British regulator takes a look at MiFID passporting to & from EU countries, FinanceFeeds investigates

The Prudential Regulatory Authority (PRA) has issued a consultation paper which covers specific aspects of the ‘passporting’ facility which is part and parcel of the MiFID II rulings which allow investment firms and electronic trading companies in European Union member states to provide regulated financial services and derivative trading to customers in any European Union member state.

This particular directive has proven a very practical framework for many FX firms in Cyprus, the global center for retail FX, to onboard customers all across Europe including in the UK, as passporting allows CySec firms to have an FCA registration number as part of their licensing.

The full implementation of MiFID II has experienced delays, the latest being this week’s anticipation that the January 2018 date, a further extension to the initial implementation date, may not be met, however the PRA, which regulates banks and financial institutions, has highlighted matters for consultation with regard to the passporting rules.

Currently, the rule change will affect PRA-regulated banks, investment firms and other financial holdings companies, which is actually not relevant to any companies in the FX industry, as they are deemed non-bank and therefore regulated in the UK by the Financial Conduct Authority (FCA) however it is worthy of note that this particular directive takes a close look at passporting, which is a very important regulatory aspect within the FX industry.

What’s good

This paper covers two specific areas, those being passporting between EU member states, and algorithmic trading.

The Extension of scope from MiFID to MiFID 2 and harmonisation of the passporting regime; and systems and controls for firms that undertake algorithmic trading and provide direct electronic access (DEA) to trade venues.

This ruling could quell any potential worry that a potential ‘Brexit’ could cause any limitations to MiFID passporting between firms in the EU and customers in Britain, or vice-versa – in short, passporting is here to stay regardless of any Brexit referendum outcome.

With further regard to regulatory passporting between EU countries, the PRA notes that MiFID II makes some “small but important” changes to the current passporting regime that will affect dual-regulated firms.

Specifically it extends the range of passportable investment services and activities, to include the operation of an organised trading facility (OTF); and the range of investments to include the new instrument of emissions allowances.

The PRA has stated that existing passports will remain valid and unchanged but firms wishing to include the new activities or instruments will need to amend their passport. These companies should use the existing PRA procedures for a change in particulars.

Bureaurcatic, but a precursor to the MiFID II final implementation

On this basis, the PRA proposes to delete its existing forms and link directly to the EU forms; and to extend its current CRD 4 passport notification declaration form to notifications under MiFID II and make minor changes to the declaration.

Where firms want to passport MiFID activities under CRD 4, the PRA will continue to process applications as it currently does and in compliance with relevant EBA forms.

Tick sizes in Multilateral Trading Facilities (MTFs)

Currently, there is only one MTF for FX, which is London’s highly technologically advanced LMAX Exchange. requires Member States to require regulated markets and MTFs to adopt tick size regimes in shares, depositary receipts, exchange‐traded funds, certificates and other similar financial instruments and in any other financial instrument for which regulatory technical standards are developed under Article 49(4) of MiFID II.

Algo Trading remains permissible, but with limits

The second area covered is algorithmic trading, specifically referring to systems and controls for firms that undertake algorithmic trading and provide direct electronic access (DEA) to trade venues.

Whilst the European Commission, along with many other central government authorities, has shown certain disdain for algorithmic and high frequency trading, the British PRA still has no specific ruling which focuses on algorithmic trading.

The PRA will add a new section to its rulebook, which centers on algorithmic trading and covers organizational requirements, internal supervision, systems and compliance. The PRA has stated that its proposals largely mirror those of the FCA, which overseas London’s institutional non-bank trading industry, and will set rules in place to avoid any abuse of the markets via algorithmic methods and also to ascertain financial strength of firms, as well as to prevent disrupting the market by sending toxic orders into a live electronic market.

This comprehensive consultation by the PRA indeed paves the way forward as the MiFID II rules continue to be hashed out by European authorities, however it looks as though the majority of firms operating in the FX industry will be able to continue unhindered as a homogeneous entity across the EU.

Research sources: Dentons, IDSA, Prudential Regulatory Authority.