### Summary of CESR Consultation Paper on MiFID Complex and Non-Complex Financial Instruments

**Source**: CESR Consultation Paper, MiFID complex and non-complex financial instruments for the purposes of the Directive’s appropriateness requirements, published May 14, 2009, by the Committee of European Securities Regulators (CESR), available at [ESMA website](https://www.esma.europa.eu/sites/default/files/library/2015/11/09_295.pdf).

**Purpose**: The paper clarifies the classification of financial instruments under the Markets in Financial Instruments Directive (MiFID) as complex or non-complex for the appropriateness test, which applies to non-advised investment services (e.g., execution-only transactions). This distinction determines whether firms must assess a client’s knowledge and experience to ensure the product is suitable, particularly for retail clients.

**Key MiFID Requirements**:
- **Suitability Test** (Art. 19(4), Level 1; Arts. 35, 37, Level 2): Applies to investment advice or portfolio management, requiring firms to assess client knowledge, experience, financial situation, and objectives.
- **Appropriateness Test** (Art. 19(5), Level 1; Arts. 36, 37, Level 2): Applies to other investment services (e.g., execution or transmission of orders), requiring firms to evaluate client knowledge and experience for specific products. If deemed inappropriate, a warning must be issued.
- **Execution-Only Exception** (Art. 19(6), Level 1; Art. 38, Level 2): For certain non-complex instruments, firms can provide services without the appropriateness test if the service is client-initiated, the client is informed of limited protections, and other conditions are met.

**Instrument Classification**:
- **Non-Complex (Art. 19(6), Level 1)**:
  - Shares admitted to trading on a regulated market or equivalent third-country market.
  - Money market instruments (e.g., treasury bills, certificates of deposit, commercial paper) not embedding derivatives.
  - Bonds or other securitized debt not embedding derivatives (e.g., traditional corporate/government bonds, traditional covered bonds).
  - UCITS (Undertakings for Collective Investment in Transferable Securities).
- **Other Non-Complex (Art. 38, Level 2)**: Instruments not listed in Art. 19(6) may be non-complex if they meet four criteria:
  1. Not a derivative or security giving rights to acquire/sell transferable securities or cash settlement based on indices (Art. 4(1)(18)(c) or Annex I, Section C(4)-(10)).
  2. Frequent opportunities to sell/redeem at publicly available prices (market or independent valuation).
  3. No liability exceeding the acquisition cost.
  4. Comprehensive, understandable public information available.
- **Complex**: Instruments embedding derivatives (e.g., convertible bonds, structured covered bonds, asset-backed securities), derivatives (e.g., options, futures, swaps), or those failing Art. 38 criteria.

**Key Instrument Categories**:
1. **Shares**:
   - **Non-Complex**: Ordinary/preference shares on regulated markets.
   - **Complex**: Convertible shares, subscription/nil-paid rights, shares not on regulated markets, depositary receipts, stapled securities.
2. **Money Market Instruments, Bonds, Securitized Debt**:
   - **Non-Complex**: Treasury bills, certificates of deposit, commercial paper, traditional bonds, traditional covered bonds (without derivatives).
   - **Complex**: Instruments embedding derivatives (e.g., credit-linked notes, convertible/exchangeable bonds, callable/puttable bonds, Spanish participaciones preferentes), asset-backed securities (e.g., mortgage-backed securities, CDOs), structured covered bonds.
3. **UCITS and Collective Investments**:
   - **Non-Complex**: All UCITS, regardless of underlying assets.
   - **Complex**: Non-UCITS (e.g., hedge funds, real estate funds) unless they meet Art. 38 criteria. Investment in derivatives does not automatically make non-UCITS complex.
4. **Other Products**:
   - **Complex**: Exchange Traded Commodities (ETCs) structured as contracts for differences, warrants, covered warrants.
   - **Not MiFID Instruments**: Deposits, loans, mortgages, life insurance (unless embedding derivatives reducing initial capital).

**Issues and Recommendations**:
- **Ambiguities**: The paper notes unclear definitions (e.g., “shares,” third-country market equivalence) and suggests MiFID’s approach to debt instruments may need review due to increased complexity in fixed-income markets.
- **Retail Protection**: Emphasizes the need for firms to provide clear risk disclosures, especially for complex products or execution-only services.
- **Consultation**: Invites feedback by July 17, 2009, with a final paper planned for autumn 2009.

**Annexes**:
- **Annex I**: Summarizes complex/non-complex classifications.
- **Annex II**: MiFID Level 1 and 2 extracts.
- **Annex III**: CESR’s technical advice.
- **Annex IV**: European Commission Q&A, clarifying convertible bonds, deposits, and money market instruments.

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### Cleansed Text
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**Source**: CESR Consultation Paper, MiFID complex and non-complex financial instruments for the purposes of the Directive's appropriateness requirements, published May 14, 2009, by the Committee of European Securities Regulators (CESR), available at [ESMA website](https://www.esma.europa.eu/sites/default/files/library/2015/11/09_295.pdf).

**Purpose**: This paper clarifies the classification of financial instruments under the Markets in Financial Instruments Directive (MiFID) as complex or non-complex for the appropriateness test, applicable to non-advised investment services (e.g., execution-only transactions). The distinction determines whether firms must assess a client's knowledge and experience to ensure product suitability, particularly for retail clients.

**Key MiFID Requirements**:
- **Suitability Test** (Art. 19(4), Level 1; Arts. 35, 37, Level 2): For investment advice or portfolio management, firms must assess client knowledge, experience, financial situation, and objectives.
- **Appropriateness Test** (Art. 19(5), Level 1; Arts. 36, 37, Level 2): For other investment services (e.g., execution or transmission of orders), firms must evaluate client knowledge and experience for specific products, issuing a warning if inappropriate.
- **Execution-Only Exception** (Art. 19(6), Level 1; Art. 38, Level 2): For non-complex instruments, firms can provide services without the appropriateness test if client-initiated, the client is informed of limited protections, and other conditions are met.

**Instrument Classification**:
- **Non-Complex (Art. 19(6), Level 1)**:
  - Shares admitted to trading on a regulated market or equivalent third-country market.
  - Money market instruments (e.g., treasury bills, certificates of deposit, commercial paper) not embedding derivatives.
  - Bonds or other securitized debt not embedding derivatives (e.g., traditional corporate/government bonds, traditional covered bonds).
  - UCITS (Undertakings for Collective Investment in Transferable Securities).
- **Other Non-Complex (Art. 38, Level 2)**: Instruments not listed in Art. 19(6) may be non-complex if they meet four criteria:
  1. Not a derivative or security giving rights to acquire/sell transferable securities or cash settlement based on indices (Art. 4(1)(18)(c) or Annex I, Section C(4)-(10)).
  2. Frequent opportunities to sell/redeem at publicly available prices (market or independent valuation).
  3. No liability exceeding the acquisition cost.
  4. Comprehensive, understandable public information available.
- **Complex**: Instruments embedding derivatives (e.g., convertible bonds, structured covered bonds, asset-backed securities), derivatives (e.g., options, futures, swaps), or those failing Art. 38 criteria.

**Key Instrument Categories**:
1. **Shares**:
   - **Non-Complex**: Ordinary/preference shares on regulated markets.
   - **Complex**: Convertible shares, subscription/nil-paid rights, shares not on regulated markets, depositary receipts, stapled securities.
2. **Money Market Instruments, Bonds, Securitized Debt**:
   - **Non-Complex**: Treasury bills, certificates of deposit, commercial paper, traditional bonds, traditional covered bonds (without derivatives).
   - **Complex**: Instruments embedding derivatives (e.g., credit-linked notes, convertible/exchangeable bonds, callable/puttable bonds, Spanish participaciones preferentes), asset-backed securities (e.g., mortgage-backed securities, CDOs), structured covered bonds.
3. **UCITS and Collective Investments**:
   - **Non-Complex**: All UCITS, regardless of underlying assets.
   - **Complex**: Non-UCITS (e.g., hedge funds, real estate funds) unless meeting Art. 38 criteria. Investment in derivatives does not automatically make non-UCITS complex.
4. **Other Products**:
   - **Complex**: Exchange Traded Commodities (ETCs) structured as contracts for differences, warrants, covered warrants.
   - **Not MiFID Instruments**: Deposits, loans, mortgages, life insurance (unless embedding derivatives reducing initial capital).

**Issues and Recommendations**:
- **Ambiguities**: Unclear definitions (e.g., "shares," third-country market equivalence) suggest a need to review MiFID's approach to debt instruments due to increased fixed-income market complexity.
- **Retail Protection**: Firms must provide clear risk disclosures, especially for complex products or execution-only services.
- **Consultation**: Feedback invited by July 17, 2009, with a final paper planned for autumn 2009.

**Annexes**:
- **Annex I**: Summarizes complex/non-complex classifications.
- **Annex II**: MiFID Level 1 and 2 extracts.
- **Annex III**: CESR’s technical advice.
- **Annex IV**: European Commission Q&A, clarifying convertible bonds, deposits, and money market instruments.