The European Securities and Markets Authority’s (ESMA) MiFID II requires full implementation by January 2018. This regulation is wide-reaching and covers aspects of conduct, market abuse protections, and trade transparency. MiFID II aims to level the regulatory playing field within the European Union’s (EU) single market. However, firms registered in ‘third countries’ will be able to access the single market where the principle of equivalence has been established by ESMA and approved by the European Commission.
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Third country firms executing transactions in regulated instruments within EU borders will be subject to all MiFID II regulations. MiFID II has an obvious impact for firms based in North America that have trading operations (or those that have branch or subsidiary structures) within the EU’s single market. What might be less obvious is that the regulations could also affect some firms that might consider themselves to be out-of-scope. Examples include firms that:
- Have a small reporting presence in the UK but are members of regulated markets;
- Have remote membership of regulated exchanges within the EU;
- Are assuming existing SEC-compliant processes and IT infrastructure will satisfy the MiFID II requirements;
- Supply technology services to an EU subsidiary (e.g. US-based algo developers will be required to deliver solutions that satisfy all MiFID II microstructural obligations).
Since MiFID II is not prejudicial on the basis of a firm’s scale within the EU, all firms are required to comply with 100% of the regulation.
While the objectives of MiFID II are aligned to regulation originating in the US and Canada, there are differences in obligations and implementation requirements. For example, it is not safe to assume that an SEC 613 compliant clock synchronization solution, or that a DFA-compliant record keeping system, will guarantee compliance with MiFID II.
Cost effective regulatory compliance is often best achieved by analyzing requirements across all legal jurisdictions and asset classes and then establishing the high water mark that is adopted by all parts of the business. In some cases, the compliance costs might not justify continued operation within EU borders for some asset classes.
- Full analysis of cross-border trading operations and underlying shared service operations to confirm MiFID II obligations;
- A detailed gap analysis against regulations and evaluation of the financial and operational implications associated with achieving and maintaining compliance;
- Leveraging existing capabilities and investments as a starting point for regulatory compliance in other jurisdictions and harmonizing systems and processes based on the high-water mark principle.