MiFID II and Non-European Entities

MiFID II Implementation and its global impact

MiFID II and Non-European Entities

The impending MiFID II is being touted as the most extensive shake-up of financial services for a generation. It’s a European regulation, but companies all over the world should care about it.

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What are the implications of MiFID II outside of Europe?

Because of the cross-border nature of today’s investment environment, MiFID II implementation will impact firms around the world that deal either directly or indirectly with Europe to varying degrees.

Specifically, non-European entities are impacted by what is known as a “beneficial” or “exposed” paradigm:

  • they are either beneficial (ultimate) owners of European-based companies, or beneficiaries of funds or portfolios of European investments; or
  • they have “exposures” by the holding, investing, trading of MiFID II-mandated European assets that are held, bought or sold on European regulated exchanges and platforms. 

What does this mean?

Firms with investments and/or ownership of companies outside their domestic market are highly likely to have exposure and obligations under MiFID II.

They will, therefore, be under much stricter compliance rules across the board in order to provide regulators with end-to-end records leading to specific investment decisions, on demand. Meeting these obligations and technical standards will require significant expertise and technology to manage.

How can Thomson Reuters help?

Leveraging tools such as real-time analytics, sophisticated alerting capabilities and increased automation will help ease the burden of satisfying MiFID II requirements.

Unbundling investment research

One of the major provisions under the MiFID II rules involves the unbundling of trading commissions from investment research payments, thus making research provisions distinct from commission payments.

When MiFID II takes effect in 2018, buy-side firms will be required to establish research payment accounts (RPAs) or set up a commission sharing agreement (CSA) with their brokers, rather than paying for research with trading commissions.

This will dramatically change how research is priced and paid for and could also serve as a differentiator for fund managers looking to attract new investors by showing transparency. It will impact various countries in different ways, however.

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Extending best execution

Included in MiFID and gaining increased importance under MiFID II, the best execution principle requires firms to prove that a product it is recommending does exactly what it is intended to do.

The goal is to ensure that firms have acted in clients’ best interests at all times when making a trade or using a financial instrument on their behalf.

To keep up, companies around the world must learn to use technology to automate processes previously handled by humans in order to lower costs and gain a competitive edge by mining that market data.

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Taking advantage of increased transparency

The ability to harness the increasing amount of available data and use it to understand the market value of certain instruments will in large part determine winners and losers in the post-MiFID II environment.

While the challenges of implementation are numerous, there is also a significant opportunity to build a more standardized environment globally and provide increased transparency to clients. 

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