ESMA Sounds a Death Knell for Cross-Border Exchange Access, in Conflict With UK Legislation and MiFIR

by Shearman & Sterling LLP

Guidance of questionable legal accuracy from the European Securities and Markets Authority (ESMA) casts doubt on the ability of non-EU members of EU exchanges to provide client access to such exchanges through a technique referred to as “direct electronic access” (DEA). If ESMA’s guidance were correct, clients wishing to access EU exchanges would only be able to do so through EU-regulated entities who are members of the relevant exchange. This is likely significantly to reduce the attractiveness of and liquidity on those EU exchanges. ESMA’s interpretation is based on a linguistic legal interpretation of a particular provision without reference to other conflicting EU legislation. By contrast, the UK has already taken the clear and rational view in its legislation that non-EU members of UK exchanges can provide DEA to those exchanges for their customers since this is expressly permitted in other provisions of the same legislative package. There is now a conflict between the UK’s statutes—which prevail within the UK—and ESMA’s guidance.

On 15 November 2017, ESMA published new questions and answers (Q&A)[1] on the EU’s Markets in Financial Instruments Directive (MiFID II) and related Regulation (MiFIR), which come into effect this January. The Q&A include new guidance prohibiting non-EU entities from offering client trading services as EU exchange members, based on Article 48(7) of MiFID II. ESMA overlooked that such access is inextricably linked to the MiFID II activities of “execution of orders on behalf of clients” and “reception and transmission of orders.”[2] These activities may be carried out by third-country firms under Article 54(1) of MiFIR. For that reason the UK took the view in its legislation implementing MiFID II[3] that third-country firms may provide DEA to UK exchanges.

ESMA’s new stance puts it on a collision course with UK legislators. It is also unattractive commercially for non-UK EU exchanges. This note explains the ESMA guidance, highlights why it is of questionable legal accuracy and discusses the enforceability of this guidance and interpretation in the UK, France and Germany. The note also considers the implications of the guidance in the context of Brexit.

Whether a Firm Needs to be Locally Regulated Under Mifid II to Provide DEA to an EU Trading Venue?

In its Q&A, ESMA has answered this question in the affirmative, stating that “Article 48(7) of MiFID II provides that trading venues should only permit a member or participant to provide DEA ‘if they are investment firms authorised under [MiFID II] or credit institutions authorised under Directive 2013/36/EU.’ Therefore, non-EU firms (including non-EU firms licensed in an equivalent jurisdiction) or EU firms without a MiFID II licence are not allowed to provide DEA to their clients. This applies regardless of where the clients using the DEA service are located.”

Is ESMA’s Q&A Binding?

ESMA’s Q&A is informal interpretative guidance that is not held out to be legally binding, as confirmed by ESMA on its website.[4]The intention of the Q&A is to enhance the consistent application of EU law, which is one of ESMA’s general objectives. Both MiFIR and MiFID II contain provisions requiring ESMA formally to prepare guidelines on aspects of MiFID II. ESMA also has certain powers under Article 16 of the ESMA Regulation.[5] However, this Q&A is not issued under such powers and, moreover, MiFIR does not empower ESMA to develop formal guidelines in relation to Article 54(1). As a result, the status of ESMA’s Q&A is not definitive as to the effect of that provision.[6] Given the informal nature of the ESMA Q&A on this topic, it does not by its nature prevail over a UK statute or other contradictory member state laws. UK laws therefore will prevail over the Q&A.

A separate and more difficult question may arise as to, if the ESMA guidance is a correct interpretation of MiFID II, whether MiFID II would then over-ride a contradictory member state law, such as the UK statutory instruments implementing MiFID II. In our view, under the EU treaties and EU case law, even if ESMA were correct, their interpretation of Article 48(7) of MiFID II would not override the UK’s statutory instrument.

MiFID II, which is a directive and contains the troublesome provisions on DEA, can have direct effect in some circumstances, even if the UK were to be found to have failed to implement MiFID II into national laws or to have implemented it incorrectly.[7] The first principle in interpreting apparently contradictory EU directives and member state laws is to attempt to reconcile them so as to achieve the purpose of the directive.[8] However, national courts cannot apply such an interpretative approach where a member state law and EU directive are in direct, irreconcilable conflict, as is the case here.[9] Where there is a direct conflict, the EU directive then cannot prevail over national laws so as to impose an obligation on individuals.[10] This principle has been somewhat eroded in recent case law as regards civil obligations. However, it remains a cornerstone of EU law that an untransposed directive cannot have the effect of imposing or exacerbating criminal liability.[11] The EU courts have also been reluctant to interpret EU laws so as to impose tax code breaches and the same principle should likely apply to regulatory breaches. The UK’s regulatory perimeter[12] is in any event a criminal law regime. ESMA’s interpretation of MiFID II is one that eliminates rights of certain persons to carry on certain activities so as to render such activities potentially criminal. The UK implementation preserves such rights and does not criminalise third-country entities providing access to UK exchanges for their clients. As a result, exchanges and third-country firms acting according to the requirements of UK laws implementing MiFID II would not be subject to UK criminal or regulatory liability due to any acts in contravention of ESMA’s interpretation of MiFID II.

As a legally binding EU regulation, in contrast, MiFIR has “direct effect,” which means that, broadly speaking, the provisions of MiFIR (including Article 54(1) on the regulatory perimeter) can be invoked and relied on by individuals or corporations in national courts.

As a result of the above, ESMA’s non-binding Q&A or its interpretations of MiFID II could not be relied upon in the UK courts or by local regulatory or criminal authorities so as to enforce a breach of EU or UK legislation, because (i) ESMA’s guidance is informal and has no EU legal status of its own; and (ii) as a matter of EU law, EU directives which create criminal liabilities cannot prevail over national laws which do not recognise such criminal liabilities.[13] UK markets and members of UK exchanges may therefore as a matter of law continue operating in a way that allows DEA access by overseas persons, unless and until the relevant UK statutory instruments are amended.

Is ESMA’s Guidance Legally Supportable?

ESMA’s Q&A repeats the language of Article 48(7) of MiFID II and so, as far as that goes, might seem reasonable. However, ESMA’s Q&A is, in our view, incorrect. This is because Article 48(7) of MiFID II is in direct contradiction of Article 54(1) of MiFIR, which states that “[t]hird-country firms shall be able to continue to provide services and activities in Member States, in accordance with national regimes[14] until three years after the adoption by the Commission of a decision in relation to the relevant third country in accordance with Article 47 [of MiFIR].”[15] Because MiFIR is directly applicable,[16] it will override any incompatible national member state legislation implementing Article 48(7).[17] As a result, national measures implementing Article 48(7) of MiFID II, including any such measures giving effect to ESMA Q&As, must be read subject to Article 54(1) of MiFIR.

From a purely linguistic legal perspective, it could be argued that the DEA provisions are not “investment services and activities” within the meaning of MiFID II, since the definitions of “DEA”[18] and “investment services and activities” use different words. ESMA’s reasoning seems to be based on such linguistic interpretations. ESMA’s conclusion must be based on a concept that DEA and investment services are distinct activities, one of which requires local regulation but the other of which does not. However, from a practical perspective, DEA is nothing more than a subset of the MiFID investment services and activities of “execution of orders on behalf of clients”[19] or “reception and transmission of orders.” The provision of DEA services to clients will inevitably involve the DEA provider’s systems being used to enter into trades on the execution platform on the client’s behalf, with contractual consequences involving agency at both exchange and clearing house level. The DEA provider will also, often, be involved in order transmission in a meaningful way, triggering the “reception and transmission” activity. Since DEA is nothing more than a particular kind of investment service or investment activity, the restriction in MiFID II on DEA is, on a proper interpretation, inconsistent with the third-country provisions of MiFIRas was concluded by the UK authorities in their implementation measuresand must be read as subject to such permissions.

The prevalence of Article 54(1) of MiFIR is also supported from the perspective of “purposive” interpretation principles, which underpin EU legislation. MiFIR enshrined an important policy approach that MiFID II should not interfere with the “regulatory perimeter” of EU member states.[20] This provision was hard-fought by the UK and other “open markets” in Europe, after attempts by certain EU member states (notably Germany and France) and the European Commission (in its original MiFID II proposal) to close Europe’s doors to third-country cross-border business, except where a “reverse solicitation” exists or where the Commission had approved the relevant third country’s regulatory regime as “equivalent.” Whilst an equivalency regime exists in the final version of MiFIR, in the absence of any equivalence determinations, the regulatory perimeter for financial services and activities is clearly reserved, on a three-year transitional basis, for member states to determine. ESMA’s Q&A flies in the face of these important structural principles underlying MiFID II.

The UK, and other open market jurisdictions of the EU (such as Ireland and, to a lesser extent, Luxembourg), have historically operated “overseas persons” regimes, which allow cross-border wholesale financial sector business to take place without local regulation of foreign participants. Such approaches have been fundamental to the success of the Cityand the emergence of Ireland and Luxembourg as important secondary financial centres in Europe. Difficulties on the part of non-EU entities to access customers, market participants and market infrastructure in other, more protectionist, member states has resulted in their financial markets being primarily domestic or regional. MiFIR expressly provides for these existing national perimeter regimes to be preserved. It is doubtfully correct to reinterpret such an important point of policy underlying the MiFID II legislative package on the account of a technical provision relating to organizational requirements for exchanges.

Conflict With the UK Implementation

The UK implementation of the DEA restriction in MiFID II takes into account the impact of Article 54(1) MiFIR. The UK expressly permits third-country firms that fall either under the “overseas persons exclusion”[21] or under the MiFIR equivalence regime also to provide DEA on UK exchanges. This implementation is found in The Financial Services and Markets Act 2000 (Recognition Requirements for Investment Exchanges and Clearing Houses) Regulations 2001[22] and The Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2017. The latter UK statutory instrument states that: “In this regulation the provision of direct electronic access is in accordance with the relevant United Kingdom national regime for the purposes of Article 54.1 (transitional provisions) of the markets in financial instruments regulation if it is an activity subject to the exclusion in Article 72 (overseas persons) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2000.”[23]

The updated provisions of the rulebooks of some of the main UK exchanges contain no restrictions on overseas persons providing client trading services and some of their proposed rules expressly refer to “overseas persons” under UK legislation as permissible providers of such services, as a result of this legislation.

The Position in Other Member States

Germany has also announced a moratorium on applications for investment firm status, which may buy members of its exchangessuch as Eurexa few months to restructure themselves, if this becomes necessary. German national legislation implementing MiFID II[24] omits an express obligation on exchanges to ensure that DEA providers are authorised under MiFID II. The non-inclusion of wording tracking Article 48(7) (but not other parts of Article 48) is noteworthy. It appears that the German legislator intended for the regulators to deal with this issue when approving the rules and regulations of exchanges.

The Netherlands has a national recognition regime for some countries, such as Switzerland and the US, which may now need reconsidering in light of the ESMA Q&A.

Many other countries, notably France, has simply copied Article 48(7) of MiFID II into local law without derogations with respect to the national perimeter. Entities accessing exchanges in these countries for purposes of client trading will now need either to discontinue client trading services, restructure them in a way that does not involve DEA or intermediate exchange access through a locally-regulated entity. Since MiFID II comes into force in January 2018 and regulatory authorisations typically take many months to approve, this late and surprising move from ESMA may create compliance difficulties for some continental exchanges and their members.

What Next?

UK laws and ESMA guidance are in direct contradiction. This raises interesting questions of what should happen next:

  • Optionally, ESMA could helpfully clarify that its Q&A only applies to “DEA to the extent that the same is not an investment service or activity” and not to DEA in general. That would result in an approach that is consistent with both MiFID II and MiFIR. In our view, firms are likely to be able to conclude in many circumstances that “DEA which is not an investment service or activity” is a nil set.
  • The UK could bring its legislation into line with the ESMA Q&A. In the current political environment and with Brexit on the horizon, it would seem unlikely that Parliament would pass legislation so detrimental to the City and so contrary to its historical legal foundations. This is all the more so given the contradiction between ESMA’s Q&A and the UK’s hard fought policy position on the regulatory perimeter, as established and enshrined in Article 54 of MiFIR. Enacting such legislation would give effect to EU regulatory authority guidance that is in our view incorrect. Such a legislative change would also doubtless have impacts in the context of the current machinations in the UK Parliament on Brexit and create an unwelcome distraction, given that the ESMA guidance could only be implemented in the UK through statutory instrument (not through regulatory rules or guidance), which requires the review of Parliament.
  • In contrast, the likelihood of France or other countries introducing new legislation at this stage and in contradiction of ESMA guidance seems unlikely.

This situation brings with it implications in several fields:

  • First, the future of third-country memberships for exchanges, particularly Euronext, for purposes of intermediated client trading and access is quite bleak, assuming that ESMA’s approach is followed in relevant countries. Several continental exchanges haveby a stroke from ESMAsuddenly become less competitive in the short term for attracting liquidity than comparable UK or international exchanges, and possibly, German exchanges, which offer similar instruments for trading. ESMA’s Q&A provides some comfort about possible delegation of client access via third-country affiliates[25] which should allow business restructuring on a compliant basis. However, such structures entail multiple layers of intermediation between clients and exchanges, which create new insolvency and operational risks for clients and require repapering, a process that adds costs, takes time and risks business attrition.
  • Secondly, what will happen next with respect to the UK position and UK laws? Will ESMA or the European Commission raise an enforcement case against the UK? If so, would they succeed in the ECJ in light of the contradictory requirements of Article 54(1) of MiFIR? Even if such a case were brought, might that be heard before Brexit?
  • Thirdly, what of Brexit? It is almost unthinkable that the UK would adopt laws resembling this ESMA Q&A after Brexit, since it runs contrary to the fabric of open markets which the City relies on to operate. If the UK is pushed to change its laws while still in the EU, will the presenting of such laws to Parliament harden pro-Brexiteers’ resolve? And after Brexit, what consequences could the UK’s position, if it remains the same, have for the goals of “equivalence” or “mutual recognition?” The answer to the latter point is it should have no impact since the UK’s approach does not give rise to systemic risk, let alone in the EU more generally. However, that remains to be seen.
  • Fourthly, could not MiFID II be corrected to address such an obvious drafting infelicity.

[1] ESMA’s Q&A is available at
[2] MiFID II, annex I, section A provides the full definition as “reception and transmission of orders in relation to one or more financial instruments.”
[3] See the Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2017 (S.I. 2017/701) and The Financial Services and Markets Act 2000 (Recognition Requirements for Investment Exchanges and Clearing Houses) Regulations 2001 (S.I. 2001/995).
[4] See ESMA’s summary of its Q&A tool, at
[5] See Regulation (EU) No 1095/2010, available at
[6] See Article 29(2), ESMA Regulation, which states, “The Authority may, as appropriate, develop new practical instruments and convergence tools to promote common supervisory approaches and practices.”
[7] The principle of direct effect of EU law was enshrined in 1963 in the judgment of the European Court of Justice in NV Algemene Transport en Expeditie Onderneming van Gend en Loos v Netherlands Inland Revenue Administration (Case 26/62). “Vertical” direct effect enables individuals to bring actions against their EU member state based on rights flowing from EU legislation. Whereas EU Directives and EU Regulations both have “vertical” direct effect, EU Regulations also have “horizontal” direct effect (enabling individuals to bring actions against other individuals). However, these doctrines only apply to EU legislation which creates rights, and not to EU legislation or measures which would create new or expanded criminal or regulatory breaches when compared to national laws.
[8] This is known as the “interpretative obligation.” See Case 14/83 Von Colson and Kamann v Land Nordrhein-Westfalen [1984] ECR 1891.
[9] In Case C-334/92 Wagner Miret v. Fondo de Garantia Salarial [1993] ECR I-6911, the ECJ recognised that the national court could not interpret the national law in conformity with the relevant directive.
[10] Case C-168/98 Luciano Arcaro [1996] ECR I-4705.
[11] See Case 80/86 Klopinghuis Nijmegen [1987] ECR 3689. This case concerned charging income tax in the event of an exchange of shares.
[12] Pursuant to the Financial Services and Markets Act 2000, sections 19 and 23. Section 23 states: “(1)A person who contravenes the general prohibition is guilty of an offence and liable (a) on summary conviction, to imprisonment for a term not exceeding six months or a fine not exceeding the statutory maximum, or both; (b) on conviction on indictment, to imprisonment for a term not exceeding two years or a fine, or both.”
[13] For the view of the ECJ on the effect of a non-binding EU measure in a broadly similar context, see for example, Case C-322/88 Salvatore Grimaldi v Fonds des maladies professionnelles [1989] ECR 4407.
[14] That is, in accordance with the local rules of the Member State in which the services or activities are provided.
[15] Article 46 – 49 of MiFIR establishes a third country equivalency regime for investment firms.
[16] See Article 288, Treaty on the Functioning of the European Union: “A regulation shall have general application. It shall be binding in its entirety and directly applicable in all Member States.”
[17] There are good grounds to argue that Articles 46 – 49 of MiFIR would override Article 48(7) of MiFID II, which requires implementation through domestic UK legislation. EU regulations supersede national laws incompatible with their substantive provisions. See, for example, R v Secretary of State for Transport Ex parte Factortame Ltd (N0. 2) [1991] 1 A.C. 603.
[18] DEA is defined in MiFID II as “an arrangement where a member or participant or client of a trading venue permits a person to use its trading code so the person can electronically transmit orders relating to a financial instrument directly to the trading venue and includes arrangements which involve the use by a person of the infrastructure of the member or participant or client, or any connecting system provided by the member or participant or client, to transmit the orders (direct market access) and arrangements where such an infrastructure is not used by a person (sponsored access).”
[19] In MiFID II, ‘execution of orders on behalf of clients’ is defined as “acting to conclude agreements to buy or sell one or more financial instruments on behalf of clients and includes the conclusion of agreements to sell financial instruments issued by an investment firm or a credit institution at the moment of their issuance.”
[20] See Council General Approach on MiFID II, available at, and Council General Approach on MiFIR, available at For a discussion of the concerns raised by Member States during the negotiation of the MiFID II package, see, for example,the Danish Presidency Progress Report, December 2012 (at para 54), available at
[21] Article 72 of the UK’s Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (S.I. 2001/544). Article 72 of the RAO provides an exclusion for “overseas persons” from the need to obtain authorisation in relation to certain regulated activities. An “overseas person” is defined in the RAO as a person who carries on certain regulated activities but who does not do so, or offer to do so, from a permanent place of business maintained by them in the UK.
[22] S.I. 2001/995. See paragraph 3C, Part I of the Schedule.
[23] See Reg 32(10) of the Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2017.
[24] The German national law implementing MiFID II is available at
[25] In its Q&A, in response to Question 24, “Can DEA clients accessing an EU trading venue through sub-delegated DEA benefit from the exemption offered under Article 2(1)(d) of MiFID II?,” ESMA confirms “ some cases a DEA provider may allow a DEA user to sub-delegate the access rights onto a third entity (Tier 2 DEA client). Unlike a Tier 1 DEA client who directly interacts with the member to obtain the use of the trading code, a Tier 2 DEA client would, in most cases, not technically be in possession of the trading code of a DEA provider. The trading code is not passed down to the ultimate users of DEA, but only appended to the order message by the DEA provider before being submitted to the trading venue. Therefore, ESMA does not consider such Tier 2 DEA clients as having DEA for the purposes of Article 2(1)(d) of MiFID II.


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For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to

Changes in Our Privacy Policy

We reserve the right to change this Privacy Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our Privacy Policy will become effective upon posting of the revised policy on the Website. By continuing to use our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

If you have any questions about this Privacy Policy, the practices of this site, your dealings with our Website or Services, or if you would like to change any of the information you have provided to us, please contact us at:

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
  3. Track anonymous site usage; and
  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

  • "Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).
  • "Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.
  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit
  • New Relic - For more information on New Relic cookies, please visit
  • Google Analytics - For more information on Google Analytics cookies, visit To opt-out of being tracked by Google Analytics across all websites visit This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at:

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This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.