MiFID II & MiFIR

Over ten years, since the Markets in Financial Instruments Directive (MiFID) went into effect in Europe, on January 2^nd, MiFID II took effect, along with the Markets in Financial Instruments Regulation (MiFIR).

From Trade Repositories (TRs), Data Reporting Services Providers (DRSPs) to Systemic Internalisers (SIs) and Central Counterparties (CCPs), new rules are aimed to bring enhanced price discovery and transparency to financial markets, including off-exchange and secondary markets, in addition to national exchanges.

A report from ESMA put the value of OTC foreign exchange derivatives in Europe at over €112 trillion, related to 6.5 million transactions.

On March 26^th, ESMA submitted a final report with additional changes related to Regulatory Technical Standards (RTS), adding clarification to how ‘prices reflecting prevailing market conditions’ are defined, among other changes that the European Commission has three months to decide on whether to accept the changes.

The very next day, the regulator took a strong stand by announcing that it was a prohibiting binary options, and implementing restrictions on CFDs with regard to marketing, leverage limits on initial positions, as well as margin close-out rules, negative balance protections on a per account basis and other requirements, including standardised risk disclosures and prohibitions on incentives, such as deposit bonuses and other promotions.

New Changes to Forex and CFD providers in the EU

An excerpt from the report, with the agreed measures from ESMA, highlights leverage limits, as can be seen in the following bulleted items, including forex, CFDs and cryptocurrencies:

• 30:1 for major currency pairs
• 20:1 for non-major currency pairs, gold and major indices
• 10:1 for commodities other than gold and non-major equity indices
• 5:1 for individual equities and other reference values
• 2:1 for cryptocurrencies
• ESMA Chairman, Steven Maijoor, said in the report: “The agreed measures ESMA is announcing today will guarantee greater investor protection across the EU by ensuring a common minimum level of protection for retail investors. The new measures on CFDs will, for the first time, ensure that investors cannot lose more money than they put in, restrict the use of leverage and incentives and provide a risk warning for investors.”

It is clear that even, aside from MiFID II, the EU is serious about its stance with regulating its financial services industry when it comes to online forex, CFDs and cryptocurrencies.

General Data Protection Regulation (GDPR)

Adding to Europe’s regulatory changes in 2018 is the onset of General Data Protection Regulation (GDPR), which was approved in 2016 and comes into enforcement on May 25^th.

GDPR aims to protect the privacy data of EU citizens and places the compliance requirement on companies who must safeguard customer data or face steep fines of up to the greater of €20 million, or 4% of their annual global turnover.

In addition, non-EU businesses that handle data belonging to EU citizens will have to appoint an EU representative. Data not only has to be safeguarded under GDPR, but must be able to be portable so that users can export it, in addition to the requirement that data be deleted when a user’s request that their data be forgotten.

Members of the European Parliament (MEPs) also supported a measure, on April 19^th, to bring greater transparency to the beneficial owners of companies, including letterbox and trust companies, as well as clearer rules for virtual currencies, although member states will have 18 months to turn any such rules into national law.

The Pros and Cons of Increased Regulations:

As concerns over data breaches and privacy have escalated in recent years, and most recently with Cambridge Analytica, incidents related to Facebook and GDPR seems to be very timely. However, the cost of compliance with GDPR and its effect on start-ups over time is still unclear, especially as hackers have become more sophisticated and cyber-security is an evolving challenge.

On the positive side, changes such as tiered leverage, increased retail client loss disclosures and negative balance protection for CFD traders can be beneficial measures for those in need of greater protection.

Greater regulation could help make forex and CFDs to be accepted as household products in consumer’s financial portfolios, and not just reserved for the most aggressive speculators, although it could also drive the industry out.

Best Execution in Forex

As the need for best execution has coincided with increasing acceptance of the voluntary Global FX Code, implemented by the Bank for International Settlements (BIS), Europe has aligned itself with the broader trend, thanks to its regulatory positioning.

On the other hand, more sophisticated and experienced traders looking for less stringency may not be as excited about the new state of regulation in Europe and could look elsewhere when it comes to margin requirements, for example.

However, best execution is important no matter where traders are, as everyone wants to be sure that they are getting a fair price, which contributes towards the whole of market integrity.

For over five years, at Financial Commission, they have been investigating trade-related complaints submitted by clients from all over the world, including from Cyprus, and it is clear that clients, and even brokers, arrive at related trade disputes and seek external mediation. Having a rules-based approach and the right education for market participants is a winning combination.

Expansion and Consolidation

With the EU toughening up its regulatory position, which should help bring more credibility to its markets, and despite the uncertainty that Brexit will have as London still remains the FX capital of the world by trading volumes, there is movement forward.

Certainly, for new and existing companies operating on tight margins, the increased costs of compliance may not immediately deliver an equal increase in revenue to help justify such expenses on a business level, which may lead companies to search for opportunities in other markets.

A recent survey by Finance Magnates revealed that a majority of respondents indicated that ‘‘reporting and restrictions’’ were aspects of MiFID II that they thought would most hurt the online trading industry.

The biggest benefactors of EU regulatory reforms appear to be all the existing incumbents and those with the resources to compete in the new EU landscape, which should drive expansion for those companies, while consolidation follows on the lower echelons – or, at least, until it becomes commonplace and more affordable for start-ups.