As of 3 January 2018, MiFID II/MiFIR will become applicable in all member states of the EU and the European Economic Area. Even though the new provisions target EU investment firms primarily, financial institutions in third countries such as Switzerland will also be affected and will have to adapt accordingly.
MiFID II/MiFIR will bring significant changes to the regulatory environment in the EU, but also in third countries that have close financial ties with it, such as Switzerland. The commonly held view is that MiFID II/MiFIR will entirely exclude third-country firms from the EU market, but in fact this is not the case. That said, the new provisions may require certain adjustments to ensure regulatory compliance – even outside the EU. This article provides an overview of those aspects of the new provisions that need to be considered by Swiss and other third-country market participants as 3 January 2018 approaches.
National cross-border regimes may be amended
Even though MiFID II/MiFIR does not impose a framework for the provision of cross-border services into the EU by third-country firms, many EU member states have been prompted by the changes that are in the offing to amend their national cross-border regimes towards third countries. In principle, EU member states are free to apply their own regimes, as long as third-country firms are not thus put at an advantage over investment firms from other EU member states.
For the servicing of retail clients, MiFID II provides an opt-in system that requires third-country firms to establish a branch in the EU member state in which retail clients and opt-up professional clients are targeted. The establishment of a branch entails a licensing requirement. France and Italy, for example, will make use of this possibility and introduce a branch requirement. However, this is just an option, and EU member states will still be able to apply their respective national cross-border regimes instead.
For the time being, the cross-border servicing of per se professional clients and eligible counterparties will also be subject to national laws and regulations. With regard to this client category, the European Commission may take an equivalence decision in the future if a third country provides for equivalent legal and supervisory arrangements (see our article on this subject). Such a decision would allow investment firms of the third country in question to provide their services to per se professional clients and eligible counterparties on a cross-border basis throughout the EU.
Trading obligation for shares and derivatives
MiFIR contains a provision requiring EU investment firms to execute trades in shares and derivatives on EU trading venues or regulated markets located in third countries that are considered equivalent (some exceptions apply—see our article on this subject). As a consequence, third-country exchanges will be excluded from the EU shares and derivatives trading market to a large extent if the European Commission has not issued a positive equivalence decision regarding the third country in question. Up to now, no equivalence decision regarding any third country has been published. However, it is expected that such decisions will be issued in time (i.e., before 3 January 2018) for the most important third-country markets, including Switzerland.
Restrictions on direct electronic access from third countries
According to the latest version of the Q & A issued by the European Securities and Markets Authority (ESMA), third-country market participants are not allowed to provide direct electronic access (DEA) to EU trading venues. Moreover, third-country clients who use a DEA provider located in the EU may face restrictions on their ability to do so, depending on how MiFID II/MiFIR is implemented nationally. Accordingly, access to EU trading venues will be subject to amended rules with an extraterritorial effect. Any third-country entity that is currently making use of such access should evaluate the new regulatory regime in order to ensure the continuity of its business even after MiFID II/MiFIR become applicable.
Compliance of Swiss financial institution’s EU businessmust be re-evaluated
As the above examples show, there are various areas where MiFID II/MiFIR will bring changes to the regulatory framework applicable to third-country financial institutions as soon as they have any business link to the EU. Therefore, it is crucial to assess the current business model with particular regard to these regulatory changes, even if the business in question is not located in the EU and even if the EU is not a target market.