ESMA publishes draft rules for third country firms under MiFID II
28 September 2020 Brussels
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The European Securities and Markets Authority (ESMA) has published draft regulatory and implementing technical standards (RTS and ITS) for third-country firms under the new Markets in Financial Instruments Regulation (MiFIR) and the second Markets in Financial Instruments Directive (MiFID II) regimes.
The aims of the new rules are to give ESMA the information for all trading activity done in the EU by firms outside the EU.
The draft technical standards have been published following the changes to MiFIR and MiFID II regimes for the provision of investment services and activities in the EU by third-country firms, introduced by the Investment Firms Regulation and Directive.
The reasoning behind this is for ESMA to be able to “identify any potential circumvention of EU law by third-country entities. The use of the reverse solicitation option by third country entities beyond their regulatory borders is a major concern in this respect”.
According to industry expert and consultant Tony Freeman, this reiterates the core suspicion among EU policy-makers that third-countries have (or will have in the future) lower regulatory standards than the EU. EU policy-makers continue to believe that different regulatory standards are automatically lower regulatory standards.
Freeman highlighted that it also reveals a concern about businesses moving out of the EU as it says “potential incentives for the EU industry to move to a third country be avoided, limiting the risk of an EU industry relocation”.
“Therefore, ESMA will have full visibility of trading activity done by London banks with EU27 clients and counterparties. This data is already collected by UK regulators so additional reporting direct to ESMA by banks in London is probably a duplication,” Freeman commented.
The new changes include new reporting requirements for third-country firms to ESMA on an annual basis and the possibility for the EU regulator to ask them to provide data relating to all orders and transactions in the bloc.
Meanwhile, new annual reporting requirements from branches of third-country firms to national competent authorities (NCAs) have also been introduced.
ESMA explained that while branches of third-country firms authorised under MiFID II are supervised by the relevant regulator of the authorising member state, the investment firms directive amends MiFID II to provide for further reporting obligations on such branches to the member state authorities where they are established.
The draft ITS also introduces the format in which the new flow of information provided by MiFID II is to be reported to NCAs by branches of third-country firms.
Regarding its next steps, ESMA noted the RTS has been submitted to the European Commission for the adoption of the final legal text.
Volker Lainer, vice president of product management and regulatory affairs at GoldenSource, noted that the report reflects the reality of what being a third-country means.
According to Lainer, regardless of whether or not a trade agreement between the EU and the UK is struck, it will not be business as usual when it comes to regulatory reporting from January 2021.
“This report is a wakeup call to UK-based firms who have not yet got to grips with precisely what needs to be reported on to whom, and when. Only through centralising all their data can firms ensure they’re not just avoiding both non-compliance and costly over-reporting, but also prepare themselves for any future regulatory changes across other third-countries and to reflect divergence created by the FCA,” Lainer commented.
Discussing further takeaways from the report, Freeman added that the data to be reported is very complex, and the implementation deadline of June 2021 is quite an “aggressive timeline”.
The aims of the new rules are to give ESMA the information for all trading activity done in the EU by firms outside the EU.
The draft technical standards have been published following the changes to MiFIR and MiFID II regimes for the provision of investment services and activities in the EU by third-country firms, introduced by the Investment Firms Regulation and Directive.
The reasoning behind this is for ESMA to be able to “identify any potential circumvention of EU law by third-country entities. The use of the reverse solicitation option by third country entities beyond their regulatory borders is a major concern in this respect”.
According to industry expert and consultant Tony Freeman, this reiterates the core suspicion among EU policy-makers that third-countries have (or will have in the future) lower regulatory standards than the EU. EU policy-makers continue to believe that different regulatory standards are automatically lower regulatory standards.
Freeman highlighted that it also reveals a concern about businesses moving out of the EU as it says “potential incentives for the EU industry to move to a third country be avoided, limiting the risk of an EU industry relocation”.
“Therefore, ESMA will have full visibility of trading activity done by London banks with EU27 clients and counterparties. This data is already collected by UK regulators so additional reporting direct to ESMA by banks in London is probably a duplication,” Freeman commented.
The new changes include new reporting requirements for third-country firms to ESMA on an annual basis and the possibility for the EU regulator to ask them to provide data relating to all orders and transactions in the bloc.
Meanwhile, new annual reporting requirements from branches of third-country firms to national competent authorities (NCAs) have also been introduced.
ESMA explained that while branches of third-country firms authorised under MiFID II are supervised by the relevant regulator of the authorising member state, the investment firms directive amends MiFID II to provide for further reporting obligations on such branches to the member state authorities where they are established.
The draft ITS also introduces the format in which the new flow of information provided by MiFID II is to be reported to NCAs by branches of third-country firms.
Regarding its next steps, ESMA noted the RTS has been submitted to the European Commission for the adoption of the final legal text.
Volker Lainer, vice president of product management and regulatory affairs at GoldenSource, noted that the report reflects the reality of what being a third-country means.
According to Lainer, regardless of whether or not a trade agreement between the EU and the UK is struck, it will not be business as usual when it comes to regulatory reporting from January 2021.
“This report is a wakeup call to UK-based firms who have not yet got to grips with precisely what needs to be reported on to whom, and when. Only through centralising all their data can firms ensure they’re not just avoiding both non-compliance and costly over-reporting, but also prepare themselves for any future regulatory changes across other third-countries and to reflect divergence created by the FCA,” Lainer commented.
Discussing further takeaways from the report, Freeman added that the data to be reported is very complex, and the implementation deadline of June 2021 is quite an “aggressive timeline”.
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