There has been much written about the impending Markets in Financial Instruments Directive (MiFID) II and what impact it will have on European markets and entities but little has been said about how it will impact American or Canadian firms (please note if you are a firm based in Asia, read my Asia LinkedIn pulse located here.)
Its easy for many to hear a 'European' sounding piece of regulation and to assume it's for those people on the other side of the pond. That's not American - that's overseas, that's outside Canada - so don't worry, but MiFIDII and in many ways FRTB are not such lite weights, they have very very BIG teeth and will impact many American & Canadian firms.
So how, where and why will American or Canadian based firms be impacted? For Non European firms that either have subsidiaries, risk exposures or trade through European markets, the legislation will require them to engage with and report toEuropean regulatorsand counterparties regardless if they 'want to or not'.
Beneficial or exposed?
Under MiFID II, non-European entities including those in North America & Canada are impacted by a “Beneficial” or “Exposed” criterion.
They are either:
- Beneficial (ultimate) owners of European-based companies, or beneficiaries of funds or portfolios of European investments.
- Have “exposures” throughMiFID II mandated European assets that are held, bought or sold on European regulated exchanges and platforms.
North American & Canadian firms with investments and/or ownership of companies outside their domestic market are highly likely to have exposure and obligations under MiFID II.
For example, a U.S. or Canadian broker-dealer executing orders originating in Europe may be asked by the European counterparty to provide audit trails for trade surveillance onexecutions in dual-listed securities.
For U.S. and Canadian companies, the prospect of meeting the MiFID II compliance obligations and technical standards can be daunting, and will require significant expertise andtechnology to manage.
Leveraging tools such as real-time analytics, sophisticated alerting capabilities and increased automation will help ease the burden of satisfying MiFID II requirements.
According to a recentITG surveyof buyside professionals, more than half of asset managers in North America do not expect MiFID II to directly impact them, though 82% of North American firms plan to “fully unbundle all of their brokers globally.”
In addition, 59% plan to continue paying for research usingcommission sharing arrangements(CSAs), while 33% expect to use a combination of CSAs and RPAs for payments. Eight percent plan to set up a new RPA ahead of the MiFID II start date.
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Extending best execution
MiFID II definesbest executionas the obligation on firms to “take all sufficient steps to obtain…the best possible result for their clients taking into account price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to execution”.
It extends the requirements of best execution across all asset classes while simultaneously establishing agreater number of venues to aggregate.
The regulation mandates execution venues, as well as market makers and systematic internalisers, to publish execution reports as stipulated by theRegulatory Technical Standard (RTS) 27included in MiFID II.
This change from MiFID I suggests a formalization of the best execution approach and also highlights that regulators will be expecting firms to place a greater focus on this requirement.
In addition, buy-side investment firms must also publish execution reports under the RTS 28 standard. In order to truly be successful and to comply firms need to upgrade or adopt new forms of Reg Tech and Fin Tech.
In many cases a range of solutions and services are at hand and in most cases firms with existing solutions in place, may simply need to upgrade their solutions, excluding sections of the directive that cover new areas entirely.
Seeking trusted answers?
Want to know how to deal with these challenges? If yes the answer is simple, just visit www.MiFIDII.com or if you want to speak to a regulatory specialist, simply click here and contact us today.
As an expert in financial regulations and market dynamics, it's imperative to shed light on the often overlooked impact of the Markets in Financial Instruments Directive (MiFID) II on American and Canadian firms. My extensive knowledge stems from years of hands-on experience in navigating the intricate landscape of global financial markets and regulatory frameworks.
MiFID II, originally designed to enhance investor protection and transparency in European markets, extends its reach far beyond the boundaries of the European Union. Contrary to the assumption that it primarily affects European entities, the directive casts a wide net, ensnaring non-European firms, including those based in North America and Canada.
One key criterion under MiFID II that has substantial implications for American and Canadian firms is the distinction between "Beneficial" and "Exposed" entities. Those deemed "Beneficial" are ultimate owners of European-based companies or beneficiaries of funds and portfolios with European investments. On the other hand, "Exposed" entities have financial exposures through MiFID II-mandated European assets traded on regulated exchanges and platforms.
American and Canadian firms with international investments or ownership of companies outside their domestic markets are highly likely to fall under the purview of MiFID II. For instance, a U.S. or Canadian broker-dealer executing orders originating in Europe may be required to provide audit trails for trade surveillance on executions in dual-listed securities to comply with the directive.
The prospect of meeting MiFID II compliance obligations can be daunting for U.S. and Canadian companies, necessitating significant expertise and technological solutions. To navigate these challenges effectively, firms must leverage tools such as real-time analytics, sophisticated alerting capabilities, and increased automation. A recent survey by ITG indicates that while more than half of asset managers in North America do not expect direct impacts from MiFID II, a majority plan to unbundle brokers globally and adopt various payment models for research.
MiFID II also brings about changes in the definition and execution of "best execution," obligating firms to take all sufficient steps to obtain the best possible results for clients across all asset classes. The directive mandates the publication of execution reports by execution venues, market makers, and systematic internalisers, emphasizing the formalization of the best execution approach.
In conclusion, American and Canadian firms with international exposures must proactively address the challenges posed by MiFID II. Upgrading or adopting new forms of regulatory technology (RegTech) and financial technology (FinTech) is crucial for compliance. For those seeking further insights and solutions to navigate these challenges, a valuable resource is available at www.MiFIDII.com or by contacting regulatory specialists directly.
