Impact of the MiFID II directive on currency trades after 1 year: expert analysis

Article originally appeared on leaprate

In 2010, after the crisis, the EU launched a consultation review to update MiFID. This led to the creation of comprehensive legislation called MiFID II which was formally adopted 5 years ago. It was supposed to start operating in January 2016 but the ESMA extended the date to 3 January 2018.

The goal of MiFID II is to protect investors and increase transparency across stocks, derivatives, fixed income, CFDs, High Frequency Trading (HFT), algorithmic trading, and the forex.

MiFID II affected everyone involved in the financial markets across the EU including: fund managers, banks, stock exchanges, pension funds, and retail investors. ESMA has later published Guidelines on certain aspects of the MiFID II suitability requirements.

Chris Hollands, in charge of sales at TradingScreen, commented on the impact of MIFID II across forex 1 year later:

The biggest impact of MiFID II’s transparency objectives has been felt in the Fixed Income, OTC Derivatives and forex environments. Across these asset classes, demand for Execution Management Systems (EMS) to provide liquidity aggregation, increasingly sophisticated analytics, as well as access to a wider set of execution venues and trading protocols has been very apparent.

The best execution imperative across a broader range of increasingly electronic asset classes and execution options, including the emergence of more block trading venues in equities, has led to greater buy-side demand for in trade and post trade analyses from brokerage houses.

Finally, MiFID II has, as intended, brought about a more transparent and upfront buy-side perspective on execution costs in the Listed markets, in addition to a preference for license versus transaction-based pricing models for independent execution tools.

Vikas Srivastava, Chief Revenue Officer in institutional foreign exchange trading platform Integral, has also shared his views on the impact of MIFID II.

How has the industry changed 1 year after the MiFID II implementation date?

Vikas: Without a doubt MiFID II and evolving regulations will continue to push for higher levels of transparency and compliance from forex players.
With the challenges posed by stringent requirements for execution, transparency and reporting, we’ve seen many brokers turn to cloud-based solutions to navigate these directives. Using this approach many of our clients were able to seamlessly fulfill the regulatory needs including RTS-27 reports in June.

Although being compliant is the primary motivator, we are also seeing firms take advantage of the standardized reporting and methodology required by MiFID II to deliver and prove best execution for their clients. What has become apparent over the last year is that the participants are learning to see regulations as less of a box-ticking exercise and more of an opportunity to differentiate themselves from their competitors and therefore as a catalyst for business growth.

From your unique perspective, what changes do you foresee in the industry in the coming months? Especially after all the changes driven by regulation such as ESMA’s leverage cap.

Vikas: We expect that regulations will continue to impact Retail forex activity significantly. Particularly given the expectations of higher market volatility over the coming months as the industry faces the challenges posed by the prospect of a hard Brexit.

Who are the real winners in terms of MIFID II?

Vikas: The entire industry has benefited from MiFID II in that greater transparency helps the market operate more efficiently. Even the market participants who initially struggled with some aspects of the regulations are learning to adapt. This year, we will see less firms viewing MiFID II as a burden and more leveraging its benefits to serve their customers better.

What can we expect from MIFID II this year?

Vikas: Continued implementation of MiFID II especially with respect to standardisation around TCA.