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The following guest post is courtesy of Richard Craddock, Chief Executive Officer of ATFX.
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In November 2007, just before the financial crisis, the European Union enacted the Markets in Financial Instruments Directive (MiFID). The directive’s goal was to create a unified financial bloc with dynamism and depth of the U.S. capital markets.
In 2010, after the crisis, the EU launched a consultation review to update MiFID. This led to the creation of a comprehensive legislation called MiFID II which was formally adopted in 2014. It was supposed to start operating in January 2016 but European Securities and Markets Authority (ESMA) extended the date to 3rd January 2018.
MiFID II will affect everyone involved in the financial markets across the EU including: fund managers, banks, exchange trading venues, pension funds, and retail investors. And, its details are deep with the final document having more than 1,000 pages.
The chart below, from EY, shows the key differences between MiFID I and MiFID II.
The core objectives of MiFID are in: market transparency, market structure, internal controls / governance, external controls / reporting, and investor protection.
Richard Craddock, CEO of ATFX UK headquarters commented:
The team at ATFX always welcome any regulation that helps to ensure transparency and support for our valued clients. As a MIFID II compliant firm we continue to offer our clientele greater market stability, transparency and clarity of what is being charged and by whom. We can be even more confident that anyone opening an account with us has greater understanding of both the product traded and the potential risks involved. ATFX will continue to offer market leading technology, customer service, pricing and stability.
For Forex brokers operating in the EU, the changes will be drastic.
- On investor protection, the regulation aims at protecting investors from brokers’ inducements. For example, before offering any service or advice to clients, firms will be required to disclose to the investors whether the advice is independent or dependent. This, protects investors from buying into investments that the brokers have a conflict of interest.
- Brokers will be bombarded with more stringent disclosure requirements. They will be required to tell their clients about the costs and charges of any financial inducements.
On transparency, firms will be required to disclose several things to the clients and regulators. For example, on pre-trade transparency, all brokers will be required to publish bid-ask spreads and show the depth by specifying the size of outstanding orders. Also, the firms are required to make pre-and post-trade data available at a reasonable fee to investors and traders. Further, all brokers will be required to synchronize their business clocks which are used to timestamp reportable events. For example, a broker who provides investment research to clients for free will be required to offer them for a fee.
On the market structure, MiFID II introduces OTFs (Organized Trading Facility) alongside the three other structures: Regulated Markets (RM), Multi-lateral Trading Facility (MTF), and Systematic Internalizes (SI). The OTF applies only to non-equities instruments like Forex and derivatives.
Also, Forex brokers will be able to choose their own clearing houses, rather than being restricted to the clearing houses to use.
On external reporting, MiFID II has expanded the provisions from the original MiFID. The new regulations have not only added the number of asset classes to report, but also the range of financial institutions to report. Brokers who were originally exempted from this reporting will be required to record and report all transactions made. Forex brokerage firms offering high frequency trading solutions will be required to register as investment firms and disclose their algorithms. This is aimed at preventing flash crashes.
On internal controls, MiFID II mandates all brokers and investment firms to recording all transactions for a minimum period of five years. National governments can extend this period. For example, Germany has extended the period to 10 years. It also requires all firms to have a compliance officer whose role will be elevated in each firm. The role of the new stringent internal control measures is to ensure that firms stay on course with the new rules.
MiFID II regulations will have consequential impacts to all people involved in investment in the EU. It will also affect non-EU companies that provide EU-based financial assets. For example, U.S. investment firms operating in the EU would have been required to follow MiFID and the Doff-Frank regulations. After many complaints, EU regulators waived these requirements to the firms.
The EU regulators are known for their strictness and adherence to the letter and spirit of their regulations. In the past, several brokers have been shut or fined millions of dollars. By 3rd January, all brokers need to have complied with all the requirements issued in MiFID II.
At ATFX, our professional team has been preparing for MIFID II and has fully complied with the MIFIDII policy on IBs. For more information please contact us at www.atfx.com.