FIA Reports on MiFID II/MiFIR Compliance for US FCMs

Posted on

 

On July 7, 2017, the Futures Industry Association (“FIA“) published a compliance brief on the impact of the revised European Markets in Financial Instruments Directive (“MiFID II“) and Markets in Financial Instruments Regulation (“MiFIR“) on U.S. Futures Commission Merchants (“FCMs“). Both regulations are scheduled to take effect on January 3, 2018.

MiFID II and MiFIR form a framework of EU legislation that provides for the regulation of investment firms and the trading of financial instruments in the EU markets. MiFID II/MiFIR revise the EU’s original Markets in Financial Instruments Directive (MiFID).

The FIA brief addresses the compliance obligations of U.S. FCMs and their non-EU clients (third-country firms) once MiFID II/MiFIR take effect. The brief covers:

  • Direct impact of MiFID II/MiFIR rules that require FCMs to either be authorized as an investment firm under MiFID II/MiFIR or to discontinue the activity that is triggering the authorization requirement.
  • Direct impact of MiFID II/MiFIR rules that require ongoing compliance from U.S. FCMs without necessitating authorization as investment firms.
  • Indirect impacts of MiFID II/MiFIR rules that may require certain compliance measures under certain circumstances.

MiFID II and MiFIR apply generally to certain financial entities, primarily those defined under the regulations as “investment firms.” Third-country firms, or firms that would be an investment firm or credit institution under MiFID II/MiFIR if its head or registered office was located within the EU, are not within the territorial scope of MiFID II/MiFIR. Third-country firms cannot be authorized as investment firms under MiFID II/MiFIR unless they retain a registered or head office in an EU member state. Similar restrictions prevent third-country firms from being authorized as:

  • Financial counterparties.
  • Non-financial counterparties above the EMIR clearing threshold (NFC+).
  • Credit institutions under MiFID II/MiFIR.

MiFIR does provide for a “third-country passport” for certain third-country firms in the event that an equivalence determination is made regarding the prudential and business conduct rules between the EU and the relevant third-country jurisdiction. Currently, no such equivalence determinations have been made.

Though third-country firms are not within the territorial scope of MiFID II/MiFIR, they still may be directly or indirectly impacted by the regulations and may incur resulting compliance obligations. The FIA brief also includes sample due diligence questions that FCMs might consider when determining potential compliance obligations under MiFID II/MiFIR.

Indirect Impact

The brief further outlines that MiFID II/MiFIR may also have an indirect impact on U.S. FCMs in the following ways:

  • General clearing-member obligations. A third-country firm is not directly subject to general clearing-member obligations under MiFID II/MiFIR, but it may be affected by these obligations if it accesses an EU CCP through an investment firm that is a clearing member.
  • Algorithmic trading. A third-country firm is not directly subject to the new rules on algorithmic trading, but it may be required to comply with the rules in the following situations:
    • when an FCM is a member of an EU trading venue, that FCM will be required to comply with the EU trading venue’s rules relating to algorithmic trading; and
    • when a third-country firm engages in algorithmic trading through an investment firm that is subject to MiFID II/MiFIR, the third-country firm may be expected to cooperate with the investment firm in meeting the investment firm’s MiFID II/MiFIR compliance obligations.
  • Transaction reporting. Third-country firms are generally not directly subject to the expanded transaction reporting regime established under MiFIR, but they may be required to provide an increased amount of information to investment firms and credit institutions that are subject to the new MiFID II/MiFIR regime. Importantly, EU branches of third-country firms will be directly subject to these new rules, and full compliance under MiFID II/MiFIR will be required.
  • Clock synchronization. An FCM that is a member of or participant in an EU trading venue may be required to utilize Coordinated Universal Time (UTC) for the recording of reportable events in accordance with new MiFID II data reporting rules.