Third-country regime under MiFID II
- Category: MiFID II/MiFIR
In the European Union there is no generic third country framework, it is rather a set of arrangements varying across the different pieces of legislation, where no arrangement is identical.
The main amendments proposed add the following items to the information that investment firms are required to provide at the passporting stage:
- the marketing means the firm will use in host Member States;
15 July 2022
Commission Implementing Regulation (EU) 2022/1220 of 14 July 2022 laying down implementing technical standards for the application of Directive 2014/65/EU of the European Parliament and of the Council with regard to the format in which branches of third-country firms and competent authorities have to report the information referred to in Article 41(3) and (4) of that Directive (Text with EEA relevance) was published in the EU Official Journal
Moreover, the third-country rules are mixtures of equivalence, endorsement, recognition, third country passporting or no arrangement at all (see Verena Ross, ESMA’s Executive Director in the Keynote Address at ASIFMA Annual Conference 2017 on 30 November 2017, ESMA71-319-65). The MiFID I Directive did not provide a harmonised framework for ‘third country firms’, but its recast, the MiFID II, and the MiFIR Regulation place greater emphasis on this important sphere.
MiFID II framework creates for the first time a harmonised regime for granting access to EU markets for firms in third countries when they provide certain services into or conduct certain activities in the EU for professional clients and eligible counterparties. The exception is the third country regime for retail clients where the EU Member States’ national rules continue to apply.
„The financial crisis triggered the adoption of more than 40 new pieces of EU legislation to restore financial stability and market confidence. Some 15 acts contain "third-country provisions" that empower the Commission with involvement of other institutions to decide on the equivalence of foreign rules and supervision for EU regulatory purposes. The implementation of these provisions involves in many cases an outcomes-based process. It is the equivalence of regulatory and supervisory results that is being assessed, not a word-for-word sameness of legal texts” said the European Commission’s Staff in the “Working Document, EU equivalence decisions in financial services policy: an assessment“ of 27 February 2017 (SWD(2017) 102 final, p. 4).
The said European Commission’s Staff Working Document of 27 February 2017 refers to 212 equivalence decisions and a total of 32 jurisdictions positively assessed for at least one area (Japan with most equivalence findings (17 positive determinations), followed closely by the US and Canada (16 equivalence decisions each) and by Australia (13), Brazil (12) and Singapore (11)). The said empowerments have already been used for CRD4/CRR, Market Abuse Regulation (MAR), Solvency II, EMIR Regulation, accounting standards, statutory audit and credit rating agencies.
’Third country firms’ are defined in MiFID II as ‘firms that would be a credit institution providing investment services or performing investment activities or an investment firm if its head office or registered office were located within the Union’ (Article 4(1)(57)).
As was mentioned above, in general, access to EU regulated markets depends on the type of clients the third country firm intends to provide services to:
- for retail and elective professional clients, a national authority has the discretion to require the third country firm to establish a branch within its territory - this is subject to certain conditions for the firm as well as for the third country,
- for professional clients and eligible counterparts, cross-border activity is possible without establishing a branch, provided that the firm registers with ESMA and informs its clients that it is not subject to EU supervision - among other conditions, this requires a positive European Commission equivalence decision.
Verena Ross, ESMA’s Executive Director, Keynote Address, ASIFMA Annual Conference 2017 – Hong Kong, 30 November 2017, ESMA71-319-65
The second iteration of the Directive, MIFID II, agreed by the co-legislators in 2014 and coming into force on 3 January, now creates for the first time a harmonised regime for granting access to EU markets for firms in third countries when they provide certain services into or conduct certain activities in the EU for professional clients and eligible counterparties.
First, there is no generic third country framework: it is a set of arrangements varying across the different pieces of legislation. No arrangement is identical and they are mixtures of equivalence, endorsement, recognition, third country passporting or no arrangement at all. While some differentiation seems inevitable to respond to the different nature of various financial market activities, based on the experience of the past few years it would be beneficial to create greater consistency.
Earlier in May we published two opinions clarifying under which circumstances transactions on third country trading venues are subject to the post-trade transparency requirements for investment firms and/or are considered to be economically equivalent over-the-counter (EEOTC) contracts for the purpose of the position limit regime. The two opinions set out a number of objective criteria that, if met by a third country trading venue, exempt transactions on those trading venues from the MiFID II/ MiFIR post-trade transparency requirements and the position limit regime.
We are now in the process of assessing more than 200 third-country trading venues for which we have received requests. Given the high numbers, this will take us some time. I can ensure you that we’ll treat all third country trading venues in the same manner. Furthermore, we are working on an interim solution that should ensure that, pending an assessment of the criteria listed in the two opinions, transactions on third country trading venues do not have to be made post-trade transparent and/or are not considered to be EEOTC contracts. Furthermore, the ESMA Q&As on transparency issues have a dedicated third country section.
Finally, I know that you’re particularly concerned about the application of the trading obligation for shares to shares which have their primary pool of liquidity outside the EU. I hope that our recently issued guidance together with the European Commission provided you with comfort that, in the absence of an equivalence decision, transactions in shares would not be considered to be of a systematic, regular and frequent nature and therefore not subject to the trading obligation for shares.
Steven Maijoor, the ESMA’s Chair, while referring to the MiFID II third-country regime on 21 June 2018 assessed (ESMA70-156-427) that MiFID II “does address remote access to regulated markets situated within the EU by EU firms. However, the conditions under which third-country venues may access EU liquidity through the placing of trading screens in the EU are not harmonised. In other words they are left to national discretion.“ He also emphasised some research ESMA did in this regard and noted how diverse and more or less detailed national rules are in place. Maijoor concluded that any regime “should ensure that a trading venue in the third country complies with requirements which are equivalent to those for EU trading venues, and that the EU has the supervisory tools to address risks relevant to the EU.”
Cross-border regulatory interactions - worldwide models
European Commission’s Staff Working Document of 27 February 2017 “EU equivalence decisions in financial services policy: an assessment“ (SWD(2017) 102 final, p. 6) identifies the following global models for dealing with cross-border regulatory interactions:
- national treatment – foreign persons, entities, and products are generally treated in the same manner as domestic ones, and regardless of the foreign regulatory regime they should comply with the same requirements as imposed on domestic operators (as a result, there is no need for the domestic regulator to develop a detailed understanding of foreign regulatory regimes, this is for example the approach of the US),
- exemptions – some other countries, like Japan or Switzerland, focus on selected regulatory aspects of cross-border activity of foreign firms, some of these jurisdictions leave considerable discretion to supervisors and are in position to apply broad exemptions,
- passporting – this is a system based on a single authorisation/registration which allows for the provision of services within the area under the supervision of a single (“home”) authority, however, passporting may require an international treaty or similar legal instrument, including an agreement on a common set of rules which permits market access (this approach is pursued for example under the Asia Region Funds Passport initiative),
- international agreements – these involve mutual commitments of two or more jurisdictions to reduce overlaps and enhance regulatory and supervisory reliance (this approach has been followed in the case of the EU-Switzerland Non-Life Insurance Agreement and the recently concluded EU-US Covered Agreement on Insurance and Re-insurance).
European Commission’s equivalence decisions
Equivalence decisions are a core element of the EU international strategy for financial services. An equivalence determinations are intended:
- to reduce or even eliminate overlaps in compliance for the EU entities concerned and in the supervisory work of EU competent authorities,
- to provide EU firms and investors with a wider range of services, instruments and investment choices originating from third countries that can satisfy regulatory requirements in the EU.
Equivalence provisions are tailored to the needs of each specific act and they should be read in the light of the objectives pursued by that act, moreover, a number of EU acts do not include equivalence provisions or other third-country measures. Whenever the European Commission determines by way of an equivalence decision that a foreign regulatory, supervisory and enforcement regime is equivalent to the corresponding EU framework, that recognition, in turn, usually makes it possible for authorities in the EU to rely on supervised entities’ compliance with the equivalent foreign framework.
European Parliament‘s document of 25 January 2018 “Equivalence decisions under the Markets in Financial Instruments Directive and Regulation (MiFID II/MiFIR)” refers to Article 47(1) MiFIR and underlines that a positive equivalence decision means that in the European Commission’s opinion the third country’s legal and supervisory arrangements ensure firms authorised in the country comply with legally binding prudential and business conduct requirements that are equivalent to requirements set out in the relevant EU legislation and that the third country’s legal framework provides for an effective equivalent system for the recognition of investment firms authorised under third country legal regimes.
Equivalence decisions under MiFID II/MiFIR are usually implementing acts, with the exception of the delegated act as regards the exemption of certain third countries central banks (MiFIR Article 1(9)). They are preceded by assessments of the regulatory and supervisory frameworks under the Commission’s ‘examination procedure’ - an assessment that follows the conditions laid-down in the basic act, is based on the principle of proportionality and follows a risk-based approach> Any equivalence assessment is initiated at the Commission’s own initiative but the EU Member States may indicate their interest for countries to be assessed. Throughout the procedure, the Commission is assisted by the European Securities Committee (ESC) that is composed of representatives from the EU Member States.The ESC receives the draft implementing act, often for a vote through written consultation, and provides its opinion by qualified majority. However, as the Commission notes in the aforementioned Staff Working Document of 27 February 2017, when taking its decision, the Commission will ultimately exercise the discretion conferred upon it.
An equivalence decision may be changed or even repealed by the Commission at any moment. The decision may stipulate whether it is granted in full or in part, and for an indefinite or time-bound duration. Sometimes, equivalence decisions may apply to the entire framework of a third country for specific covered entities, products or services, to some of its competent authorities only or to some entities only (e.g. regulated markets).
As a unilateral and discretionary EU act, an equivalence decision may be changed or even withdrawn by the EU, as necessary, at any moment. Depending on the circumstances, such decision can take effect after a possible transition period, applicable to the full decision or to its part. Equivalence could be restored at some subsequent time if and when all necessary conditions were met.
Unlike for delegated acts, European Parliament does not have a formal scrutiny role for implementing acts. If European Parliament opposes an equivalence decision, this does not affect the validity of the measure, but gives a political signal.
The equivalence framework in force based on unilateral European Commission’s decisions sparked the criticism from the European Parliament. In that respect, the European Parliament insists that the process for granting equivalence be subject to appropriate scrutiny by Parliament and the Council - i.e. that equivalence decisions should be taken by means of delegated acts as opposed to implementing decisions (see Third country equivalence in EU banking and financial regulation, European Parliament, In-depth analysis, European Parliament, p. 2).
Equivalence decision under Articles 23 and 28(4) of MiFIR - trading obligation for shares and derivatives
Third-country trading venues may be considered as regulated markets for the purpose of the trading obligation for shares and derivatives under MiFIR (Article 23 and 28(4)), if the European Commission considers the third-country is equivalent.
For further details in this regard see:
Equivalence decisions under Article 25(4) of MiFID II
European Parliament‘s document of 25 January 2018 “Equivalence decisions under the Markets in Financial Instruments Directive and Regulation (MiFID II/MiFIR)” observes that the European Commission has recognised four countries providing trading venues under Article 25(4) that are equivalent to EU venues: the Unites States, Australia, Hong Kong and Switzerland. The trading obligation applies to shares listed on exchanges in these countries and in the EU (‘dual listings’), on condition that EU trade constitutes a significant percentage of shares’ global trading volume.
In its press release, the Commission notes that it considers that shares only listed on exchanges in Australia, Hong Kong and the US (‘single listings’) are not traded significantly in the EU and that trade in these shares can continue. The decision for Switzerland was limited to one year, to allow for the Commission to ‘closely monitor the impact of [the] decision and consider the broader political context, notably the progress in the negotiation of the institutional agreement with Switzerland’.
The above European Parliament‘s document of 25 January 2018 also notes that during the equivalence assessment process, concerns about US alternative exchanges and so-called ‘dark pools’ have furthermore led the Commission to reduce the list of exchanges in the final decision to only those that trade in shares admitted to one of the US national exchanges.
The provisions of MiFIR in Article 54 include the possibility for the EU Member States to allow third-country firms to continue to provide their services until three years after the adoption of an equivalence decision.
Furthermore, in the absence of equivalence decisions, EU Member States may allow firms from third countries to provide services to eligible counterparties and per se professional clients, in accordance with their national regimes.