EC to miss Mifir equivalence deadline

Draft timetable would leave some jurisdictions inaccessible to European Union firms from January 2018


Share-trading venues in some third countries will be inaccessible to European Union firms after a key regulation goes live in January 2018, has learnt, under plans by the European Commission to prioritise equivalence decisions for certain jurisdictions.

“If they are working on equivalence for certain jurisdictions, that might be the top three, it might be the top five, top 10 or more, but that leaves a significant number of jurisdictions which would not have third-country equivalence. If they are working on equivalence now it means there must be a hangover effect for those third countries not deemed equivalent,” says an industry lobbyist.

Under the Markets in Financial Instruments Regulation (Mifir), which enters into force on January 3, 2018, EU investment firms are required to trade shares available in the European Economic Area (EEA) on only EEA-regulated markets or multilateral trading facilities (MTFs), with an EEA systematic internaliser or on a third-country venue deemed equivalent by the EC.

The procedure for the EC to grant equivalence is triggered by national competent authorities of EU member states requesting the decision. It is then down to the EC to evaluate the trading venues of the third country and grant equivalence after the assessment. has seen a document dated February 3, circulated to the industry by the expert group of the European securities committee (EGESC) – an EC body that consults and advises on securities law. The document requests feedback on which jurisdictions the EC should prioritise for equivalence under the share-trading obligation.

“The commission’s services preliminary assessment indicates that equivalence decisions will be necessary for the US, Switzerland, Japan, Canada, Australia, Korea, Hong Kong, Singapore and certain Latin American jurisdictions. The aim of the EGESC consultation is to determine priority jurisdictions and the lead national competent authorities that would submit the equivalence requests for regulated markets in those jurisdictions,” the document states.

This list leaves out several obvious large equity markets, including India and Russia. The problem, however, is not just which countries are not on the list, but also whether jurisdictions on the list but assigned a lower priority will be deemed equivalent in time for January 2018.

One possible issue with the equivalence approach is there are a lot of markets that need to be covered. Also, what do you do if a market isn’t deemed equivalent?
Christian Voigt, Fidessa

“One possible issue with the equivalence approach is there are a lot of markets that need to be covered. Also, what do you do if a market isn’t deemed equivalent? Does it imply certain markets will be off limits for European brokers?” asks Christian Voigt, a senior regulatory advisor at trading technology firm Fidessa.

The consultation document outlines a timetable the EC will follow for the equivalence process. Third countries will submit their equivalence analysis to the EC by May 2017. Then, between June and October there will be an internal consultation of EU member states and the adoption of potential decisions. The publication of decisions in the EU’s official journal is planned for December 2017, just days before Mifir enters into force.

“That is news to me and would be cutting it very close,” says Voigt.

The European Commission did not comment in time for publication.

Foreign equities threat

The risks of delayed equivalence decisions are particularly acute for non-EEA equities that have some trading in the EEA, but a much larger liquidity pool located elsewhere. This category would mainly consist of dual-listed stocks and EEA-listed depository receipts of third-country issuers, but could in practice affect many other shares.

“There are one or two MTFs that trade Apple [in Europe] – the liquidity there is not that deep, so if you were to trade there you would presumably end up with a wider spread and a worse price. The risk is you are preventing pension schemes getting the best price and you are also Balkanising global securities trading into pools of liquidity,” says Tim Cant, a financial services regulatory lawyer at Ashurst in London.

According to Fidessa’s Fragulator, an online tool that provides a breakdown of where shares are traded, about 0.28% of Apple’s shares were traded on EU venues between January 30 and February 3, while 0.14% of shares in Toshiba were traded on EU venues.

The difficulty is it isn’t entirely clear whether this interpretation is legally justified
Tim Cant, Ashurst

“You absolutely can’t solely trade non-EU shares on an EU venue. There is not enough liquidity and it is not just the US affected here – the issue is global,” says Andrew Bowley, head of regulatory response and market structure at Nomura.

Industry participants have proposed various solutions to the problem caused by the share-trading obligation, including either amending the level one text or issuing guidance providing an alternative interpretation of the text. Given the tight timeline, changes in level one legislation seem unlikely.

“In Article 16 of the short-selling regulation there is a provision that says where the primary centre of liquidity is outside the EEA, you are not subject to the provisions in this regulation. If you could construe the trading obligation in the same light, to say this stock’s centre of gravity is outside the EEA and therefore the share-trading obligation doesn’t apply because price discovery happens elsewhere, then actually the global architecture remains largely unscathed. The difficulty is it isn’t entirely clear whether this interpretation is legally justified,” says Cant.

The share-trading obligation also contains an exception where trading is “ad hoc and occasional”. However, the European Securities and Markets Authority was not given a mandate to produce a regulatory technical standard that might clarify the scope of this exemption. The regulator did produce non-binding guidance in 2014.

“Esma gave some indications in 2014 [that] they would consider [the scope] similar to the systematic internaliser threshold, which might make the share-trading obligation somewhat toothless, because a lot of order flow would happen outside the obligation. But Esma does not have a mandate, so they just suggested this as a possibility,” says Cant.

Jurisdictional approach

It appears for now that the EC will try to resolve the issue by granting equivalence to as many venues as possible by next January. One element of the EGESC consultation has given industry participants at least some cause for optimism: the wording of the consultation document and the equivalence questionnaire implies the EC will assess equivalence on a jurisdictional basis rather than by individual trading venue.

“If they are looking at jurisdictions, then that is a much more effective way of doing it, because if you are looking at the US market and you look at the number of venues that have to be deemed equivalent, you have a significant challenge,” says a source at a global investment bank.

The EC has to factor in a number of conditions when making an equivalence decision on a non-EU venue. The markets have to be subject to effective supervision, and have clear and transparent rules for securities trading. Securities issuers must be subject to periodic information requirements to ensure investor protection, and there must be sufficient prevention against market abuses such as insider trading and manipulation. Nomura’s Bowley is confident the equivalence decisions should generally be straightforward, given the operational similarities between many venues.

“If you are comparing London Stock Exchange with New York Stock Exchange, you would probably conclude they are broadly similar. They are both transparent pre-trade, [and] they both have order books and transparent post-trade and comparable rule sets,” he says.

Even with equivalence for third-country regulated markets and MTFs, EU firms would still be restricted from accessing bilateral sources of liquidity outside the EEA. This is because there is no equivalence provision for systematic internalisers under the share-trading obligation. 

“If they do think they will sort most of the issues out with the equivalence process – we do think that is relevant and important – the question is whether they will address all of the problems or whether they will need something else,” says an industry lobbyist.

Additional reporting by Philip Alexander

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