On 3 January 3 2018 the MiFID II directive, along with the MiFIR regulation, will come into force in the EU. The new rule sets are going to affect the business of retail forex and cfd brokers in an unprecedented manner.
The most important change from MiFID I to MiFID II is the requirement of Transaction Reporting, which is described in the MIFIR regulation.
MiFIR Transaction Reporting require investment firms to report (almost in real time) all sorts of information related to individual trades. Relevant information that needs to be reported is buyer information, seller information, price, quantity, venue, ticket number, maturity data, and the underlying currency of the product.
Transaction Reporting already exists, i.e. for equities and bonds. But the new regulation has widened the selection of financial instruments under scope of Transaction Reporting. MiFID II has expanded reporting to include all financial instruments traded or based on venue traded product.
Regarding forex trading, products offered by retail brokers are based on OTC forex pricing and not venue based trades. As a result, this would theoretically nullify retail forex products from falling under MiFIR obligations.
However, although more than 99% of rolling spot forex trades are OTC based, there is a small percentage transacted on EU-registered trading venues such as LMAX. In addition, MiFID II definitions of trading venue will cause some bilateral trading platforms to become registered venues as well. As a result these venue listed forex products will thus cause the retail version of the product to fall under the scope of MiFIR Transaction Reporting.
Due to their characteristics, the EU Commission has classified retail forex products as a financial instrument due it being “indefinitely renewed” and therefore like a CFD derivative. Due to this definition, most European financial regulators including the FCA in the UK and CySEC in Cyprus consider retail forex trades to be derivatives under MiFIR reporting requirements.
The CySEC illustrated the new reporting obligations to be met by Cyprus investment firm in a circular dated 20.09.2017.
Transaction Reporting is going to have a severe impact on Cyprus investment firms, which are mostly small or medium sized and low capitalized. Transaction reporting cannot be performed manually, but requires an expensive IT infrastructure. In order to meet the requirements, these companies will have to invest in data management and reporting resources.
The provision of services by Data Reporting Service Providers will be required, if investment firms cannot establish an internal reporting infrastructure. This means that sensitive data (i.e. transactions volumes, clients names ecc.) will be known to external market partecipants.
According to media reports, few financial institutions are ready to meet the requirements of transaction reporting under MiFID II.
Even large firms in the UK are struggling.