EUROPEAN UNION: MiFID II Considerations for Non-EU Entities

Friday November 24 2017

It has been reported that the indirect effects of MiFID II on those sitting outside the EU but who have dealings with EU financial instruments and markets, are many and varied.

There is a need for EU trading venues to transaction report to their national regulator for all their direct participants that do not transaction report themselves.  This is less of an issue in the equity markets, where members of the LSE are almost all EU brokers that will transaction report.  The situation of EU futures exchanges, with numerous members outside the EU or the newly expanded MTFs operated by Bloomberg, Thomson Reuters and the like that have hundreds of participants across the world, is creating a logistical challenge.  All the non-EU firms that use these trading venues will have to supply quite a lot more data to the venue for the venue’s transaction reporting purposes.

Another aspect of MiFID II, which will affect some non-EU entities, is the new product governance rules. Again, the rules do not apply directly to anyone outside the EU.  However, if you are a fund manager (or other product manufacturer) whose product is actively distributed in the EU you will very likely have to supply product information (target markets assessments, risks, stress testing and the like) in a MiFID II format to your EU distribution partners.

So, in many cases MiFID II will effectively be indirectly imposed on non-EU firms by contractual means. There is also the question of delegation.  If an EU firm delegates important services like portfolio management to, say, a US affiliate, the US firm will get drawn into the MiFID II web. The FCA has been quite clear on this. Their view is that they want the same outcomes for EU investors dealing through EU firms, regardless of whether the investment manager is located; in London or New York and the MiFID II requirements, such as best execution, will therefore provide the benchmark for assessing the execution performance of the US affiliate for EU investors. The FCA won’t be happy if someone in the UK outsources portfolio management back to the US and the proper controls and processes are not in place.

A third aspect of MiFID II, which third country firms should be mindful of, is role MiFID II will play in the evolution of global standards.  In some cases, much of the world can be expected to move towards the MiFID II standard as a global approach.