Brexit — HM Treasury publishes draft Statutory Instrument — MiFID

The European Union (Withdrawal) Act 2018 (EUWA) repeals the European Communities Act 1972 on the day the UK leaves the EU and converts into UK domestic law the existing body of directly applicable EU law. The purpose of the EUWA is to provide a functioning statute book on the day the UK leaves the EU.

By way of background, the EUWA also gives Ministers powers to make Statutory Instruments (SIs) to prevent, remedy or mitigate any failure of EU law to operate effectively, or any other deficiency in retained EU law.

The most recently published SI is the Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018 (“MiFi SI”).

This latest MiFi SI, which is still in development and subject to change, is designed to provide Parliament with details of the approach to be taken to onshore financial services legislation.

The purpose of the MiFi SI is to support the fair, stable and transparent operation of the UK financial markets after withdrawal from the EU and to provide for investors to have the same protections as they currently enjoy. To ensure the MiFID II regime continues to operate effectively once the UK has left the EU, certain changes to the legislation are necessary.

HM Treasury has stated that MiFID investment firms and market operators should also have regard to amendments made in separate SIs, which will be published in due course. These will include, amongst others, amendments to the Financial Services and Markets Act 2000 (FSMA), the Regulated Activities Order 2001 (RAO), and the Recognition Requirements for Investment Exchanges and Clearing Houses Regulations 2001.

The MiFi SI focuses on the following areas:

  • Transfer of Functions
  • Binding Technical Standards
  • Information sharing and cooperation requirements between UK and EEA regulators
  • Equivalence
  • Recognition of EU firms, instrument scopes and market data
  • MiFID II Transparency Regime
  • MiFID II Transaction Reporting

Transfer of Functions

Functions under MiFID II that are performed by EU authorities, for example, the European Commission or ESMA, will no longer apply in the UK after EU withdrawal. The MiFi SI generally transfers the functions of ESMA to the PRA or FCA and the functions of the European Commission to HM Treasury.

Binding Technical Standards

Under EU financial regulation, drafts of Binding Technical Standards (“BTS”) are developed by European Supervisory Authorities (“ESAs”). HM Treasury is transferring responsibilities for making BTS to UK regulators. As a result, the FCA and PRA will be making changes to the relevant parts of MiFID II BTS and it is expected that the FCA/PRA will consult on these shortly.

Information sharing and cooperation requirements between UK and EEA regulators

Under MiFID II, there are obligations on UK authorities to co-operate and share information with EEA authorities. The MiFi SI removes these obligations from UK legislation. Following EU withdrawal, UK authorities will be able to continue to cooperate and share information with EEA authorities, in the same way as they can with authorities outside the EEA, based on the existing domestic framework provisions for cooperation and information sharing, which allow for this on a discretionary basis.


Under MiFID II, a third-country’s regulatory regime may be deemed by the European Commission to be equivalent to the approach set out in MiFID II. For example, a third-country regime may be equivalent in relation to trading venues for the purpose of the trading obligations for shares and derivatives, or for the purpose of the provision of investment services and activities to professional clients.

To ensure the MiFID II equivalence regimes can continue to operate effectively in the UK, the European Commission’s function of making equivalence decisions for third-country regimes will be transferred to HM Treasury.

Where the European Commission has taken an equivalence decision for a third country prior to the UK withdrawal, such decisions will be incorporated into UK law and will continue to apply to the UK’s regulatory and supervisory relationship with such a third country.

Passporting — Without a negotiated agreement with the EU, the EEA financial services “passporting” system will be unworkable. A Temporary Permissions Regime is being introduced by the UK Government which will enable relevant EEA firms and funds operating in the UK via a passport to continue their activities in the UK for a limited period after exit day and allow them to obtain UK authorisation or transfer business to a UK entity as necessary. The MiFi SI makes special provisions for EEA firms which intend to operate in the UK under the TPR by introducing the possibility of ‘substituted compliance’ in cases where not doing so could lead to conflicts of law. This means that a firm operating under the TPR will not be deemed in breach of the UK’s MiFID II rules if it can demonstrate that it complies with corresponding provisions in the EU’s MiFID II rules.

Substituted compliance will not be available for all aspects of MiFID II. For example, it will not apply to those aspects of MiFID II where supervisory responsibility is reserved to the host state regulator, such as conduct of business obligations for branches.

Recognition of EU firms, instrument scopes and market data

Generally, the MiFi SI provides that the EU is treated a third country. However, certain exceptions have been made to this approach. These provisions include, amongst others, that UK firms will be able to treat Undertakings for Collective Investment in Transferable Securities (UCITS) in the EU as automatically non-complex instruments, so that they can, in general, continue to be sold to retail clients in the UK without a client undertaking an appropriateness test.

MiFID II Transparency Regime

The MiFID II transparency regime requires that buyers and sellers of financial instruments disclose price and volume information for their trades. For each class of financial instrument, there are various thresholds and waivers which apply in respect of making price and volume data of orders and transactions public. Some of these thresholds and waivers protect investors who place large orders while others take account of the illiquidity of some instruments. Waivers relating to the trading in equities are also subject to a mechanism which limits the proportion of trading that can take place without being subject to pre-trade transparency (the ‘Double Volume Cap Mechanism’).

The waivers and thresholds contained in the MiFID II transparency regime are generally calculated on the basis of EU-wide market data. An abrupt move to using UK-only data could pose operational challenges for the FCA and could result in adverse implications for the functioning of markets. For this reason, the FCA is being granted temporary powers in regard to the regime during a transitional period.

These temporary powers include the ability, in specified circumstances, to:

  • amend certain transparency calibrations (which are otherwise frozen on exit day)
  • direct the application of the Double Volume Cap Mechanism
  • freeze the obligation to publish trading information in respect of certain instruments

MiFID II Transparency Regime

Under the MiFID II transaction reporting regime, investment firms are required to submit a report to their national regulatory authorities following the execution of a trade. These transaction reports are used by regulators to detect and prevent market abuse.
UK branches of EEA firms currently send transaction reports to their home regulator rather than to the FCA. The effect of this SI is to require UK branches of EU firms to report to the FCA, in the same way as UK branches of non-EEA firms are required to do. UK branches of EEA firms will need to adapt their reporting systems accordingly.
Under the MiFI SI, firms will continue to be required to submit reports on trades in financial instruments admitted to trading, or traded, on trading venues in the UK and in the EU. This will maintain the existing scope of the FCA’s monitoring of markets.