Market News

European Council Reaches Agreement Regarding MiFID II

After nine months of grueling negotiations, the European Council has finally achieved a breakthrough in discussions regarding the revision of the Markets in Financial Instruments Directive (MiFID). An agreement has been reached among the members of the Council, and a spokesperson for the Irish EU presidency stated before the Financial Times that the deal will be officially signed this week, bringing the long-awaited MiFID II a step closer to completion.
 
MiFID has been the ruling legislation for financial transactions in the European Union for several years now. It was initially designed to bring about a harmonized regulation for investment services across the European Economic Area (EEA), and introduce better consumer protection in investment services. Its most prominent aspects included a demand for more transparency, both before and after a trade is executed, client categorization as "eligible counterparties", professional clients or retail clients (who receive highest protection protection), and a requirement for the amount of information a company collects from its client before accepting an order. The Directive also introduced the so-called MiFID passport, which allows companies falling under its jurisdiction to be authorized and regulated by the country where they have a registered office, even when dealing with clients from other EU member states. 
 
MiFID II will revise and complement the first version, addressing issues such as banks' trading activities, dark pools, and high-frequency trading (HFT), among others. But the most significant change will be the introduction of a new category, an Organized Trading Facility (OTF), which will encompass all asset classes, including Forex, bonds, equities, etc. It will also capture all currently unregulated trading venues, including "broker-crossing networks" - networks of brokers matching clients' orders with each other outside organized trading venues, which are hidden from the market There is a special provision planned for equities OTFs – two years after application, they will be subject to an evaluation to determine whether they have been harmful to the market in any way. 
 
Some of the other proposals made by the Council include a special clause that will allow brokerages more discretion regarding trade execution, and a requirement for clearing houses to clear financial instruments “on a non-discriminatory and transparent basis regardless of the trading venue on which a transaction is executed”. Matched principal transactions also have not been overlooked. These types of transactions allow traders to trade on market exchanges and participate in over-the-counter (OTC) transactions. If the proposed version of MiFID II is accepted, matched principal trading will only be acceptable for bonds and non-standardized (off-exchange) derivatives, to the exclusion of equities.
 
Severe restrictions are planned for HFT and the so-called “dark pools” - trading venues off the lit markets. According to the proposals, anyone using algorithmic trading will be forced to submit their algorithms and strategies to regulators, and provide proper risk control to prevent market disruptions (as stated, in fact, by the German HFT Act passed earlier this year). As for dark pools, the Council is pushing for a limit of no more than 4% off-the-market trading per venue, and 8% for the entire EU region as a whole.
 
 

MiFID II impact on the market

 
Probably the greatest impact that MiFID II could have on foreign exchange is that, as we mentioned, Forex will fall under the category of OTF and will benefit from the greater transparency and investor protection that is paramount to the Directive. Unfortunately for brokers, increased transparency also means increased costs for reporting. Opinions have also been expressed that the limitations on dark pools and HFT could seriously disrupt brokers' current workflow.
 
Equity trading will probably be most affected by MiFID II in its current state. European stock exchanges have argued that including equities in the OTF category would reduce investor protection, allowing preferential treatment to certain clients. It is also possible that small and medium enterprises will have trouble raising capital in the EU.
 
Of course, it has to be noted that, even after the proposal is officially signed by the European Council this week, it will be some time before it can become part of standard EU legislature. A “trialogue” between the Council, European Commission and European Parliament will most likely result in further amendments to MiFID II. The process is expected to be long and difficult, as the three sides of the trialogue have had many points of discord in discussions so far. For example, the European Parliament is against the inclusion of equities among OTFs, while the Commission was in fact the first to propose the new category back in October 2011. Though the MiFID II is not likely to become a law until next year the earliest (or maybe even as late as 2015), the new proposal is clearly a step in the right direction. 
 
In any case, changes to legislature are at this point inevitable. The US has already led the way with the signing of the Dodd-Frank act and the recent introduction of Swap Execution Facility (SEF), a platform for regulated swap trading (swap being the exchange of one asset or liability for a similar asset or liability for the purpose of shifting risk, as per official definition). I mean, it's not for nothing OTF's have now acquired the nickname “European SEF”. The best action for Europe now seems to be to try and catch up to the US, bringing its financial markets under strict control.   
 
 
TAGS: european council  mifid  mifid ii  agreement  mifid ii agreement 

More Forex Market News

Forex Scam: FCA UK Warns of BPEFX

Jul 17 2014 10:19:22

Financial Conduct Authority (FCA) has issued a warning about BPEFX, another clone of UK regulated firm. The UK watchdog believes that the forex broker has been providing financial services or products in the UK without its authorization. Read more

5 Forex Brokers Accepting US Clients and Offering Hedging and High Leverage

Jul 16 2014 15:49:56

Like most of you know,  four years ago the Dodd–Frank Act limited the leverage offered by US forex brokers to 1:50, prohibited hedging and imposed the first-in-first-out (FIFO) rule. What's more, foreign forex brokers was prohibited from accepting US clients. Read more

US Retail Forex Assets Finally Up in May

Jul 08 2014 09:17:56

According to data provided by CFTC, after hitting an all time low in April, customer assets held by US forex brokers has increased in May by $4.75 million, to almost $600 million.   FXCM remains the biggest US forex broker. Read more

Forex vs. Binary Options: Industry Insights by Optimove

Jul 01 2014 14:27:22

Optimove, an Israel based developer of customer retention automation software, has examined 18 months of granular customer behavior data from a score of online Forex and Binary Option brokerages to find out that forex traders are less likely to convert initially, but are more likely to remain engage... Read more

US Forex Traders' Assets Drop to an All Time Low

Jun 23 2014 14:46:20

Four years after Dodd-Frank Act came into force, limiting leverage and forbidding hedging all but the largest brokers to operate, US retail FX trading has dropped to an all time low. Read more

ECB Meeting on June 5th - Scenarios, Targets and Impact on EURUSD

May 29 2014 12:49:48

All around the globe investors and speculators are trying to figure out the next move of ECB on their next meeting. Consensus opinion indicates, that rate cut in all three rates ( including refi rate to 0,15 and deposit rate to -0,10% ) is with very high probability. Read more

FXBeat Forex News: First, Fast, Fun and Paid

May 28 2014 15:45:01

FXBeat, the forex news feed, brought to traders by Jamie Coleman and his team, has been improved and is now available as a Premium service for individuals. The price is just $14/month and traders can take advantage of 30 days free trial. Read more

Trading in Australia - Regulatory Environment

May 27 2014 15:27:18

Today Australia’s financial markets receive worldwide recognition for their overall wellbeing. The country’s financial markets are supported by a regulatory system that functions under a series of best practices guidelines. Read more

Searching for the Alpha

May 25 2014 09:45:55

Alpha is generated by regressing the security or mutual/hedge fund`s excess return on the benchmark excess return.   In the times of deleverage, quantitative easing, geopolitical problems and general economic uncertainty the search for alpha is getting much harder. Read more

FCA Fines Barclays £26M for Manipulating the London Gold Fixing

May 23 2014 14:53:44

The Financial Conduct Authority (FCA) has fined Barclays Bank Plc (Barclays) £26,033,500 for failing to adequately manage conflicts of interest between itself and its customers as well as systems and controls failings, in relation to the Gold Fixing. These failures continued from 2004 to 2013. Read more