Why MiFIR Will Matter to You

There is a generally high level of unease across European financial services about Markets in Financial Instruments Directive (MiFID) 2 and Markets in Financial Instruments Regulation (MIFIR), which came into effect at the beginning of 2015. A large part of the apprehension is due to the lack of clarity about who will be affected and how. Final technical standards have not been published and there is still hope in some quarters that one or two of the more challenging aspects of MIFIR reporting may be averted.

However, the experience of EMIR teaches that sooner or later the regulator gets what the regulator wants, and on a current reading of the draft rules this means that retail FX brokers can expect to be included in all of the reporting requirements, as they were for EMIR.

The aim of MiFID 1 was the detection of market abuse in regulated markets. However, there was a blanket exclusion for contracts related to FX, commodities and short-term interest rates. No such exclusion has been built into MiFIR (the regulation which directly governs the new reporting requirements). And the scope of reportable products has been extended to include, among other things, all instruments traded on Multilateral Trading Facilities (MTFs), as well as all OTC derivatives based on those instruments, even where traded bilaterally between a broker and client.

Now consider the LMAX MTF – their main business is in offering an exchange infrastructure for the trading of currency pairs. In all probability this means that everyone who trades those same currency pairs, whether as a spread bet, CFD or rolling spot contract, will be caught by the reporting requirement. It is probably an unintended consequence, but the most likely result is that a Cyprus broker trading EUR/USD with a Far Eastern client will need to report that trade simply because of the existence of a similar product on an MTF within the EU.

The same Cyprus broker should already be reporting these trades for EMIR, but this won’t be of much practical help, as there is limited overlap between the fields required by these parallel reporting regimes. Among the details, which will need to be supplied, is the National Insurance Number, or other national identifier, of the trader responsible within the reporting firm, as well as numerous personal details of any individual client.

The reportability logic set out above would seem to apply equally to binary options based on currency pairs, irrespective of whether they expire within 90 seconds of execution. The cost of setting up reporting systems capable of meeting these requirements might force some of the smaller brokers to start looking for easier ways to make money!

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