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#1 24-02-2020 15:18:50

Admin & Trader
From: Paris - France
Registered: 21-12-2009
Posts: 3050

Confusion in terms of trader categorisation needs to be resolved

Confusion in terms of trader categorisation needs to be resolved

The correct classification of traders has become so complex that it is not surprising that many financial institutions get it wrong. However, it is absolutely essential to classify traders correctly from the start in order to know which products and services to sell them, to protect both the brokerage and the trader, and to avoid large fines in case of a violation of regulations.

There are essentially 3 main categories of traders: Individual traders; professional traders; counterparties. While retail traders have the highest level of protection and are the main category to be protected by the financial mediator, there are a number of reasons why financial institutions (and traders themselves) may wish to be "pushed" up the ranking to the next category.

First, financial institutions must separate their money from that of their traders; for lower level brokers this can be problematic as they need this money for lines of credit from liquidity providers and many of them simply don't have the internal resources to manage this separation. Second, because of ESMA's temporary product restrictions - which most national authorities have now taken as permanent measures, restricting the marketing, distribution and sale of CFDs to individual traders - clients can access more products if they aren't in this category, and brokers also have more marketing opportunities.

To move up in the classification ranking, traders must pass two tests: a qualitative test assessing their expertise, experience and knowledge, and two out of three parts of a quantitative test. It sounds simple, but it isn't, largely because of the lack of standardisation and clarity.

Shortcomings in these categorisation tests

With the qualitative test, many brokers ask a simple question such as "Do you have the knowledge and experience necessary for trading?" In response to this, it is very easy for the trader - eager to be embarked - to simply respond: “Yes.” However, forex brokers should gain a better understanding of their expertise, experience and knowledge by asking questions such as “what types of transactions have you done in the not so distant past?”, “what instruments have you traded?” and “how relevant are they to the instruments you want to trade with our brokerage?","what is your experience in the forex?", "what is your level of education?", and in general by testing trader knowledge specific to the instrument(s) and service(s) it wishes to use with the forex broker.

An erroneous classification at this stage should not be taken lightly: if traders complain that they were not correctly "ranked" during the integration and that they should have been classified in the category of individual traders, and not in that of professional traders, they may be authorised to cancel their trades and recover their lost funds.

With the quantitative test, the lack of clarity is even more worrying. For example, the first criterion is as follows: "The client has carried out transactions of significant size on the relevant market at an average frequency of 9 per quarter during the previous 3 quarters". On the surface, this may seem clear - but what does "significant size" mean? In France, for example, it is more than 500 euros per transaction, in Slovakia, it is more than 5,000 euros per transaction and in the United Kingdom, the concept of significant size is not defined at all, which leaves room for individual interpretation.

Many people assume that once they comply with the MiFID rulges, they conform to all EU markets in this regard. This assumption is incorrect because the financial institution must rely on the status of the client's domicile. If they don't know, for example, the specific guidelines for the integration of Slovak clients, they could easily and inadvertently violate the regulations, which would require a cancellation of the trade and/or fines from the regulatory authority.

"Anything worth having is worth going for - all the way." - J.R. Ewing



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