10 August 2017

Financial Times: MiFID vies with Brexit as City traders’ main problem

While the UK will enforce MiFID II in full, the key issue is whether after Brexit, the UK and EU will operate financial services under the same rules. Known as regulatory equivalence, this would defuse tension in the City and insulate them from having to make radical changes. The risk, however is one of a hard Brexit and no agreement over regulatory standards that makes the UK’s acceptance of MiFID II a moot point for the City. “When thinking about MiFID II, you always have to think about Brexit as well since both topics are interconnected,” says Niels Tomm, director of group regulatory strategy at Deutsche Börse.

Most City institutions are continuing to work on the worst-case scenario that the UK leaves the EU in March 2019 without a deal, or transitional arrangements that some UK ministers have talked about.

But the shifting political landscape, and lack of clarity over the UK’s eventual divorce from the EU, is forcing some to defer decisions on whether to move.

[...]complying with the requirements of MiFID represents a much closer deadline, with more defined legal requirements. Among them, in the event that the EU agrees that those rules from an overseas jurisdiction are equivalent, then so long as the UK implements the same rules, trading firms can remain in London and transact across the EU.

“This still means that we, like others, are working on contingency options but there should be a relatively easy way to agree market access courtesy of MiFID II,” says Ben Pott, head of government affairs at Nex Group, which operates a bond and currency trading venue in London. “Still there is the politics around it which needs to be overcome first.” 

For some high-frequency trading firms, MiFID is making other countries less attractive while they wait for Brexit.

Tougher capital rules for MiFID investment firms across the EU next year will force institutions to hold more capital on their balance sheets to guard against systemic risk that could spark a financial crisis.

Trading firms will have to hold a sufficient amount of capital that reflects how much margin they supply to clearing houses in order to back their derivatives trades. This could amount to billions in extra capital. For example Germany’s Eurex Clearing alone received €13.9bn last year in margin, from clearing members’ own trades and proprietary traders.

But under MiFID, national regulators can grant exemptions for locally-registered investment firms. For example Ireland, whose financial industry was badly hit by the financial crisis, is taking a relatively tough line even on its local institutions. This would mean incoming firms facing higher capital requirements than in other financial hubs.

By contrast the UK applies a relatively light-touch regulatory capital regime to its local companies. Furthermore the cap on bankers’ bonuses can be extended to investment companies like high-frequency traders, and here Dublin is also taking a tougher line. [...]

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