MiFID II

MiFID II European Securities and Markets Authority’s (ESMA) MiFID II requires full

implementation by January 2018. This regulation is wide reaching and covers aspects

of conduct, market abuse protections, and trade transparency. MiFID II aims to level the

regulatory playing field within the European Union’s (EU) single market. However, firms

registered in ‘third countries’ will be able to access the single market where the principle

of equivalence has been established by ESMA and approved by the European

Commission.

A. ​What are the top 5 challenges facing financial firms in compliance with MiFID II?

B. ​How is the impact of MiFID II determined on US Asset Managers?

C. ​How does MiFID II effect US Asset Managers Trading European Equities, Fixed

Income or Derivative Instruments?

D. ​How does MiFID II impact US Asset Managers Providing Sub-Advisory Services?

E. ​How does MiFID II impact US Asset Managers Marketing Cross-Border Products

and Services to European Clients?

a. ​Retail Clients

b. ​Professional Clients

F. ​How does MiFID II impact US Asset Managers that wish to offer alternative

investment funds or Offering UCITS Funds?

G. ​How does MiFID II impact a US Manager with a EU Subsidiary for Marketing Only

H. ​What are the Internal Organizational and Governance Requirements?

The European Union has begun a wide-ranging and radical reform of its securities and

derivatives markets through MiFID 2,​1​ which is scheduled to be implemented across the

EU by January 3, 2017. Implementation is dependent on a large amount of EU-level

secondary legislation, drafts of which recently have been published for consultation.

MiFID 2 implementation will present significant strategic challenges and operational

issues for both EU and many non-EU investment firms to consider in the coming year.

At a high level, MiFID 2 will:

● Enhance investor protection by increasing compliance obligations on EU

investment firms​2​ and giving EU regulators the power to ban certain investment

products and services;

● Tighten the regulation of algorithmic and high-frequency trading

● Force more trading in shares and derivatives onto regulated venues, and reduce

over-the-counter (OTC) trading in those instruments;

● Increase trading transparency across a broader range of securities and

derivatives, and restrict the use of waivers from transparency requirements that

allow dark-pool trading;

● Bring more commodity derivatives trading within EU regulatory scope and

implement commodity derivative position limits and reporting requirements;

● Tackle vertical silos in trading, clearing and settlement;

● Begin harmonizing rules allowing non-EU investment firms to access EU

securities and derivatives markets; and

● Give the European Securities and Markets Authority (ESMA) an expanded

supervisory role.

MiFID 2 will apply to EU-established investment firms and regulated exchanges, as is

the case under MiFID 1. However, its scope will expand in several ways:

● Algorithmic trading conduct-of-business rules will be extended to entities that

currently fall outside MiFID's scope, such as EU-established management

entities of the Undertakings for Collective Investment in Transferable Securities

(UCITS) and alternative investment funds, pensions funds and insurance

companies;

● The obligation to trade all "clearing-eligible" liquid derivatives on a regulated

execution venue (the "trading obligation") will effectively be extended to

European Market Infrastructure Regulation (EMIR) financial counterparties (such

as UCITS managers), authorized alternative investment fund managers and

insurance companies, irrespective of whether they are EU-established. Further,

the trading obligation will be extended to nonfinancial entities whose nonhedging

derivatives trading exceeds specific thresholds;

● Commodity derivatives position limits will apply to persons, not just financial

entities. Although investment firms will bear the brunt of commodity derivatives

position reporting, they will have to obtain position information from their financial

and nonfinancial clients so as to be able to comply; and

● Non-EU firms that provide investment services to EU retail clients and less

sophisticated professional clients may need to establish an EU presence if a

local regulator so demands. An ESMA registration requirement may eventually

apply to non-EU firms that wish to conduct cross-border business with more

sophisticated EU institutional investors.

In addition to scope extension and extra compliance obligations, MiFID 2 presents a

number of strategic issues that regulated entities must consider and address, including:

● Internationally active groups, especially those headquartered in the United

States, will need to adapt policies and procedures to comply with international

regulatory requirements, which are similar in thrust but different in detail, making

implementation of global standards difficult (See "​Reconciling Regulatory

Requirements in Cross-Border Derivatives Takes Center Stage​");

● Financial services groups with a sell-side focus will need to make a number of

strategic decisions regarding whether they wish to become multilateral trading

facilities, organized trading facilities (OTFs) or systematic internalizers. A number

of restrictions and compliance obligations come with each execution model, and

the potential level of market demand for the new OTF and expanded systematic

internalizer categories is unknown;

● It remains to be seen whether the push to move more securities and derivatives

trading to "lit" regulated execution venues will result in less buy-side trading and,

therefore, less liquidity — particularly in fixed-income markets potentially

affecting a wide variety of market users, liquidity providers and, ultimately,

issuers; and

● MiFID 2 provisions regarding both non-EU firms' access to EU markets and EU

entities' ability to trade "trading-eligible" derivatives on non-EU exchanges

depend on the EU making equivalence assessments on non-EU countries'

regulatory regimes and the non-EU countries giving reciprocal access rights.

Thus far, mutual recognition in the derivatives clearing space has been very

slow. Although the effects of some of the MiFID 2 mutual recognition

requirements will be mitigated by transitional arrangements, the pace of global

regulatory convergence will need to quicken in order to avoid EMIR, MiFID 2,

Dodd-Frank and derivatives laws from other countries reversing the trend toward

more globalized financial markets.

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1. MiFID 2 will comprise the Markets in Financial Instruments Directive

(2014/65/EC) and the Markets in Financial Instruments Regulation (Regulation

(EU) No 600/2014) and will be supplemented by delegated acts from the

European Commission, as well as technical standards and guidelines by the

European Securities and Markets Authority.

2. EU investment firms are EU-established and -licensed firms and banks that act

as brokers, investment advisers, discretionary managers, underwriters,

placement agents and multilateral trading venues with respect to securities and

derivatives.

This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates

for educational and informational purposes only and is not intended and should not be construed

as legal advice. This memorandum is considered advertising under applicable state laws.

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Please complete a comprehensive report (​20 pages, double spaces and cite

references)​ on MiFID II.

Purpose of Assignment

-Consider US financial market from an international-oriented perspective

-Obtain deep understanding in derivative market