The Markets in Financial Instruments Directive (MiFID II) is set to make substantial regulatory changes to European Union (EU) financial markets. While this complex regulatory regime directly affects EU investment firms, it will have a ripple effect that may leave many firms outside the EU struggling to comply with its requirements.
MiFID II seeks to minimize the risks for the financial system and protect consumers by mandating licensing of certain investment services and activities within the EU, as well as instituting required organizational and conduct standards. Much of MiFID II’s impact on non-EU firms will be due to the post- and pre-trade transparency it mandates as it steers trades away from internal trading desks onto regulated, exchange-like venues in an effort to increase transparency.
Direct and not-so-direct effects for non-EU firms
Non-EU firms are subject to some MiFID II requirements directly — e.g., the trading obligation for derivatives, and a new position limits regime for commodities derivatives. Less obvious is the impact on non-EU firms due to MiFID II compliance demands on their EU business partners. In those cases, EU firms may find themselves making material changes to their business operations to comply with MiFID II, changes which, in turn, by necessity trickle down to their subsidiaries and business partners.
Non-EU support for transparency obligations
MiFID II transparency obligations will require firms to capture and record a wide range of data at certain points in a transaction. A few of the many ways this could impact non-EU firms include:
- Best execution. MiFID II will increase the transparency and proof required of firms in providing best execution to their clients. Currently, firms must take all reasonable steps to provide best execution; next year, however, MiFID II will require proof that all sufficient steps were taken to achieve best execution. An important component of best execution is defining a product’s target market and ensuring it is distributed properly within that market. This will require that non-EU firms provide EU firms with information enabling them to determine if the non-EU firm’s clients are part of the EU firm’s target market. Consequently, non-EU firms should consider how MiFID II’s best execution requirements could extend to their own business, and be prepared to provide this information to its EU partners.
- Record keeping and reporting requirements. MiFID II’s record keeping and reporting requirements are onerous and fulfilling them will require the support of a firm’s subsidiaries and business partners. EU firms’ pre- and post-trade reporting requirements may involve seeking specific information regarding an investment or fund from a non-EU firm, or even implementing particular time requirements to meet the need to submit post-trade reporting within 15 minutes from trade execution. Assisting business partners and affiliates to meet such obligations may require that non-EU firms adjust their own methods of tracking and recording data.
- Research fees. Currently, EU firms prefer not allow commissions, fee payments and other non-monetary benefits to impair their duty to act in the best interests of their clients and must disclose such fees to clients. MiFID II will take this a step further by banning EU firms from accepting or receiving any fees, commissions or monetary benefits from any third party in connection to its services, unless the EU firm transfers these third-party fees and commissions to the relevant client. As a result, non-EU firms may find they need to shift their payment processes to handle research costs from EU firms separately.
Third country regimes could streamline some cross-border operations
MiFID II will make it easier for some non-EU firms wishing to access the EU markets. Currently, non-EU firms face compliance with a patchwork of rules of varying flexibility regarding non-EU firms doing business on a cross-border basis. MiFID II attempts to harmonize these rules through a “third country regime” that allows non-EU firms to access EU markets if they register with EU regulators. Such registration, however, is contingent on the non-EU firm being licensed in their home country, and being from a home country with a legal and supervisory framework considered “equivalent” to that of the EU. This regime, however, is limited in its scope, applying only to the cross-border provision of investment services and activities for, per se, professional clients and eligible counterparties.
Non-EU firms should now be reviewing business operations for MiFID II issues
These are but a few examples of what non-EU firms should be considering when reviewing their business operations for possible MiFID II triggers. Non-EU firms within the potential reach of MiFID II should be implementing appropriate measures now to be ready when it goes into effect on January 3rd, 2018. One of the most vital components for effective compliance efforts is the knowledge of its staff. Thomson Reuters provides online MiFID II training courses that help employees understand the basic obligations and requirements of the new MiFID ll regime, from increased market access to best execution.