UK Government Report
Description of the sector
“Wholesale capital markets” covers a wide range of capital market linked activity. The subsector includes, in particular, many of the services traditionally associated with investment banks, such as Goldman Sachs and JP Morgan. It also includes banking activity carried out by more diversified market actors such as Barclays and HSBC.
Beyond banking, other firms in the sector include stock and futures exchanges such as the London Stock Exchange Group and ICE and wholesale market brokers such as TP ICAP and BGC Partners, as well as thousands of assorted smaller or specialist firms which operate in the wholesale markets “ecosystem”.
The current EU regulatory regime
There is a wide range of EU legislation that affects firms in this sub-sector. Much of this has either been revised or put in place following the 2008 financial crisis. Typically, a large firm like an investment bank may need to comply with several of these laws to offer its services.More specialist firms may rely on a narrower range of legislation.
Legislation governing wholesale markets activity is established by the EU in part to implement international standards, e.g. from FSB, G20 and IOSCO. However, EU rules will often go beyond these global standards both in terms of scope and granularity. Others are designed specifically for the EU market, although standards originating at international level have become increasingly prevalent, especially since the financial crisis. This is particularly true for prudential banking standards.
In aggregate, the areas of regulation that relate to this sector include rules in relation to e.g. bank capital, remuneration of staff, transparency of trading financial instruments and market abuse. The core list of EU legislation relevant to this sub sector is:
– Prospectus Regulation (PR)
– Markets in Financial Instruments Directive (MiFID II)
– Markets in Financial Instruments Regulation (MIFIR)
– European Market Infrastructure Regulation (EMIR)
– Capital Requirements Directive (CRDIV)
– Capital Requirements Regulation (CRR)
– Market Abuse Regulation (MAR)
– Benchmarks Regulation (BMR)
– Central Securities Depositories Regulation (CSDR)
– Financial Collateral Directive (FCD)
– Credit Ratings Agency Regulation (CRA)
– Securities Financing Transactions Regulation (SFTR)
– Transparency Directive (TD)
– Short Selling Regulation (SSR)
– Settlement Finality Directive (SFD)
– Bank Recovery and Resolution Directive (BRRD)
– Central counterparty recovery and resolution (still under negotiation)
These regulations rarely correspond neatly to different categories of firm within the wholesale markets subsector. In some cases, a firm may need to comply with numerous pieces of legislation, even where the scope of their activities is reasonably narrow. For example, an investment bank may be authorised under the Capital Requirements Directive (CRD) which determines how much capital banks must hold, and need to comply with at least MiFID and the Market Abuse Regulation to offer just its core market making services.
One of the most important pieces of legislation for the sector is MiFID (which is in the process of being replaced by MiFID II and MiFIR). Compliance with MiFID enables firms to conduct many core capital market activities across the EU, for example: reception and transmission of orders, execution of orders on behalf of clients, dealing on own account,advice to professional investors. MiFID is also the key directive for operating exchanges and trading venues.
Broadly-speaking, if a firm is authorised in one member state to provide investment services under relevant EU legislation, then it is permitted to serve clients across the EU under that authorisation. This arrangement is known in the industry as “passporting”. In some areas, similar rights of market access are achieved through third country equivalence or national market access regimes within the EU.
EU Financial Services legislation is generally applicable to Gibraltar but not Crown Dependencies or other Overseas Territories. Crown Dependencies and Overseas Territories with substantial Financial Services sectors may choose to adopt EU legislation.
Third country equivalence
Within the legislation described above, there are a range of rules affecting how firms from non-EEA countries may interact with the EU, known as third country regimes. These tend to involve so-called “equivalence assessments” (and also exist across parts of insurance, asset management and other financial activity).
Equivalence involves a set of piecemeal regimes that sometimes support market access to the EU (notably for MiFID and EMIR services), or sometimes operate to support market efficiency and avoid duplicate regulatory burdens, e.g. for CRR. The MiFID II third country regime comes into force at the start of 2018. Once this is in place many, but not all, capital market activities will be subject to third country access gateways under EU law. However, equivalence does not always provide a mechanism by which market access is secured, and the European Commission has itself observed that it is specifically not a system aimed at delivering international trade in financial services. There are, for example, no powers for the EU to extend CRR market access to non-EEA lending banks.
Additionally, national regimes may also establish rules under which third country firms can provide services. The requirements for achieving market access in this way differ under each individual national regime (and may be subject to a complete prohibition) and national regimes only confirm rights to access customers in that country. Therefore, a firm accessing EU markets on this basis could theoretically be subject to 28 different sets of regulatory and supervisory requirements.