Europe should not adopt proposals contained in the current draft of MiFID II that would hamstring third-party financial institutions trying to operate in the EU. Criticism of the European Commission’s position is included in responses to a MiFID II questionnaire issued by Markus Ferber MEP, rapporteur to the Economic and Monetary Affairs Committee (ECON) of the European Parliament.
"The proposals as they stand may seriously hinder global trade," said The British Banking Association (BBA) in its submission, while European Banking Federation (EBF) warned against making access to EU markets by third-country firms conditional on positive equivalence assessments. Such a request would, de facto, prevent non-EU firms which are willing and able to render MiFID/MiFIR-compliant services to access the EU financial market."
The questionnaire, published on 20 October, requested feedback on draft proposals for MiFID II and MIFIR, a regulation that accompanies the directive. The survey asked 31 questions on topics including the scope of the directive, market structure and transparency.
Supporting the view of the industry associations, Chris Bates, partner at global law firm Clifford Chance, characterised the draft MiFID II approach to non-EU firms as a ‘no callers welcome’ policy that would harm the EU, and the UK in particular.
"The current provisions for non-EU firms operating within the union are not really viable for an international financial centre such as London,” he told participants at an event held by the BBA yesterday. “Whereas some member states might not be aware of the full importance of open, free markets for obtaining international business, for a centre such as the UK, having open markets is absolutely vital."
The draft proposal states that all EU branches of non-EU firms must cease providing investment services within four years, unless the European Commission has determined that the company’s EU branches comply with MiFID II, its home country rules are equivalent with MiFID II, and a reciprocity arrangement is in place between the EU and the home country. Non-EU firms that satisfy these criteria will be able to provide both cross-border dealing and investment management services within the EU. Bates suggested that most third-party institutions currently operating in the EU would not meet the new criteria.
The Futures and Options Association called for an amendment to remove the requirement for reciprocity, while the London Stock Exchange (LSE) suggested that a memorandum of understanding between the European Securities and Markets Authority (ESMA) and the home authority should be sufficient for a non-EU firm to continue its investment activities inside the union, so long as the third-county firm’s home competent authority is regarded as independent.
The International Swaps and Derivatives Association (ISDA) attacked the lack of specificity in the rules, complaining that the proposal did not make sufficient distinction between retail and professional clients. ISDA requested that article 36 of MiFIR should be extended so that third countries may provide services to professional clients within the EU without setting up a branch, providing they meet the registration criteria. Others questioned the ability of non-EU countries to comply with the standards of regulation being imposed by the draft document.
"The proposed MiFID II rules are restrictive and it is difficult to see that many countries would qualify under such conditions – especially the emerging markets,” said Bates. “EU business will suffer as a result. If you want to raise money in the Middle East, for example, and bring it into Europe, you may find that it's no longer possible. This is not a satisfactory solution."
The UK currently offers numerous exemptions for cross-border businesses, effectively enabling them to operate in the country with relatively limited restrictions. However, under the MiFID II proposals, there would be little scope for national differences in the way EU states handle non-EU firms – leading to a potential clash with other EU member states such as Germany and France that operate on a more case-by-case basis.
In its response document, the LSE pleaded that rules should allow for flexibility and national differences that achieve similar outcomes. The exchange expressed concerns that regulators should not impose an excessive burden on the third-country parties, on the grounds that it might lead those countries to raise protectionist barriers against the EU. Third-country firms not offering services in the EU nor soliciting clients there, but that want access to EU trading platforms, should be exempt from MiFID, it said.
The BBA called for harmonised exemptions for eligible counterparties, governments and authorised intermediaries, third-country group members of EU authorised firms and for business that is intermediated by a MiFID-authorised firm. It also warned that since a third-country firm cannot seek authorisation for a local EU branch unless the European Commission has given an equivalence decision in respect of its home state and certain other conditions are met, large numbers of third country firms could be precluded from accessing EU markets, “even where they are adequately capitalised and willing to follow MiFID rules in their dealings with EU investors”.
Ferber and other members of ECON are now considering the responses to the MiFID II questionnaire. After the European Parliament has agreed on amendments it wishes to make to the text, the Council of the European Union will then conduct its own reading of the revised legislation. The implementation of MiFID II is expected at some point during 2014.