MiFID II For Non-EU Investment Banks And Brokers

The revised EU Markets in Financial Instruments package—known as MiFID II—takes effect on January 3, 2018. Some aspects of this legislation are extra-territorial. New rules on inducements, the unbundling of research, legal entity identifiers and the regulation of algorithmic trading are some of the areas where a non-EU investment bank or non-EU broker may find that it is impacted, directly or indirectly. Non-EU investment banks and brokers should consider how these new requirements will affect how they do business in the EU or with EU counterparties from the start of next year.

INTRODUCTION

The MiFID II package comprises a revised Markets in Financial Instruments Directive II,1 the new Markets in Financial Instruments Regulation2 and supplementary secondary legislation and guidance. These will replace the existing directive and its implementing legislation ("MiFID I")3 from January 3, 2018 (the effective date for the new rules).

A non-EU investment bank or broker without any EU place of business is not generally within scope of MiFID I and usually requires no license in the EU. That position will remain the same under MiFID II, because current national regulatory perimeters are generally preserved. However, certain exemptions that non-EU investment banks and brokers have previously relied on to operate in the EU unregulated have been narrowed4 which, depending on the particular member state and business models, may trigger local licensing requirements. Further, even if a non-EU investment bank or broker is outside the scope of MiFID II, it may be indirectly impacted in its dealings with entities that are subject to the full MiFID II requirements. The way in which this indirect application occurs varies, depending on the relevant requirement, as illustrated in Figure 1.

Figure 1: MiFID II issues on which non-EU investment banks and brokers should focus, where relevant.

A non-EU investment bank or broker will be affected by MiFID II in the context of:

Inducements and unbundling research MiFID II restrictions on inducements mean that entities subject to MiFID II may only provide or receive research, hospitality or corporate access5 which qualifies as "minor non-monetary benefits." Non-EU brokers should be aware that their EU counterparties may implement new policies restricting the provision or receipt of research and other services. There are also new rules restricting the provision of research by brokers to EU investment firms 6 unless these are either directly paid for by the EU investment firm from its own funds or paid from a separate research payment account funded by a research charge to individual clients.

Direct electronic access ("DEA")7 and algorithmic trading8 Non-EU brokers will need to assess their trading activities to determine whether they need to become locally authorized and/or will be subject to systems and controls requirements. Non-EU brokers which use algorithmic strategies or which utilise DEA services to access EU trading venues may need to cease trading on or accessing some continental EU trading venues, unless they obtain a local license in the relevant member states. The UK is maintaining its "overseas persons" exclusion and so will exempt many foreign algorithmic traders and firms accessing UK trading venues using DEA from local licensing requirements. However, exemptions will not be available in many member states.

Dealings with EU counterparties Non-EU investment banks and brokers should expect to receive from EU counterparties revised terms of business which have been updated to take into account MiFID II requirements on conflicts of interest, suitability and appropriateness, inducements and best execution for MiFID II. In addition, non-EU investment banks and brokers providing execution services for EU clients...