MiFID II trips up on first day. Last minute extensions given to large venues, but will small brokers be a target?

Clamor is abound in London this morning regarding MiFID II compliance and some of the large exchanges being given another two and a half years to comply. Problem? No. The problem is with those who will not be given any leeway to comply. Here is our analysis from London this morning


As expected with any large scale, cross-border regulatory implementation, the long-awaited MiFID II directive which is the architecture of the European Securities and Markets Authority (ESMA) has experienced a major stumbling block on its first day of having come into force.

In London today, the large, well established executing venues have been the subject of discussion as their requirement to comply with the new MiFID II rulings is being taken very seriously.

Underlining the complexity of the MiFID II reforms that touch on everything from the cost of analysts’ research to the trading of equities, London’s Liffe derivatives exchange and the London Metal Exchange were given an extra 30 months to comply with rules related to clearing on the very day they were due to come into force.

Eurex, the Frankfurt-based futures exchange owned by Deutsche Börse, was given a similar late reprieve on Tuesday by BaFin, Germany’s national regulator.

The UK’s Financial Conduct Authority said on Wednesday that it had granted the extension to ensure the “orderly function” of a clearing market that the reforms are designed to open up.

Banks and brokers have sought to upgrade their IT systems in advance of Mifid II, which will require far more detailed reporting of trades. Mifid II is expected to cost the finance industry more than €2.5bn to implement, with the largest banks spending more than €40m each on compliance, according to estimates by Opimas, the consultancy.

In securing its late delay, Eurex argued that the exit of the UK — Europe’s largest market for clearing derivatives — from the EU introduced too much uncertainty given that Britain may not be bound by the rules once it leaves.

The proposed changes would also potentially increase the links between clearing houses at a time when the shape of the UK’s relationship with the EU is unclear.

Many City institutions had lobbied for the changes, especially the London Stock Exchange Group, which owns the LCH clearing house.

“Brexit is a game changer,” Eurex said following BaFin’s decision.

“We share industry concerns around financial stability regarding the open access provisions of Mifid II.”

Eurex will only have to apply the rules from July 3 2020.”

This may well be this morning’s topic of discussion among well established and highly respected listed derivatives marketplaces across London’s Square Mile, however FinanceFeeds views this as actually a very different dynamic to that displayed during discussions with industry professionals in London this morning that we spoke to within the listed derivatives and institutional technology sector.

Indeed, the regulators are extending the timeframe in order that very well organized and trustworthy exchanges such as LIFFE and LME can ensure complete compliance, not because this is a ‘problem’, as it has been perceived by certain figures within London’s mainstream media circles this morning, but actually because ESMA and the FCA understands that long-established and well organized venues will comply and will ensure that their trading infrastructure is completely in line with rulings by working closely with the authorities and their in-house R&D and IT teams, without any attempts to circumvent the law.

This is why this extension has been granted.

FinanceFeeds maintains the stance that whilst extensions will likely be granted to large, publicly reporting British venues that are mainstays of the global institutional financial and technological ecosystem, such cooperation will not apply to small firms in other regions under the MiFID II remit, such as Malta and Cyprus.

The regulators, however, along with the European Securities and Markets Authority, have been notable by their silence,  and FinanceFeeds, having attended all of these MiFID II seminars by regulatory technology and reporting entities which have been host to senior executives from CME Europe and TRAX, both vast industry-standard trade repositories, has noted that the majority of senior level brokerage personnel had learned tremendous amounts of vital information from these seminars, which says clearly that the regulators are not conveying requirements diligently to those expected to adhere to them and implement them.

The capital I in MiFID stands for Infrastructure, and indeed the requirements for brokerages to stick rigidly to very structured infrastructure categories and ensure that best execution  is carried out, as well as be able to demonstrate exactly how a price was decided and trace the entire order trail, is vast and very clear.

Dissenting voices in Western regions have several times displayed their concern about this, however.

Many have that whilst companies in the world’s largest financial center – London – and branches of those firms in Europe along with native European firms, will have to organize themselves as specific entity types and make massive attempts to keep themselves that way and report specifically, others do not.

These categories consist of Regulated Marketplace (RM – that being a listed derivatives venue such as the London Stock Exchange), an Organized Trading Facility (OTF – The conception for OTF is broad and includes a multitude of electronic platforms that were not so far subject to requirements applied to regulated markets and MTFs, for this reason an OTF is often perceived as a catch-all category of a trading venue), a multilateral trading facility (MTFs, which are a kind of “exchange lite” because they provide similar or competing trading services and have similar structures, like rulebooks and market surveillance departments) and finally, Systematic Internalizer, (SI – basically a b-book market making retail brokerage).

The dissenters are indeed correct, however most are referring to the lack of jurisdiction over brokerages in unregulated regions – for example there has been an outflow of firms from Cyprus, which is under the MiFID II remit, to newly popular offshore islands such as Vanuatu, with a large number of FX industry specific legal and licensing firms already set up to help them do this, which now means that the same firms, which have garnered European clients (although that is not their core business) from their Cyprus base, are now able to service those same clients without adhering to MiFID II as they’ll do it from an island in the pacific with no regulatory structure at all.

This means that they can slip their clients’ trades, onboard customers at offshore entities instead of the ones under the MIFID rulings, apply massive leverage, launder IB commission through personal accounts of bogus ‘representatives’, all the while keeping out of the eye of the regulations. MiFID II simply lays down the rules to those in regulated areas, who abide by the rules already – it does not cover those outside it, which circumvent.

MiFID II does have third country rulings. It is not the same as the US system in which foreign entities are not allowed to solicit for OTC derivatives clients in the US, hence this door is wide open.

Indeed, that is the industry dialog in many cases, however there is a far worse elephant in the room, and it is actually right under the nose of the regulators, and is firmly planted in their very own jurisdiction, and even more alarmingly, is rife in London.

Educational services are not covered by any British or European regulations, unless their content actually advises clients on which actual trades to place, that constituting financial advice.

Whilst social trading is now largely a thing of the past due to its faddishness, one of the moot points surrounding its legitimacy was the ability for any retail novice trader to become a ‘lead trader’, to which brokerages could then attach automatically traded accounts to follow the actions of the ‘lead trader’, himself often not qualified to provide advice on which positions are in the interest of completely unrelated investors.

The FCA categorizes this as investment advice, and social trading lead traders would, if sticking to regulations, need to register themselves as financial advisers and pass the relevant examinations in order to be considered for a license.

The ‘educational’ services that are running roughshod over the regulatory remit are indeed those promising to give novice investors a cure-all, magic solution that will make them rich immediately, and that all they have to do is buy some completely uncertified and unproven ‘software’ for a few thousand dollars (!!!), and listen to the outpourings of self-designated experts who use gimmicks such as yachts on the Thames as a training room, or engage in yogic flying, whilst trading from a helicopter in order to falsely portray an air of massive success and other-worldly charisma which should wrench the desperate and dejected away from their 9-5 mediocrity within weeks.

This practice is financial suicide for most of the people who pay to attend such courses.

Largely, the entire structure is bogus, from the absurd notion that after a few weeks of watching some completely unproven red lines after paying thousands for a piece of very rudimentary installable software that is not connected to any market, a novice can enjoy a lifestyle of caviar and Gulfstream transport between Malibu and Monte Carlo.

Those promoting this are not only offering completely unsubstantiated financial advice, but are doing so in a way that it represents a complete conflict of interest with the end client.

Often, firms like that are sponsored by unregulated brokerages, usually in offshore jurisdictions, by receiving a lump sum to ensure that all delegates and purchasers of these ‘courses’ are sold b-book accounts at brokers with no live connection to the market.

The course provider then fiercely markets training courses, which in some cases last for several days, either on a luxury yacht in the Thames, or at palatial premises in prestigious parts of London, Toronto or Sydney, the delegates then pay an attendance fee plus the fee to buy ‘software’.

Once all in the room, the sales pitch begins, usually in a very forceful manner, in which tactics include making the delegates feel as though they have achieved nothing in life and it will all change once they follow the magical success they are about to be shown by a master. This then results in a signing to an unregulated brokerage, which then zeroes their accounts, and splits the commission with the entity that is supposed to ‘educate’ them.

Thus, the ‘educator’ has sold software that has no real proven value, a course which is often conducted on a demo account and has no proven track record or credible outcome to view – and has pocketed a percentage of the ensuing losses from the delegates, who are then contacted again by aggressive sales teams to deposit more, and told they lost their money as they can expect to do as novices, and the software and method requires more training, hence the circus wheel begins to turn once again.

The target market for this is often educated, middle aged professionals who are dejected and are looking for more than what they have come to accept as a mundane 9-5 existence.

The marketing is clever, because the perpetrators know that this demographic has the money to invest, and is easily fooled as they are slightly older than the generation that grew up with an eye for internet related scams, therefore are likely to believe someone at his word without doing any research that he was a Goldman Sachs trader, or that his software has powered ‘many to millions’ and that the yachts and helicopters are genuine and not provided by a PR firm, for example.

The will to give up the 9-5 and be free all day to ‘trade from a helicopter’ is too much for many to resist, thus they are taken in.

Where is the FCA and MiFID rulings on this? It is neither best execution, nor is it transparent as to how the entire relationship is structured between broker, client, IB and trainer.

The FCA has been busying itself recently attempting to crack down on highly established, well organized CFD firms that have in some cases public listing on British stock exchanges, a 30 year history of excellent business conduct and shareholders and executive teams that have spent their entire adult lives perfecting their understanding and knowledge of an ever-developing industry, in many cases, contributing to its refinement globally.

The loyal, domestic market customer bases of these long established firms are testimony to their own elevated place in the electronic trading world, yet the FCA has been attempting to attack their core business activities, whilst meanwhile, several bogus ‘training’ entities with relationships just as described above, have been operating right under the FCA’s nose for over ten years.

Ten years is long enough for the officials in blazers to pay them a visit and inspect their modus operandi. Especially given the flamboyant way in which they promote themselves. It is clear that this comes under Financial Infastructure which is exactly what MiFID II is about.

An FCA official attempting to explain to a public which could easily be a target that he did not know they existed would be rather like attempting to believe that he missed his Underground train to work that morning because he couldn’t see the 500 meter long red and white metal objects that appear in the station every 30 seconds.

It is very well and good forming new infrastructure rulings that continue to improve the method by which trade execution and reporting takes place, however it is infra dig to do so to those which are compliant and will go the extra mile to ensure that they themselves understand the remit and then implement it, whilst letting the OTC derivatives industry equivalent of Arfur Daley pervade the airwaves, streets and marinas of the world’s largest and most highly respected financial center.

This type of establishment, along with its lead-buying ethos, is what will fall foul of MiFID II and will not be allowed leeway, hence the extension given to London’s exchanges is testimony to their professional approach.

Further testimony to this effect has made itself evident in research provided this morning to FinanceFeeds by a real time surveillance system used by a compliance company in London.

The study, conducted by voice recording compliance specialists Red Box Recorders, also found that:
  • 53% of IT executives in financial institutions and compliance managers do not know the date of implementation
  • 1 in 5 (21%) are still not fully aware of the regulations coming into effect
  • Only 15% said they would describe their knowledge as complete
  • 43% were not fully aware of the requirements on client communications or how long they should be retained

It is quite clear that ESMA is well aware of this.

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