The European Union (EU) has announced that an agreement has been reached to roll out more stringent rules for investment firms and traders in the EU market and beyond. This means that it will have more power over foreign firms that operate in the EU, especially London-based firms that will soon be leaving the EU.
There are several changes that should be of interest to the many financial firms who are planning to trade in the EU. One of them is stricter requirements when it comes to liquidity and capital, a tightening of an original proposal from December 2017.
The result is that the current threshold for applying capital and liquidity rules has been lowered, so that more firms would be under its scope.
This means that investment firms with 15 billion euros or more will automatically be subject to the same laws as banks when it comes to ensuring liquidity and capital are fine. Those with less than 15 billion euros will have lesser requirements placed on them. Some companies that are now under these rules include Goldman Sachs and Morgan Stanley International.
What will have UK-based firms worried is the strengthening of the equivalence regime that would only apply to third-country investment firms. The EU will also have a lot more regulatory power when checking whether foreign regulatory rules are compatible with current EU regulations.
A majority of investments firms in the EU have made London their home due to the central location of the City of London. However, Brexit has forced a lot of these firms to set-up EU offices so that they may continue to operate in Europe.
The new rules will allow the EU to determine whether foreign investment firms can act as banks. If they are considered banks, then they will be treated under stricter conditions, especially those that are key players in the trading sector. With this final announcement, the EU now considers itself Brexit ready.
Level Playing Field
According to the EU, this will level the playing field between banks and investment firms. Banks often have a lot of red tape to wade through in order to be able to trade and this will now be applied to investment firms going forward.
Asset managers will also be now required to disclose it if they own five percent or more of shares in a company they are investing in. Plus, they will need to disclose how they vote during general meetings of the company they have ownership in.