Bankers hope an obscure law will preserve the City s access to the EU
Jul 9th 2016
THERE was a time when a mention of MiFID 2, a complex European regulation,
elicited groans from financial types in the City of London. Since Britain voted
to leave the European Union, however, it has become a source of hope. That is
because a clause in the second iteration of the Markets in Financial
Instruments Directive, to give it its full name, seems to provide financial
firms outside the EU, as those in the City may soon be, with a means to provide
services to customers inside it.
The provision in question allows financial firms from outside the EU to offer
trading, brokerage and underwriting services to European institutional (but not
retail) clients, as long as the regulatory regime where they are based is
deemed equivalent to that of the EU. In theory, there should be no doubt
about the equivalence of Britain s laws, points out Jonathan Herbst of Norton
Rose Fulbright, a law firm, as long as Britain continues to implement European
rules until its exit. This suggests that for banks and brokerages based in
London it should be business as usual.
Politics is likely to get in the way, however. The equivalence provision is as
yet untested, since MiFID 2 does not come into force until early 2018. But the
regulators interpretation of a similar clause in the European Market
Infrastructure Regulation (EMIR), which governs the trading and clearing of
derivatives, is sobering.
The declaration of equivalence, both for EMIR and for MiFID 2, is at the
discretion of the European Securities and Markets Authority (ESMA), based in
Paris. It has so far proved to be largely a political process , says Simon
Gleeson of Clifford Chance, another law firm. Declaring American regulations on
clearing-houses equivalent under EMIR, for example, took over three years and
involved a long debate between America and the EU over the extent to which
America should adapt its rules to mirror Europe s (resolved only after ESMA
eventually yielded).
As Mr Gleeson points out, the equivalence provisions of both EMIR and MiFID 2
were originally intended to encourage other countries to bring their rules more
in line with European ones, in exchange for generous market access. A
post-Brexit Britain would start with identical rules, but even a small
divergence a decision, say, to repeal Europe s caps on bankers bonuses could
be construed as an unacceptable step in the wrong direction. In any case,
argues Philippe Morel of Boston Consulting Group (BCG), a consultancy, it is
unrealistic to expect that any decision on equivalence could be divorced from
the wider, potentially acrimonious exit negotiations, in which it is bound to
be used as a bargaining chip.
Indeed, the huge uncertainty about the length and outcome of the negotiations
over Britain s departure could be enough to render MiFID 2 useless to the City.
If bankers cannot be sure about how soon a decision on equivalence will be
made, or whether it might be revisited at any moment, they cannot rely on MiFID
2 to keep their operations running smoothly. According to Mr Morel, co-author
of a recent joint report on MiFID 2 by BCG and Markit, a financial-information
company, the implementation of the new law has already proved more costly and
time-consuming than anticipated, requiring a big overhaul of market
participants data systems. Banks would not want to risk wasting all the money
spent complying with MiFID by maintaining European trading desks in London
alone.
Instead, financial firms with big operations in London will probably begin
setting up or scaling up European subsidiaries, to be able to continue trading
with European clients no matter how the Brexit saga ends. Once trading has
moved, it may not shift back. Some British bankers remain sanguine, arguing
that retaining access to Britain s deep capital markets is so important to
European businesses that they would not allow it to fall victim to petty
politics. Then again, some thought that the City was so important to the
British economy that voters would not dare risk its future by plumping for
Brexit.