What is at stake?

The City of London is home to numerous foreign (third-country) banks which benefit from the opportunities deriving from the City’s location in the EU. These advantages have been seized by banks from the US, Switzerland, Japan, and others, which have used the City as a gateway to provide their services in the EU internal market as the EU gradually opens various sectors to cross-border competition.

The UK’s decision to leave the EU (so-called Brexit) will have profound consequences not only for UK banks but also for third country banks presently hosted by London. Their future ability to provide financial services in the EU internal market will depend on the EU granting the relevant passporting rights or, as the case may be, recognizing the UK regulatory framework as equivalent. Access to the single market cannot be guaranteed after Brexit, as there are no acquired rights in this regard. Currently, to the extent that UK-domiciled banks would benefit from freedom to provide cross-border services following a relevant equivalence decision, this is typically limited to wholesale investment services (services to professional clients per se and eligible counterparties). Provision of retail banking/investment services would require individual arrangements with each EU Member State. The outcome of bilateral negotiations will dictate whether the EU is willing to grant any further-reaching benefits.

The MiFID II/ MiFIR equivalence process

A worked example serves to illustrate the complexity. MiFID II/ MiFIR will come into application on January 3, 2018, which is likely to be before the UK has completed withdrawal negotiations1. Whether the UK will be treated a de facto third country for the purposes of EU financial services legislation, or a full member until ultimate withdrawal, it is inevitable that its approach to MiFID II/ MiFIR will be strikingly different to that of other full Member States. The question of whether the UK should implement EU legislation fully, even with an eye on the exit, is still to be resolved2.

MiFID II/ MiFIR has a third-country equivalence process which provides that:

A. third-country trading venues may conclude certain classes of derivatives transactions; and

B. third-country investment firms may provide services to EU professional clients per se and eligible counterparties.

Timing will be delicate. The European Securities and Markets Authority (ESMA) is expected to carry out assessments of third-country regulatory frameworks for endorsement decisions, as well as Technical Advice to the European Commission on the equivalence of third countries this year (2016), while the UK is a full member of the EU.

A. Admission of derivatives subject to trading obligation


Under MiFIR, ESMA may impose an obligation to conclude derivative transactions pertaining to certain classes of derivatives only on authorized trading venues (trading obligation). Parties will only be able to conclude transactions in derivatives that are subject to such trading obligations if the legal and supervisory framework of the third country concerned subjects those trading venues to requirements that are equivalent to MiFID II, MiFIR and the Market Abuse Regulation. Furthermore, the third country must recognize EU trading venues for those same derivatives.


  • The third-country legal and supervisory framework must meet the following assessment criteria, as set out in Article 28(4) MiFIR:
  • The third-country trading venues must be subject to authorization and to effective supervision and enforcement on an ongoing basis;
  • Venues must have clear and transparent rules on admission of financial instruments to trading so that the latter can be traded in a fair, orderly and efficient manner, and are freely negotiable;
  • Issuers of financial instruments must be subject to periodic and ongoing information requirements which ensure a high level of investor protection; and
  • Third-country regulations must ensure market transparency and integrity via rules addressing market abuse in the form of insider dealing and market manipulation.


The Commission takes equivalence decisions using a procedure described in section 3 below. ESMA delivers technical advice to the Commission and a positive opinion of the European Securities Committee (ESC), which is composed of high-level representatives from the EU Member States, is required.

This year a major task for ESMA will be to start assessing which classes of derivatives should be subject to the trading obligation. Given London’s pre-eminent status as a trading venue, it is likely to be sufficiently affected, whichever classes of derivatives are subject to the trading obligation, to want to request equivalence.

ESMA must first adopt Regulatory Technical Standards (RTS) specifying whether a certain class of OTC derivatives should be subject to the clearing obligation (under EMIR). ESMA expects to adopt two sets of Technical Standards (specifying the trading obligations for two classes of derivatives) this year.

B. Provision of investment services


If the third-country prudential and business conduct requirements are deemed equivalent, investment firms from that jurisdiction, following registration with ESMA, may perform investments activities or provide investment services to EU professional clients per se and eligible counterparties, without establishing a branch in the EU.

In addition, where a third-country firm has established a branch in a Member State in order to provide services to retail/professional clients, a positive equivalence decision would allow that firm to offer services and activities to professional clients per se and eligible counterparties through the branch, on a cross-border basis.

There are three requirements for registration with ESMA, equivalence determination is one of them. The other two conditions are:

  • The investment firm must be authorized in the third country to provide services or activities it wishes to provide in the EU and full compliance with the third-country rules must be ensured through effective supervision and enforcement; and
  • ESMA must have established cooperation arrangements with the relevant third-country supervisor, which cover (i) exchange of information; (ii) the mechanism for prompt notification to ESMA where the third-country firm infringes any rules applicable to it; and (iii) the coordination of supervisory activities.


  • The third-country prudential and business conduct framework are assessed against the following criteria, as set out in Article 47(1) MiFIR:
  • Third-country investment firms must be subject to authorization, effective supervision and enforcement on an ongoing basis;
  • They must be subject to sufficient capital requirements and appropriate requirements applicable to shareholders and members of their management body;
  • They must be subject to adequate organizational requirements in the area of internal control functions;
  • They must be subject to appropriate conduct of business rules; and
  • The regulatory framework in the third country concerned must ensure market transparency and integrity by preventing market abuse in the form of insider dealing and market manipulation.

The third-country framework must also have an effective equivalent system to recognize foreign investment firms.


As above, the Commission takes equivalence decisions using a procedure described in section 3 below. Again, ESMA delivers technical advice to the Commission and a positive opinion of the ESC is required. In addition Member States may influence the process directly given that the relevant MIFIR provisions grants them the right to indicate their interest in subjecting a specific jurisdiction to the equivalence assessment. However, such Member State recommendations are not binding on the Commission.

This year, ESMA’s objective is to set-up the work to establish co-operation arrangements with third-country competent authorities. It has provisioned budget and resources to complete the first batch of co-operation agreements with third-country authorities by the end of 2016. This is likely to be too soon for the UK to be part of the process, as it will still be a full member of the EU during this period.

Equivalence adoption process

The first point is that this is an EU-driven process. Candidate countries have little influence.

  • The Commission initiates the process by identifying a list of third countries to go through an equivalence assessment. Candidate countries are selected after consultations with Member States representatives and the relevant European Supervisory Authority (ESA).
  • Once the Commission has selected the candidate countries, it issues a call for advice to the ESAs and mandates the relevant ESA(s) to provide technical advice on the equivalence of the regime applicable in a given third country.
  • On the basis of the ESA’s technical advice, the Commission drafts and adopts an equivalence decision for a specific third country.
  • Commission equivalence decisions in all financial services sectors, except insurance (where the Solvency II Directive applies) as well as alternative investments (AIFMD), take the form of “implementing acts” (Commission Implementing Decisions). The equivalence decisions are subject to the examination procedure. The Commission is required to submit the draft equivalence decision to the relevant level 2 committee (the ESC) and, as a rule, may only adopt the decision if the level 2 committee delivers a positive opinion.
  • Finally, as for all implementing acts, the two EU co-legislators, the European Parliament and the Council, have a “right of scrutiny” over Commission equivalence decisions. Either of them may inform the Commission at any time before the adoption of the decision that, in their view, the Commission has exceeded the implementing powers conferred by the relevant EU financial services legislation. In such a case, the Commission is required to review its draft decision and to inform the co-legislators whether it intends to maintain, amend or withdraw the draft decision. The Parliament’s rules of procedure allow it also to oppose an implementing act if it is “not consistent with Union law in other respects.”

“Wait and see” is not an option

Against this background, banks in the UK will face a multitude of legal uncertainties, because EU banking regulation is multifaceted and varies greatly, and it involves a multitude of players, depending on the scope of activities of the banks concerned and the type of financial service to be provided. Totally apart from equivalence concerns, the regulatory framework is constantly evolving and the UK’s ability to influence the changes is already diminished. The fact that the UK regulatory framework is currently compliant with EU requirements enhances the chances for recognition of equivalence but this is by no means a foregone conclusion. Under these circumstances the UK and UK-domiciled third country banks cannot afford to indulge in a “wait and see” policy. Proactive engagement is necessary to ensure a smooth transition and the sector would be well-advised to think about adequate contingency measures to mitigate any potential commercial risks.

About Steptoe

Steptoe has a long established practice in EU banking regulation. We have particular expertise in advising credit institutions from non-EU countries on the EU’s third country regimes in applicable regulatory texts such as EMIR, MiFID II/MiFIR, AIFMD and related acts such as the Directive on Administrative Cooperation in Taxation or the General Data Protection Regulation. Steptoe also has specific strengths in complementary practice areas which are relevant for banks, such as anti-money laundering, anti-corruption and economic sanctions compliance. Steptoe is further recognized for its advice to FinTechfirms, notably on the blockchain and virtual currencies.