MiFID II will require brokers to publish their client base! Here is how to safeguard YOUR intellectual property. Live from Cyprus

The retail FX brokerage sector of the electronic trading industry is one which places extremely high value on its own client base, which is actually in many cases the entirety of the value of the business, especially for smaller firms which have a white label MetaTrader 4 solution and do not develop their own trading environment.

Last year, FinanceFeeds conducted fully automated research which deduced that as of May 2016 there were 1,231 active MetaTrader 4 retail FX brokerages across the world, with approximately 110 of them being based in Cyprus, holding a CIF license from CySec.

Of those brokerages, a substantial proportion fall into the category defined by under the Europe-wide MiFIR (Markets in Financial Infrastructure Regulation) as Systemic Internalizers (SIs), which means that they deal on their own account and internalize orders.

Such brokerages are often firms that do not own their own technology, instead leasing licenses from MetaQuotes, and taking a feed from either another retail brokerage or creating their own market via their own dealing desk, and will be required to report their entire trade data as public information as of January 2018 when MiFID II becomes fully implemented.

That in itself is a matter that is fully understood by the vast majority of firms in the retail sector and the European Securities and Markets Authority (ESMA) has detailed this for quite some time in the advent of the impending new market infrastructure rulings.

There is, however, a very important consideration for many retail firms, that being the means by which post-trade reporting must take place, and that there is a directive which falls under the category of ‘enrichment’ which refers to the comprehensiveness of data supplied to trade reporting entities and subsequently to European regulatory authorities.

For firms that do not develop their own trading systems, and who compete with similar companies that use an off the shelf solution from MetaQuotes, their client base is their most valuable asset, and forms the vast majority of their intellectual property, which until now has been preserved within the internal databases of the firms which have spent vast amounts of marketing dollars (approximately between $1200 and $1500 per new client acquisition) to build.

With the implementation of MiFID II and the MiFIR directives across the European Union member states, including Cyprus where many retail brokers are based, the requirement to publish full trade information on a real time basis will be mandatory, thus causing firms to have to make their most valuable asset – their hard earned client base – visible to every individual or entity that looks at publicly available trade reports.

Whilst the need for transparency and the means by which this is being conducted is absolutely necessary and laudable. the commercial impact could be severe and devastating.

How to comply with such a demand and yet still keep your client base confidential

This morning at the MiFID II breakfast briefing in Limassol Cyprus hosted by post trade reporting and regulatory technology specialists Point Nine at the Alasia Hotel, Pavlos Christoforou, Partner & Co-Founder of Point Nine, raised this critical matter as a very important topic.

Attended by FinanceFeeds, the challenges relating to MiFID II and MiFIR compliance were discussed.

“A significant problem for brokers with regard to the new MiFIR directive is the subject of enrichment and masking” said Mr. Christoforou, addressing delegates representing large brokerages, law firms, FX industry regulatory consultants and liquidity providers.

“I can demonstrate a case that occurred between a retail trader and a broker, that arose due to the stipulations set forth under the European Markets and Infrastructure Regulation (EMIR)” he continued.

“The EMIR rulings set the scene for a case between a retail trader and broker. There was a Limassol-based brokerage that sent a trade to a reporting entity, which I can refer to as ‘party A’. This then was reported by ‘party B’ with just a reference number, that being 101” he explained.

“The repository at the time did not have any reason to investigate who the counterparty was when the post trade reporting was provided using a numerical code such as 101 in this case” he said.

“The difference is that if you are an entity being established right now, you have to get the right transaction ID. At the time of the case that I have just explained having taken place, it was enough just to report a number, but now the authorities require comprehensive data so full MiFIR is needed to be understood, including the full name of the legal entity” – Pavlos Christoforou, Co-Founder & Director, Point Nine

Mr. Christoforou explained that whereas previously it was acceptable to report a number, the new methodology under MiFIR will require ‘enrichment’ of data including full details of the client’s identity, which will pose problems for retail brokers.

“The asset of a broker is its client base, so suddenly the brokers will have to reveal who all their clients are and will need to identify who made the trades. This means reporting the beneficiary of the trade, whether a managed account, or retail trader, which has to be identified including publication of full identification of the client, who the counterparty in the trade was” he explained.

“If a broker would like to outsource this service to a firm such as Point Nine, we have a masking solution in place which between the time of receiving the information from the broker and it reaching our system in order that the data can be enriched with full details, we then hide the client information” explained Mr. Christoforou.

“With our system, the information could become a code, such as the aforementioned ‘101’, we then do all the conversions, send the full trade information back to a staging system which is hosted in a controlled environment and then this will be transformed back to full client information including detials of the client, broker and counterparty information before it goes to CySec. This way client information will not be available publicly yet the regulatory reporting duties are covered comprehensively and the regulator has full details of the entirety of the trade” said Mr Christoforou.

This indeed is a very interesting point to acknowledge and it is a welcome addition to Cyprus’ regulatory technology and reporting landscape that such services already exist in the advent of the new directives from the European financial markets regulatory authorities.

FinanceFeeds will report further during the course of the next few days with regard to the discussions that took place at this morning’s MiFID II and MiFIR briefing in Limassol, hosted by Point Nine.