MiFID II & Brexit

Brexit and the MiFID II

There has been a lot of talk in the media about various ways of turning directly-applicable EU law into UK law before Brexit, in order to prevent legal uncertainty as the UK leaves the European Union.

For those of us affected by the MiFID II, it is important to know that this is a d i r e c t i v e and directives are already transposed into UK law.

If we go into the nitty gritty, we can see that MiFID II is largely built into the FCA Handbook, with authorization, governance and management, investor protection and other provisions embedded in the relevant sourcebooks.

After Brexit, there will be some leeway for FCA to diverge somewhat from the EU in terms of detailed disclosure requirements, but judging by FCA history this is unlikely to happen – especially not quickly.

Brexit and MiFIR

MiFID was always intended to be reviewed after its original implementation, and this happened according to plan. After plenty of discussions, the European Parliament approved MiFID II (and updated version of the original MiFID) and its accompanying regulation: MiFIR.

Both MiFID II and MiFIR are notable for containing fewer exemptions than MiFID and they have expanded the scope to cover a larger group of companies and financial products. Both MiFID II and MiFIR became effective on 3 January 2018.

While MiFID II is a directive, MiFIR is regulation needs to be actively made part of UK law to be applicable after Brexit. As a regulation, it is currently directly applicable to all EU Member States – but soon the UK will no longer be a member state.

Brexit and the Systematic Internaliser (SI) regime

The Systematic Internaliser (SI) regime is aimed to shine a spotlight on the bilateral over-the-counter trade and make it more regulated. To this end, the SI regime imposes requirements regarding price transparency and execution, forcing the bilateral OTC trade to adhere to rules that are fairly similar to those imposed on multilateral trading venues.

So, when is a CFD broker, A  forex broker platform, an investment firm or credit institution an SI? An entity is deemed to be an SI in an instrument or set of instruments if it exceeds certain thresholds in its OTC trading with clients, as measured against total European activity.

The instrument of scope of the SI regime depends on whether or not a instrument is available to trade on a MiFID trading venue (RM, MTF or OTF). Against this background, it will be very interesting to see what happens when the UK is no longer a part of the EU, and all the UK trading venues are no longer MiFID trading venues. A very large chunk of the totalt trading activity in Europe is currently taking place within the EU. What will happen when none of this trading is no longer happening on MiFID trading venues? Clearly, Brexit will remove a major part from the denominator of the SI calculation. Of course, some venues that are currently UK-authorised might migrate to the EU before or soon after Brexit, and this will mitigate the situation somewhat. Even then, many more firms could suddenly find themselves subject to SI regimes – both in EU and in the UK since both entities have SI regimes.