Article 9(12)(b) of the MiFID II Delegated Directive
How should firms manufacturing financial instruments ensure that costs and charges do not undermine the financial instrument's return expectations, as required by Article 9(12)(b) of the MiFID II Delegated Directive?
Answer 3
During the product design phase the firm shall undertake a scenario analysis of their financial instruments [Article 9(10) of the MiFID II Delegated Directive.] and, in this context, simulate product returns taking into account all costs of the instruments (implicit and explicit).
In order to ensure that charges do not undermine the financial instrument's return expectations firms could, for example, assess the consistency between costs and return of a complex product through the Monte Carlo methods. Alternatively, or additionally, firms could, for example, undertake a scenario analysis to assess whether the costs of the product (implicit and explicit) are inferior to the expected return. For instance, where t
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