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MiFID II: It's Time to Take Action
Traders Magazine Online News, July 11, 2017
The size, scale, complexity, and anticipated impact of MiFID II is no longer news, in fact it ceased to be so quite some time ago now. With implementation just six months away there is little else on the minds of compliance professionals. This is true in the EU anyway, across the Atlantic less so; indeed it is fair to say that in some US compliance teams there has been little interest in engaging with MiFID II, this however, could well be a mistake.
MiFID II contains a complex web of extraterritoriality rules which govern how its rules apply to non-EU firms. Requirements must be evaluated on an area by area basis in order to determine how they apply extraterritorially. For example, communication recording rules apply in instances in which the investment firm is within the EU. This means that the rules not only apply to EU investment firms, but also to EU branches and subsidiaries of non-EU investment firms. In other areas requirements that rely upon communications recording, such as monitoring for market abuse, apply globally to EU firms and therefore capture any non-EU branches or subsidiaries of EU investment firms.
For trade reporting and transparency requirements the application is based entirely on where the execution is carried out, meaning this will impact firms based in the US executing on EU venues. For position limits and reporting in commodity derivatives the rules are based upon whether the instruments are listed in the EU, this of course impacts a huge number of instruments and many positions held completely outside of EU markets. For many investor protection measures such as costs and charges disclosures and client classification the rules are based on where the client is papered, whereas rules around product governance are based entirely on the geographic location of both the manufacturing and distribution processes.
The variation in how these rules apply extraterritorially means that as a non-EU firm simply working out how you are impacted is a resource intensive and time-consuming exercise that many firms continue to put off. However, due to the huge impact of some of the obligations getting MiFID II right could be business-critical come 2018.
One example of this is transparency, which is a key theme in MiFID II, whether it be transparency of prices, transparency of process, transparency of risk or product transparency. MiFID II will ultimately result in a far more transparent market place with customers, competitors and regulators receiving more information than ever before regarding the nature of operations, products and services on offer from investment firms.
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