David Bull's headshotMiFID II – the second iteration of the EU’s impending Markets in Financial Instruments Directive, due for implementation on January 3, 2018 – is being touted as the most extensive shake-up of financial services for a generation. But it’s a European regulation, so why should Asia-based companies care?

In a general sense, any firm operating in global financial markets should care. Like its predecessor before it, MiFID II is being heralded as a new standard in regulatory obligations. MiFID I, introduced in the post-Credit Crisis era of 2007/8, introduced concepts that were later adopted by regulators further afield than the EU, among them aspects like best execution and client classification.

MiFID II – the second iteration of the EU’s impending Markets in Financial Instruments Directive, due for implementation on January 3, 2018 – is being touted as the most extensive shake-up of financial services for a generation. But it’s a European regulation, so why should Asia-based companies care?

In a general sense, any firm operating in global financial markets should care. Like its predecessor before it, MiFID II is being heralded as a new standard in regulatory obligations. MiFID I, introduced in the post-Credit Crisis era of 2007/8, introduced concepts that were later adopted by regulators further afield than the EU, among them aspects like best execution and client classification.

More specifically, though, unless they are entirely ‘domestic’ in focus, Asian firms may find themselves or at least some of their activities governed by one or more of MiFID II’s many provisions. An Asian firm with a global sphere of operations will be impacted by MiFID II under either a ‘beneficial’ or an ‘exposed’ paradigm.

Non-EU firms are said to be beneficial if they are owners of Europe-based companies or beneficiaries of funds or portfolios of European investments. They are ‘exposed’ if they hold, invest or trade in MiFID II-mandated instruments that are traded on European Regulated Markets or other trading platforms.

So far, so good, but what does this actually mean for firms operating in Asia or with Asian clients?

A few examples spring to mind where firms with Asia connections will need to consider what data obligations they may have under MiFID II to obtain from, process, publish and/or report to European markets, regulators and/or counterparties.

For instance, a European firm with an EU client that wants to execute transactions on an Asian exchange would need to ensure its Asian affiliate – the exchange member – provides services in accordance with MiFID II. Most likely, this would require the Asian affiliate to provide services according to the European firm’s best execution policy, and provide all relevant proofs required under MiFID II, among them time-stamping, order, price, volume and transaction details. It would also need to comply with MiFID II’s trade and transaction reporting requirements. Finally, the relationship between European parent and Asian affiliate could fall under MiFID II’s outsourcing provisions, which require the EU entity to attest to the affiliate’s suitability.

Another example could involve an Asia-originated client order for execution on an EU Regulated Market (exchange) or other trading platform, whether a multilateral trading facility (MTF), organised trading facility (OTF) or broker crossing network (systematic internaliser). In this instance, an Asian firm providing advisory services to the client may have a relationship with a European executing brokerage that is necessarily governed by MiFID II. As well as the best execution and reporting obligations described earlier, the Asian affiliate may be impacted by MiFID II’s client classification provisions, which govern whether a customer is qualified to invest in the security in question.

More broadly, any of the above activities may be subject to MiFID II records retention provisions, not only for evidence of best execution but also for trade surveillance and fraud prevention. Asian firms may also be affected by the unbundling of research and execution under MiFID II, which is expected to result in many buy-side firms buying research services from their brokers under a subscriptions model, requiring mechanisms to handle access and payments.

MiFID II’s extensive changes will doubtlessly be felt most on its home turf: in Europe. But in today’s globalised markets, many if not most Asian firms will be impacted in some way, and so should take care to understand which of their activities in Europe are MiFID II-liable and how best to deal with their new obligations.