Inside view on endless crippling regulation in FX. Surely MiFID was enough? - FinanceFeeds

Inside view on endless crippling regulation in FX. Surely MiFID was enough?

Andrew Saks

It still looks as though the whole regulatory obsession with spot FX may be driven by the exchange lobby, hence if you can’t beat them join them – the only thing is of course that if most FX brokers brought their skill and tenacity to the multi asset market, they certainly would beat the exchanges hands down.


In the advent of MiFID II in Europe, it was the general perception that this top-to-tail government-led restructure of every area of the electronic trading business from how trades are executed, reported and priced, all the way through to marketing methodology and transparency would be the final attempt by regulatory authorities to modernize themselves and in turn bring the OTC derivatives industry in line with how regulators will be able to check every aspect of the business as time goes on.

Clearly it did not stop there. As if there hasn’t been enough bureaucracy, legal wrangling and wing-clipping over the past few years in major regions which are synonymous with FX brokerages.

It has become increasingly clear that the authorities in Europe, North America and Australasia, continents in which the vast majority of the world’s retail FX brokerages are based and from which the majority of electronic OTC derivatives business is conducted, are continuing to demonstrate a very negative perspective, and drive ever toughening conditions onto the regulatory remit.

The hard work that most brokers, liquidity providers and technology vendors conducted to ensure that their infrastructure and method of operation was in line with MiFID II in 2017 which led to its 2018 implementation may well now be long forgotten, so rapid is the development cycle in the electronic trading business, however it presented a considerable number of challenges to brokers, liquidity providers and vendors not only within the European Union, but also with those wishing to sell their products within the region.

We have witnessed Australia’s crackdown on the CFD sector, which is one of Australia’s largest retail electronic trading business sectors, succumb to over-reaching restrictions which have echoed Europe and the United Kingdom’s draconian stance.

During interaction with Australian FX industry leaders over the past two years and certainly since the implementation of MiFID II in Europe, FinanceFeeds has been able to glean from opinion among senior executives that ASIC may potentially follow suit in terms of restructuring the means by which OTC trades are executed, reported and sold to retail customers, many of whom considered that leverage restrictions would be part of that remit.

There is no doubt that the vast majority of the brokerages which have operated for many years in regions which are synonymous with the capital markets industry and therefore are subject to the most stringent regulations have worked very hard to ensure that they keep pace with the continual changes, however the regulators have simply not stopped, and are continuing their drive to push hard against the OTC sector, a direction that has driven many brokerages from respected regions into the murky waters of the offshore islands, thus regressing the retail sector rather than advancing it.

It may indeed appear to be similar to a witch hunt, especially in the case of the Australian authorities which do not stop railing against the industry and publishing negative diatribes on the regulator’s website against ‘Margin FX brokers’, many of which are among the best in the world.

Today, in order to gain an inside perspective on this, FinanceFeeds spoke to Natalia Zakharova, Head of Global Sales at FXOpen, which has offices in various regions around the world and a global client base.

Ms Zakharova explained to FinanceFeeds “I do believe there is enough regulatory oversight over FX industry in order to make as safe as possible for retail and non-professional investors.”

“There is no misleading marketing, and clients are well informed about the risks. The leverage is restricted, client funds are safe and trades are reported to the regulators on a daily basis” said Ms Zakharova.

“All additional restrictions are simply reminiscent of a witch hunt and do not add any protection to traders or brokers or to the industry itself. I think that the regulator who will manage to keep healthy balance between keeping established practices in place and still leaving some liberty to the brokers will ultimately be able to attract a lot of brokers and customers” concluded Ms Zakharova.

That is absolutely right. Now, the industry faces further curtailment as spot FX is being considered as an inclusive part of the FX Global Code.

The constantly discussed fragmentation of a global market was also expressed as a reason not to go down this route, in that the inclusion of spot FX would break the global harmonisation of the regulation of the FX global market with 56% of transactions carried out on a cross-border basis, incentivising firms to relocate their spot FX trading activities to other non EU jurisdictions and creating the conditions for regulatory arbitrage.

The inclusion of Spot FX in the FX Global Code would likely extend the onerous licencing regime designed primarily for “true” financial service providers to a wider range of market participants active in the spot FX market, including the development of additional exemptions for certain transactions as well as extend the transaction reporting regime which requires the adjustment of the 65 fields currently required besides the need to collect personal data and the need to extend and adapt the identification system of financial instruments defined by the ISIN and provided by ANNA-DSB, would extend the pre- and post-trade transparency regime and the definition of the ToTV concept and extend the set of rules related to organisational and operational requirements for the organisation and operation of trading venues.

A moot point is that it would also include identification on how to provide best execution in such a global market, something which bureaucrats involved in the operation of MiFID II are considering scrapping, and which has caused tremendous arguments within the electronic trading industry.

A large number of A number of industry participants have warned about undertaking unilateral EU initiatives in this global market where the FX Global Code of Conduct is in the process of being adopted by most of the industry and currently under review.

However, it is worth noting that these respondents also acknowledged that the FX Global Code itself does not impose legal or regulatory obligations on market participants, nor substitutes regulation. The Code is intended to supplement any and all local laws and there is a relationship between spot FX and the FX derivatives with spot FX contracts as underlier.

One way of ensuring that this does not knock your brokerage off its perch is to begin connecting to derivatives exchanges and offer a multi-asset product range including listed products. Regulators are not so eager to victimize the exchange sector, and it could well be that the whole regulatory obsession with spot FX may be driven by the exchange lobby, hence if you can’t beat them join them – the only thing is of course that if most FX brokers brought their skill and tenacity to the multi asset market, they certainly would beat the exchanges hands down.

The good thing if that happens is that exchanges wouldn’t retaliate as they would ultimately be executing the trades on their venues.

It’s the way forward folks….

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