MiFID II, the Markets in Financial Instruments Directive, comes into effect in January 2018, and while European sell side and buy side firms have been grappling with the implications and the steps required to ensure compliance for a while now, many firms outside the European Union (EU) are having to play catch-up. The potential sea-change in the way EU firms carry out business — among themselves and with their counterparties globally — requires a strategic rethink for many institutions and, almost certainly, investment in new systems for all.

Just the facts

At a recent event organised by Bloomberg in Dubai, representatives from the regional financial industry discussed the new regulation and the potential implications for their businesses.

MiFID ll will have a significant impact on the entire trading life cycle due to the much tougher conduct of business standards and increased amount of trade and transaction reporting required. Massive investment in staff and IT is underway in order to upgrade specialist legal, compliance and reporting systems in order to demonstrate compliance with the new rules. Alicia Kedzierski, Deloitte’s Global Regulatory Specialist, explained that non-EU firms will be impacted directly if they have branches or subsidiaries in Europe. However, they will likely be impacted indirectly any time they are transacting or trading instruments with European firms or clients.

For example, in order to continue servicing European clientele, non-EU banks may face pressures to upgrade their systems across the board. And to service EU professional clients on a cross-border basis, non-EU investment managers need to register with ESMA and be subject to the same standards as MiFID firms, based upon the EU’s regulatory equivalence and reciprocity determinations. Moreover, MiFID ll could become a global regulatory benchmark as many global firms will take a strategic approach to implementation and adapt their compliance systems and processes to the toughest standard. Even the prerequisite step of researching (and understanding) the regulations, before adding or amending procedures, seems daunting.

Déjà vu

Many of the region’s institutions have been here before. John Morton, Bloomberg’s MiFID ll Market Specialist, explained at the event that MiFID ll will force non-EU investment managers to market to EU clients in a compliant manner in much the same way as the Alternative Investment Fund Managers Directive does; a piece of regulation that banks in the middle-east are familiar with and have successfully integrated into their processes. So it should be possible to achieve compliance, especially using third-party solutions to keep costs down, provided the will is there.

While European banks’ and funds’ legal and compliance project teams have been gearing up over the past year and a half to meet MiFID ll requirements, full compliance on day one will be a challenge for many firms, especially mid-tier and smaller institutions. The EU’s complex institutional set-up, where some aspects of new regulations are still under deliberation, is partly a cause. But unlike their US peers, regulators in the EU lack the same powers to provide regulatory forbearance and delay the start of requirements so the pressure is now really on ahead of the January go-live deadline.

On the same page?

The reaction of compliance officers attending the Dubai event varied. Some cited a lack of clarity because of the delay on the part of EU regulators in releasing guidance related specifically to non-EU firms. Others were less concerned than some by the significance of MiFID ll given their limited interaction with European firms and clients.

On the whole, this diversity of views is not a case of regional institutions burying their heads in the Middle Eastern sand. Most recognise that the regional investment management sector, both buy-side fund managers and sell-side equity brokerage and research companies, are all impacted to some extent. These regional firms are already witnessing their European counterparties initiating requests for data, a signal that tools and solutions to satisfy the exacting reporting standards of MiFID ll will soon be necessary for financial firms across the Middle East region.

— Joe McHale, Head of Regulatory Affairs for Bloomberg in EMEA.