Foreign exchange: How to deal with the summer MiFID II blues

This article is by Tod Van Name, Global Head of Foreign Exchange Electronic Trading at Bloomberg. 

Foreign Exchange executives are sweating, not just from the summer heat, but because of the looming deadline of the most far-reaching financial regulation to date – the Markets in Financial Instruments Directive II (MiFID II).

Compliance with MiFID II is less than six months away and corporate and financial professionals are under pressure to create or acquire the technology to provide an un-paralleled level of detail on where, why and how they executed their trades.

MiFID II’s mission is beneficial –bringing a degree of transparency that is unprecedented — to make markets fairer, safer and more efficient.  Understanding and adhering to those rules is much more complicated.

To clarify what is covered by MiFID II and how to deal with it, Bloomberg’s FX electronic trading business held a webinar recently to explain what the regulation says, what it addresses, and how to comply. The first version of MiFID applied solely to equity markets, MiFID II applies to “non-equity products,” such as cash and derivative products in fixed income, FX and commodities.

An asset-management firm will need to ensure its team and systems meet all MiFID II requirements. These obligations affect all aspects of the trading life cycle including business and product governance, pre-trade, at-trade and post-trade. This calls for a far more detailed and systematic approach to compliance than under previous regulations.

The FX financial instruments that are affected include: Deliverable and Non-Deliverable FX forwards and Swaps, FX Options, and other FX derivatives. FX Spot is not covered by the regulation, as it is not considered to be a financial instrument by ESMA, the European Union (EU) regulator. As FX is considered “illiquid” it does not have pre-trade reporting requirements.

The Key MiFID II requirements include:

  • Transparency reporting – Firms will need to publically report executed trades through an Approved Publication Arrangement (APA).
  • Transaction reporting – MiFID II extends transaction reporting requirements to all financial instruments traded in the EU, which will need to be reported to approved reporting mechanisms (ARMs) or the client’s National Competent Authority.
  • Best execution – Under MiFID II investment firms will be required to take all sufficient steps to obtain, when executing orders, the best possible result for their clients – taking into account price, costs, speed, likelihood of execution and settlement, size, nature or any other relevant consideration. Currently, MiFID only requires firms to take all reasonable steps to obtain the best result for their clients. The difference means that firms should take a systematic approach and monitor all trades. It might not be enough to simply do sample tests.
  • Recordkeeping – MiFID II requires firms to keep extensive records of all transactions, communications, services and activities for 10 years, in order for them to be able to provide transparency into the trade life cycle. This is to support trade reconstruction if required.

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