Implications of MiFID II for Forex

June 19, 2017
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Initially launched to ensure effective and secure financial operations across the various regulatory frameworks of European Union (EU) member states in 2007, the Markets in Financial Instruments Directive (MiFID or Directive 2004/39/EC) encountered challenges during the financial crisis of 2008, which ultimately resulted in the introduction of an updated, revised MiFID to come into force in 2018. Becoming compliant to the looming regulatory changes carries a heavy financial burden, warns international payment service provider and acquirer ECommPay. Forex merchants operating within the confines of MiFID II must invest in secure technological architecture and introduce sophisticated payment solutions to avoid financial losses.


Limiting the ability of EU member states to establish individual rules for external investment firms operating through both cross-border services and local branches, MiFID helped institutionalise a competitive environment, which consequently resulted in many companies reducing their fees. The directive was largely considered to be a success, having established a pan-European framework for the provision of investment services and the operation of markets.

While the first MiFID laid the groundwork for increasing competition, customer protection, and market transparency by removing concentration rules and introducing the passport principle (granting companies licensed in one EU country the authorization to establish a local branch or to offer services remotely on a cross-border basis without any additional requirements), MiFID II targets increased transparency and reinforcement of investor protection measures.

How MiFID II will affect Forex

From a Forex perspective, the new initiative will require redistribution of resources, which, by Financial Times estimates, will cost the finance industry more than €2.5 billion. Though it’s hard to calculate how much MiFID II implementation will cost the retail Forex industry alone, companies working within the sphere need to restructure their business processes for cost efficiency in preparation for compliance to new regulation. Forex operators must prepare for MiFID requirements, which will introduce the following measures:

Provision of telephone recordings and electronic communications

To facilitate investor protection and deter market abuse, MiFID II introduces new mandates requiring companies to keep a record of all telephone communications and electronic communications concerning the receipt and transmission of orders; execution of orders on client behalf; and independent dealings. The requirement was further extended to include face-to-face client meetings. Records should be kept for a minimum of five years, and an additional two years if requested by the national authority of an EU member state.

Product governance and regulated sales processes

By introducing a new product governance regime applicable throughout the EU, MiFID intends to regulate all stages of the life cycle of a financial instrument. The design, marketing, and distribution of products by investment firms must be tailored to the predefined ‘target market’ of a financial instrument. The European Securities and Markets Authority (ESMA) lists six categories for identifying a target market:

  • Type of clients to whom the product is targeted
  • Client knowledge and experience of products offered
  • Financial situation of clients (with a focus on their ability to bear losses)
  • Risk tolerance of clients and the compatibility of the risk/reward profile of the product with the target market
  • Client objectives
  • Client needs

As some of the categories listed above are already in use to conduct suitability tests, Forex brokers will be able to use existing information to identify the target market. This knowledge will furthermore assist in the second prerequisite of the product governance regime, which necessitates operators to identify any group(s) of clients for whose needs, characteristics, and objectives their offering is incompatible, ie. negative target market.

Introduction of third country regime

The term “third country” refers to jurisdictions outside the EU, if they do, or seek to do, business within the EU, regardless of whether that be by way of a branch established in the EU or on a cross-border basis. Outlining a new scheme for granting third country companies access to EU markets, MiFID II proposes a differentiated approach depending on the type of clients they expect to engage. Retail Forex client services may require the establishment of a branch within the EU member state the third country broker intends to serve, whereas service to professional and eligible counterparties will not require a regional branch if the broker in question is registered with ESMA.

Individual EU member state legislation will determine whether the branch model will be available as an option to third country companies, provided that third country firms do not receive special privileges not granted to businesses from other member states. The cross-border model, meanwhile, will be determined and facilitated by ESMA. As the ability of third country firms to conduct MiFID regulated business with retail and professional clients will be at the discretion of each EU member state, only the cross-border operations will become subject to an EU-wide initiative.

Though only the additions to the MiFID legislation most relevant for Forex brokers and operators were outlined above, the recently introduced regulation will extend far beyond data collection, product governance, and third country business activity. Coming fully into force by 2018, MiFID II will demand financial services companies to dedicate a large number of resources to becoming compliant. Forex companies operating within the EU jurisdiction must establish cost effective measures to counteract the expenses of restructuring business processes, including updating technological frameworks and streamlining payment processes for maximum revenues.

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