Comparing European and U.S. Securities Regulations
MiFID versus Corresponding U.S. Regulations
Summary
The purpose of this paper is to compare the EU and U.S. securities regulations. In November 2007, the Market in Financial Instruments Directive 2004/39/EC (MiFID) came into force in the EU, and brought about deep changes in the market infrastructure. The same year Regulation NMS in the United States was fully enacted and reformed equities markets. This study compares MiFID with the corresponding U.S. regulations, and primarily focuses on the regulatory and supervisory framework, trading venues, and the provision of investment services. Implementation of the rules, enforcement, and right to redress are beyond the scope of this paper. Likewise, the paper does not intend to judge the effectiveness of the two regulatory systems.
At a glance, one difference between the EU and U.S. securities regulations is the existence of a unified regulation in the EU under MiFID while in the United States, several regulations and oversight bodies co‐exist: the federal level, the state level, and the industry (so‐called “Self‐Regulatory Organizations”—SROs—in the 1934 Securities Exchange Act). The EU securities framework is relatively close to the United States: MiFID being a Directive, it had to be transposed and its implementation may vary from country to country despite harmonization efforts by the Committee of European Securities Regulators (CESR). Each member state has its own securities supervisor. And exchanges in Europe enact their own rules for their members as do SROs in the United States. Historically, securities Read More [102 KB Pdf]
2. Scope of the Securities Regulations
The MiFID encompasses investment firms, Regulated Markets, and MTF. It regulates investment advice as a service requiring authorization. The U.S. regulations focus on brokers and dealers and exchanges, which are respectively the “investment firms” and the “Regulated Markets” in the sense of the MiFID.1 The main difference between the two regulations is that dark pools are not explicitly captured by the MiFID (the Directive is not currently applied to them) whereas they are considered as ATS in the United States and are registered as broker and dealers. They however do not display public quotes if they are below a certain trading volume threshold. Read More [105 KB Pdf]
3. Objectives of the Securities Regulations in Europe and the United States
Securities regulations in the EU and United States have a similar emphasis on investor protection, fair and orderly markets, and price transparency, which is viewed in the United States as a tool to achieve both investor protection and fair and orderly markets. Such similarities are in line with the 2003 IOSCO Core Principles of Securities Regulation.1 Harmonization is also an important goal in Europe for institutional reasons, but it has no equivalent in the United States, since state powers in securities regulation are pre‐empted by and must rely on the SEC rules (Section 15(h) of the Exchange Act). Read More [69 KB Pdf]
4. Implementation of the Different Objectives
As Regards Competition/Fair and Orderly Markets Authorizing procedures for investments firms, brokers‐dealers, and exchanges: The authorizing procedures are similar on both sides of the Atlantic. Pre‐clearance is required for investment firms/broker‐dealers and Regulated Markets/exchanges before they begin business, and the information needed to obtain the authorization is broad. Read More [ 134 KB Pdf]
5. Post-Financial Crisis Lessons
The international financial crisis has revealed some gaps in the securities regulations on both sides of the Atlantic. Main issues have focused on the imperfect oversight of large interconnected institutions, the low transparency of OTC markets, especially derivatives, and the insufficient liquidity and capital across financial institutions. Regulators on both sides have announced plans to address them. Read More [90 KB Pdf]
6. Conclusion and Areas for Future Research
There are differences in securities rules and approaches on both sides of the Atlantic: Regarding the trading venues, MiFID is not currently applied to dark pools, while in the United States, dark pools are considered as ATS and register as broker‐dealers. They have to make their quotes available to the public above a certain trading volume threshold. Read More [71 KB Pdf]
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