The European Securities and Markets Authority (ESMA) has published on 6th of February 2019 the MiFID II supervisory briefing on the supervision of non-European Union (EU) branches of EU firms providing investment services and activities. The supervisory briefing has been designed to assist national competent authorities (NCAs) in their supervision of the establishment by EU firms of branches in non-EU countries.
The main topics covered by the supervisory briefing are the following:
- Supervisory expectations in relation to the authorisation of investment firms;
- Ongoing activities of non-EU branches including reporting and collection of information; and
- Supervisory activity and cooperation with non-EU Competent Authorities.
The National Competent Authorities (NCAs) should ensure full compliance with the authorisation requirements set out in the MiFID framework and should require applicants to provide them with a complete set of information as required under the MiFID framework and should carry out the complete authorisation procedure without any derogations or exemptions.
As shown in the briefing, NCAs should pay particular attention to issues affected by relocation and to situations where the applicant is part of a group/has links with non-EU entities and should therefore assess any qualifying shareholders, the group business model/structure, the impact of potential (prudential) consolidated supervision or lack thereof, etc.
NCAs should verify how any (in particular non-EU) shareholders or members with qualifying holdings are likely to influence the sound and prudent management of the investment firm and its compliance with the MiFID framework as well as prudential requirements under CRR/CRD IV (Regulation (EU) 575/2013 on prudential requirements for credit institutions and investment firms and Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms). In particular, NCAs shall carefully assess whether the group structure within which the investment firm will operate constitutes an obstacle to their effective exercise of supervisory functions.
Furthermore, NCAs should also pay attention to arrangements where the investment firm uses or proposes to use another party that is based in a non-EU jurisdiction to place or execute client orders. If the non-EU execution venue is not subject to similar regulatory requirements, the NCA should consider how the investment firm will be able to ensure that the other party provides sufficient execution quality and information to allow them to monitor ongoing performance (e.g. based on clear contractual terms).
Similarly, if a firm, dealing on own account and executing client orders and that is hedging on a back-to-back basis, uses an execution venue based in a non-EU jurisdiction for its hedging activity or to derive prices for its clients’ orders, the NCA should require the firm to demonstrate how this enables it to comply with its best execution obligations and to monitor this on an ongoing basis. If an NCA is not satisfied that the firm will be able to meet its MiFID obligations for the execution of client orders or for the firm to execute its hedge orders, the firm should not use the venue.
For further information: MiFID II supervisory briefing