MiFID II [European Union - Markets in Financial Instruments Directive]

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chatbotte
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MiFID II [European Union - Markets in Financial Instruments Directive]

Post by chatbotte » Sat Dec 30, 2017 9:29 am

Some people say the Markets in Financial Instruments Directive II (MiFID II) effectively prohibits investors from buying ETFs that aren't domiciled in their country of residence. Is that true? I'm in the EU and it's not illegal for me to buy ETFs domiciled in other countries now. In fact, there're no ETFs domiciled in my country, so I'm a bit worried that I might not be able to buy any ETFs starting from January 3. What's your take on the new European legislation? I know this is a US-centric site, so my apologies if this topic doesn't belong here. Thank you.

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Re: MiFID II

Post by JamesSFO » Sat Dec 30, 2017 10:09 am

There's a fair amount of Q&A materials at: https://www.esma.europa.eu/policy-rules ... -and-mifir

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Re: MiFID II

Post by pecunia » Sun Dec 31, 2017 8:42 am

It is true, I received a message from my broker that nobody will be able to purchase ETFs that don't offer documentation with (in my case) the Dutch language.
Apparently part of mifid ii is that companies that offer ETF must offer documentation about the ETF in the native language where the ETF is being sold.

I don't know what Vanguard is doing to mitigate this.

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Re: MiFID II [European Union - Markets in Financial Instruments Directive]

Post by LadyGeek » Sun Dec 31, 2017 10:38 am

This thread is now in the Investing - Theory, News & General forum (general investing). I retitled the thread to help with the acronym and to attract the attention of our EU experts.

pecunia, Welcome!
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Re: MiFID II [European Union - Markets in Financial Instruments Directive]

Post by pecunia » Mon Jan 01, 2018 3:48 pm

Thank you LadyGeek :sharebeer

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Re: MiFID II [European Union - Markets in Financial Instruments Directive]

Post by pecunia » Tue Jan 02, 2018 8:55 am

I mailed Vanguard and got a response that states that US based ETFs will no longer be available to non-US folks :shock:
Because those ETFs don't have a "European passport" whatever that means..

Only ETFs that have an "Ireland domicile " will be available to EU folks which sucks because of the dividend tax. (foreign withholding tax).
With one stroke of a pen, Vanguard funds are no longer an attractive option for people in the EU :oops:

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Re: MiFID II [European Union - Markets in Financial Instruments Directive]

Post by alpine_boglehead » Tue Jan 02, 2018 9:39 am

pecunia wrote:
Tue Jan 02, 2018 8:55 am
With one stroke of a pen, Vanguard funds are no longer an attractive option for people in the EU :oops:
Why are the Ireland-domiciled Vanguard ETFs less attractive than e.g. the also Ireland-based iShares ETFs?

Both should have the same dividend tax leakage(i.e. taxes already paid on dividends in US not creditable for local taxes, thus taxed twice)

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Re: MiFID II [European Union - Markets in Financial Instruments Directive]

Post by pecunia » Tue Jan 02, 2018 9:51 am

Netherlands and US have a tax treaty.
US dividends have 30% tax. but if you filled in the correct paperwork you are taxed (only) 15% dividendtax. That 15% dividendtax can then be put on your income tax form and be redeemed because we already pay 1.2% wealth tax. So with VTI-VXUS dividend leakage is 0%.

Ireland ETFs pay dividend taxes to different countries that we as humans can't redeem as far as I know.

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Re: MiFID II [European Union - Markets in Financial Instruments Directive]

Post by Valuethinker » Tue Jan 02, 2018 10:14 am

pecunia wrote:
Tue Jan 02, 2018 8:55 am
I mailed Vanguard and got a response that states that US based ETFs will no longer be available to non-US folks :shock:
Because those ETFs don't have a "European passport" whatever that means..

Only ETFs that have an "Ireland domicile " will be available to EU folks which sucks because of the dividend tax. (foreign withholding tax).
With one stroke of a pen, Vanguard funds are no longer an attractive option for people in the EU :oops:
Hi. I realize we are not in the EU much longer, but for a UK taxpayer an Irish domiciled ETF works fine?

"passporting" is the financial term that means a product legal in one EU country is legal in all the 28 (27 when we exit). What happens post Brexit is anyone's guess but it's not a worry for non UK investors.

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Re: MiFID II [European Union - Markets in Financial Instruments Directive]

Post by pecunia » Tue Jan 02, 2018 10:17 am

I think you should send Aunt May a letter so she can put it on her todo list during the negotiations in Brussels :)
If Ireland sucks for the rest of Europe can't imagine it won't for the UK..

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Re: MiFID II [European Union - Markets in Financial Instruments Directive]

Post by Valuethinker » Tue Jan 02, 2018 10:58 am

pecunia wrote:
Tue Jan 02, 2018 10:17 am
I think you should send Aunt May a letter so she can put it on her todo list during the negotiations in Brussels :)
If Ireland sucks for the rest of Europe can't imagine it won't for the UK..
It's already on the to do list - remember our financial services industry is 10% of the economy. Philip Hammond (Chancellor) is their route in.

I know the Germans call Merkel "Mother" but I've never heard "Aunt May" (Spiderman fans are not so common, here ;-)). Mrs May (note her husband works for Capital International, the Los Angeles HQ'd fund manager).

The Ireland position won't change post Brexit, I am pretty sure. It works now, we won't change our regulatory laws or our tax laws. Although some form of capital taxation is a real possibility if we get a change in government.

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Re: MiFID II [European Union - Markets in Financial Instruments Directive]

Post by pecunia » Tue Jan 02, 2018 1:03 pm

Well then you don't have anything to worry about :sharebeer
Let us EU citizens suffer in silence then..

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Re: MiFID II [European Union - Markets in Financial Instruments Directive]

Post by TedSwippet » Tue Jan 02, 2018 1:23 pm

pecunia wrote:
Tue Jan 02, 2018 9:51 am
US dividends have 30% tax. but if you filled in the correct paperwork you are taxed (only) 15% dividendtax. That 15% dividendtax can then be put on your income tax form and be redeemed because we already pay 1.2% wealth tax. So with VTI-VXUS dividend leakage is 0%. Ireland ETFs pay dividend taxes to different countries that we as humans can't redeem as far as I know.
Yes. For non-US investors who live in countries where the dividend tax rate (or equivalent) is higher than the US rate on dividends -- standard is 30% but this reduces to 15% for most treaty countries, and 10% for a lucky few -- the US tax on US domiciled ETFs at the investor level is usually directly creditable, but any US tax paid internally by a (say) Ireland domiciled ETF is not. It is effectively the difference between a tax credit and a tax deduction.

It is too early to say whether MiFID II will have any effect in terms of protecting the large numbers of non-US investors, who are not in the above group, from accidentally buying US domiciled ETFs that would for them be both inefficient on dividend taxes when compared with Ireland domiciled equivalents and also potential wealth-destroying US estate tax traps. That at least would be a balancing plus-point to this new piece of regulatory nonsense.

The one set of investors I can see that will be harmed by it will be US citizens and green card holders living in the EU. For these people, non-US domiciled funds and ETFs represent a likely US tax death-sentence, and their current major workround is often to buy US domiciled funds inside their EU brokerage accounts. That route may now be closed. As a UK resident, I am once again glad that I am not a US citizen or green card holder.

Finally, worth adding that MiFID II doesn't yet cover UCITS funds and ETFs, so the majority (all?) of EU domiciled funds will still be available to any EU investors. It's just non-UCITS funds that don't -- and don't intend to -- meet the new regulation that are being restricted. There is a long-standing and analogous situation in the US, where non-SEC regulated funds and ETFs (such as UCITS ones) are not strictly available to US investors either. A cynic might view MiFID II as 'retaliatory protectionism'.

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Re: MiFID II [European Union - Markets in Financial Instruments Directive]

Post by pecunia » Tue Jan 02, 2018 1:44 pm

TedSwippet wrote:
Tue Jan 02, 2018 1:23 pm
Yes. For non-US investors who live in countries where the dividend tax rate (or equivalent) is higher than the US rate on dividends -- standard is 30% but this reduces to 15% for most treaty countries, and 10% for a lucky few -- the US tax on US domiciled ETFs at the investor level is usually directly creditable, but any US tax paid internally by a (say) Ireland domiciled ETF is not. It is effectively the difference between a tax credit and a tax deduction.

It is too early to say whether MIFID II will have any effect in terms of protecting the large numbers of non-US investors, who are not in the above group, from accidentally buying US domiciled ETFs that would for them be both inefficient on dividend taxes when compared with Ireland domiciled equivalents and also potential wealth-destroying US estate tax traps. That at least would be a balancing plus-point to this new piece of regulatory nonsense.

The one set of investors I can see that will be harmed by it will be US citizens and green card holders living in the EU. For these people, non-US domiciled funds and ETFs represent a likely US tax death-sentence, and their current major workround is often to buy US domiciled funds inside their EU brokerage accounts. That route may now be closed. As a UK resident, I am once again glad that I am not a US citizen or green card holder.
I'm reading and trying to understand whether you agree with me or not :)

When we talk about Vanguard ETFs (to keep it simple for me )

- the VTI/VXUS combo offers an tax credit a EU citizen can redeem
- the VWRL (Ireland based ETFs) suffer from a internal tax deduction that will reduce profits.

A dutch blogger did a lot of research and posted this :
Image

Which shows that Ireland based ETFs suffer major leakage

So if the MIFID II forces EU citizens away from US based ETFs does that not mean that all EU countries that have a tax treaty with the US which is less then 30% automatically be hit by MIFID II ?

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Re: MiFID II [European Union - Markets in Financial Instruments Directive]

Post by TedSwippet » Tue Jan 02, 2018 3:33 pm

pecunia wrote:
Tue Jan 02, 2018 1:44 pm
I'm reading and trying to understand whether you agree with me or not.
I am agreeing. The introductory 'yes' is a clue :-)
pecunia wrote:
Tue Jan 02, 2018 1:44 pm
So if the MIFID II forces EU citizens away from US based ETFs does that not mean that all EU countries that have a tax treaty with the US which is less then 30% automatically be hit by MIFID II ?
Well, the tax rules of the assorted countries vary considerably, so I'm not sure we can conclude 'all'. And a country without a treaty but with a dividend tax rate of more than 30% and which allows direct tax credits is also affected. So having or not having a treaty isn't a requirement for being drawn into this; it's just that treaty rates make it more likely that US tax will be below local rates. And many investors even in treaty countries don't want the hassles of investing in 'offshore' funds, particularly if their local government is prone to punitively taxing them (the UK to an extent, but for one of the worst examples of punitive taxes on 'offshore' funds, see the US PFIC rules).

The relative tax drag on Ireland domiciled funds will vary depending on the proportion of US stocks it holds. The worst case is probably 85% of 15% of a 3% or so dividend, so perhaps 0.38% or so a year. The best case will be nothing, where a fund holds no US stocks at all. And surrounding all of this will be currency effects from all the countries that make up the assets in the ETF, any differences in accounting or valuation timing points, capital gains distribution distortions (US funds must distribute realised gains, non-US ones may retain them), and any number of other weird things that frustrate a direct comparison.

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Re: MiFID II [European Union - Markets in Financial Instruments Directive]

Post by pecunia » Tue Jan 02, 2018 4:32 pm

My apologies, I've worked with quite some people from other parts of the globe where they always start their sentence with the word "yes" but they mean something else :mrgreen:

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Re: MiFID II [European Union - Markets in Financial Instruments Directive]

Post by chatbotte » Thu Jan 18, 2018 6:55 am

pecunia wrote:
Tue Jan 02, 2018 9:51 am
Netherlands and US have a tax treaty.
US dividends have 30% tax. but if you filled in the correct paperwork you are taxed (only) 15% dividendtax. That 15% dividendtax can then be put on your income tax form and be redeemed because we already pay 1.2% wealth tax. So with VTI-VXUS dividend leakage is 0%.

Ireland ETFs pay dividend taxes to different countries that we as humans can't redeem as far as I know.
pecunia,

Are you sure about VXUS? The ETF holds non-U.S. company stocks, which tend to be subject to (treaty-regulated) dividend withholding tax rates in their respective countries of domicile. So, VXUS receives non-U.S. dividend net of foreign tax on dividends. What the paying agent withholds on disbursement to you is on top of those non-U.S. dividend withholdings, so you typically get taxed twice to receive 0.85x0.85=0.7225 of your non-U.S. dividend, i.e. your effective tax rate is about 28 percent.

If you can reclaim the 15 percent withheld by the paying agent on disbursement thanks to a tax treaty, then you're subject to one "level" of tax only, i.e. you only "pay" non-U.S. tax on dividends from non-U.S. corporations, and your effective tax rate is 15 percent.

I think you're right about VTI though. I don't think U.S. corporations withhold dividend tax on disbursement to U.S. stockholders/mutual funds/ETFs.

[EDIT: Could you please elaborate on the wealth tax issue? How do you claim back the 15 percent withheld by the paying agent on disbursement?]

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Re: MiFID II [European Union - Markets in Financial Instruments Directive]

Post by BeBH65 » Thu Jan 18, 2018 12:16 pm

pecunia wrote:
Tue Jan 02, 2018 1:44 pm
A dutch blogger did a lot of research and posted this :
Image

Which shows that Ireland based ETFs suffer major leakage

So if the MIFID II forces EU citizens away from US based ETFs does that not mean that all EU countries that have a tax treaty with the US which is less then 30% automatically be hit by MIFID II ?
Micks is a member on this forum, he is one of the authors of the wikie page on The Netherlands.
Let's see if I can highlight this thread to him.
Micks wrote:
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

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Re: MiFID II [European Union - Markets in Financial Instruments Directive]

Post by Micks » Thu Jan 18, 2018 3:32 pm

BeBH65 wrote:
Thu Jan 18, 2018 12:16 pm
Micks is a member on this forum, he is one of the authors of the wikie page on The Netherlands.
Let's see if I can highlight this thread to him.
Micks wrote:
That worked :wink: . Full disclosure: the blog pecunia is referencing is mine as well.

VXUS does indeed have 'internal' dividend taxes which is deducted from the dividends it receives. Rates differ per country, but as in the table it was about 6% per year, which comes at 0.12% in yearly taxes at a 2% dividend yield. The US taxes dividends at a 30% rate, so the dividends that VXUS issue are taxed at 30% as well. The Netherlands has a tax treaty with the US reducing this US dividend withholding tax to 15% and as a Dutch taxpayer you can settle this non-Dutch tax with 'wealth tax' (which you pay if your wealth reaches a certain threshold, otherwise you cannot settle this 15% US tax). Hope this clarifies a bit.

As for the PRIIPS regulation, I found this article which indicates that funds need to publish a KID if they are intended to be sold to people in Europe (EEA more specifically). US ETFs are not intended for sale in the EU, which is why they are not passported as such by Vanguard. It also makes me wonder if then, Vanguard's US ETFs even have to comply with EU laws if they are not intended for sale here. A broker is in my view not the one offering/selling the funds, but just an intermediary, so has no obligation to prevent you from buying ETFs without a KID. Also noteworthy is that the broker that banned buying US ETFs is alone in the Netherlands, I have yet to hear of other brokers in the Netherlands removing US ETFs from their platforms. Still, I am far from an expert on these matters, so I guess time will tell.
Kind regards, Mick

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Re: MiFID II

Post by hilink73 » Thu Jan 18, 2018 3:39 pm

pecunia wrote:
Sun Dec 31, 2017 8:42 am
It is true, I received a message from my broker that nobody will be able to purchase ETFs that don't offer documentation with (in my case) the Dutch language.
Apparently part of mifid ii is that companies that offer ETF must offer documentation about the ETF in the native language where the ETF is being sold.

I don't know what Vanguard is doing to mitigate this.
If it only would be the language, providing a translation should not be that difficult.

But I doubt it's only about the language of some leaflets and such.

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Re: MiFID II [European Union - Markets in Financial Instruments Directive]

Post by pecunia » Thu Jan 18, 2018 3:46 pm

chatbotte wrote:
Thu Jan 18, 2018 6:55 am
pecunia,

Are you sure about VXUS? The ETF holds non-U.S. company stocks, which tend to be subject to (treaty-regulated) dividend withholding tax rates in their respective countries of domicile. So, VXUS receives non-U.S. dividend net of foreign tax on dividends. What the paying agent withholds on disbursement to you is on top of those non-U.S. dividend withholdings, so you typically get taxed twice to receive 0.85x0.85=0.7225 of your non-U.S. dividend, i.e. your effective tax rate is about 28 percent.

If you can reclaim the 15 percent withheld by the paying agent on disbursement thanks to a tax treaty, then you're subject to one "level" of tax only, i.e. you only "pay" non-U.S. tax on dividends from non-U.S. corporations, and your effective tax rate is 15 percent.

I think you're right about VTI though. I don't think U.S. corporations withhold dividend tax on disbursement to U.S. stockholders/mutual funds/ETFs.

[EDIT: Could you please elaborate on the wealth tax issue? How do you claim back the 15 percent withheld by the paying agent on disbursement?]
Micks wrote:
Thu Jan 18, 2018 3:32 pm

That worked :wink: . Full disclosure: the blog pecunia is referencing is mine as well.

VXUS does indeed have 'internal' dividend taxes which is deducted from the dividends it receives. Rates differ per country, but as in the table it was about 6% per year, which comes at 0.12% in yearly taxes at a 2% dividend yield. The US taxes dividends at a 30% rate, so the dividends that VXUS issue are taxed at 30% as well. The Netherlands has a tax treaty with the US reducing this US dividend withholding tax to 15% and as a Dutch taxpayer you can settle this non-Dutch tax with 'wealth tax' (which you pay if your wealth reaches a certain threshold, otherwise you cannot settle this 15% US tax). Hope this clarifies a bit.

As for the PRIIPS regulation, I found this article which indicates that funds need to publish a KID if they are intended to be sold to people in Europe (EEA more specifically). US ETFs are not intended for sale in the EU, which is why they are not passported as such by Vanguard. It also makes me wonder if then, Vanguard's US ETFs even have to comply with EU laws if they are not intended for sale here. A broker is in my view not the one offering/selling the funds, but just an intermediary, so has no obligation to prevent you from buying ETFs without a KID. Also noteworthy is that the broker that banned buying US ETFs is alone in the Netherlands, I have yet to hear of other brokers in the Netherlands removing US ETFs from their platforms. Still, I am far from an expert on these matters, so I guess time will tell.

Nothing more to say, Micks is the man! :sharebeer
Last edited by pecunia on Thu Jan 18, 2018 3:51 pm, edited 1 time in total.

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Re: MiFID II [European Union - Markets in Financial Instruments Directive]

Post by herpfinance » Thu Jan 18, 2018 3:47 pm

Micks wrote: Also noteworthy is that the broker that banned buying US ETFs is alone in the Netherlands, I have yet to hear of other brokers in the Netherlands removing US ETFs from their platforms. Still, I am far from an expert on these matters, so I guess time will tell.
Although I am based in Denmark, Nordnet bank (which is favored by many Scandinavian investors) has also decided to remove access to US-domiciled ETFs from its list of products.
"The intelligent investor is a realist who sells to optimists and buys from pessimists" - Benjamin Graham

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Re: MiFID II [European Union - Markets in Financial Instruments Directive]

Post by 1nv35t » Thu Jan 18, 2018 7:19 pm

Seems increasingly US ETF's are including wording something to the effect 'not to be marketed to EEA residents' so specifically the EU (UK I believe will drop out of the EEA post Brexit). Perhaps the motivation is for a EU wide transactions tax as part of its intended convergence (centralized tax and spend). If so I wonder what will happen in the case of having to dump holdings that have accumulated large capital gains that you otherwise might have continued to hold for tax deferral purposes.

All up in the air, planning for the worst, hoping for the best (IME US ETF's have more breadth/depth are more liquid and cost effective).

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Re: MiFID II [European Union - Markets in Financial Instruments Directive]

Post by Epsilon Delta » Fri Jan 19, 2018 5:22 pm

TedSwippet wrote:
Tue Jan 02, 2018 3:33 pm
The relative tax drag on Ireland domiciled funds will vary depending on the proportion of US stocks it holds. The worst case is probably 85% of 15% of a 3% or so dividend, so perhaps 0.38% or so a year. The best case will be nothing, where a fund holds no US stocks at all.
A withholding tax on dividends paid to foreign stockholders is not unique to the US.* There are only a couple of dozen countries that do not have withholding taxes. Any broadly diversified international fund will almost certainly have some withholding tax drag, though working out how much would require digging into the tax systems and treaties of the relevant countries. The US is also probably not the worst case, since some countries have higher rates, and smaller countries are less likely to have tax treaties with each other.

* Withholding taxes by other countries is why US mutual funds generate foreign tax credits.

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Re: MiFID II [European Union - Markets in Financial Instruments Directive]

Post by 1nv35t » Sat Jan 20, 2018 9:40 am

A withholding tax on dividends paid to foreign stockholders is not unique to the US
Useful guide/reference for the rates around the world ...

https://www2.deloitte.com/content/dam/D ... -rates.pdf

Note that those figures exclude where tax treaties might apply. For instance as a UK investor the 30% US withholding tax rate is reduced to 15% providing you're known to the US (register a W-8BEN every couple of years).
The US is also probably not the worst case, since some countries have higher rates
Pretty much is up there at the top, at least from a dividends perspective. Chile (35%) is higher, as is France in 'unfriendly' cases (75%, but otherwise 30%).

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Re: MiFID II [European Union - Markets in Financial Instruments Directive]

Post by mixinvest » Tue Feb 13, 2018 3:41 am

I contacted a Dutch broker called Degiro, which operates in Ireland, and they said:
"
Due to the new regulation, we cannot provide the products unless we have the relevant KIID documentation.

These are issued by the provider. We are currently in the process of obtaining these documents and cannot provide a timeline for when this will be complete.

"

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Re: MiFID II [European Union - Markets in Financial Instruments Directive]

Post by mixinvest » Wed Feb 14, 2018 6:03 am

And got a reply from TD Direct too..

Unfortunately , under new MiFID II regulations we can no longer trade PRIIPS where a KID document is not available. This means we cannot trade US ETF's on our system.


What i cannot understand is whether all the providers elected not to provide a KID for US ETFs? Or is that only Vanguard?

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Re: MiFID II [European Union - Markets in Financial Instruments Directive]

Post by pecunia » Wed Feb 14, 2018 8:57 am

mixinvest wrote:
Tue Feb 13, 2018 3:41 am
I contacted a Dutch broker called Degiro, which operates in Ireland, and they said:
"
Due to the new regulation, we cannot provide the products unless we have the relevant KIID documentation.

These are issued by the provider. We are currently in the process of obtaining these documents and cannot provide a timeline for when this will be complete.

"
You should take a look at Lynx, Dutch IB reseller which still gives the opportunity to buy US based funds.
PM me if you want 100 EUR "transactie-tegoed" on top of the current deal that they are having..

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