Any income from a US source income, which is Fixed, Determinable, Annual or Periodic ("FDAP"), including:

• • Interest, dividends, rents, royalties, premiums, fees, commissions, etc.
  • Income arising from total return equity swaps and securities lending
  • Interest paid by a branch of a US bank
  • Interest on bank deposits and portfolio interest.