Bankers hope an obscure law will preserve the City’s access to the EU
Posted by hkarner - 11. Juli 2016
Source: The Economist
Subject: MiFID: Financial tonic
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.