The positive side of MiFID II

Most of the discussion around MiFID II in an FX context has been pitched in fairly negative terms – yet the industry has much to gain from the clarity the directive will bring to the trading process.

It is understandable that some market participants have viewed the implementation of the new rules with trepidation given that they are required to provide a greater degree of detail around their trade execution.

However, it is also understandable that traders want to see the same level of transparency in FX that they see in equity or fixed income trading.

We have seen that banks are using MiFID II to improve transparency around the FX trading process. By reporting on price construction and displaying cost to the client, the sales desk ‘owns’ this P+L to a greater extent.

This is significant because banks are facing unprecedented pressure on costs. Margins are shrinking and as a result headcount is falling, so it is vitally important for FX sales desks to be able to justify their existence.

One of the most effective means of underlining their importance is to improve efficiency. This can be achieved by getting clients to self-serve but having a management information system to demonstrate value and proactivity in increasing margin/wallet share.

That means client trades can be attributed even if they are done on a self-service basis, increasing the visibility of eFX across the investment banking arm by highlighting the profitability of the sales desk relative to its modest headcount.

Intelligent institutions are overcoming budgetary constraints, using the compliance budgets allocated to MiFID II to re-tool existing systems to the overall benefit of the user.

In conjunction with the Global Code of Conduct, MiFID II has also created a more level playing field within the FX industry. The ability to demonstrate full compliance is vital to maintaining market credibility and will also serve to limit the impact of firms who have used technology to distort the market.

Future of Single-Dealer Platforms: SIs, MTFs or OTFs?

An excellent article in covered also in FXWeek, looks at the future of Single-Dealer Platforms under MiFID II and discusses the options for bank platforms.

Should they register as:

  • Systematic Internalisers (SIs), which enables them to utlilise their own risk capital and trade on bilateral basis with customers
  • Organised Trading Facilities (OTFs), in which case they cannot use their own capital, and would in effect be running an agency business, but cannot run both an SI adn OTF under the same legal entity
  • Multilateral Trading Facility (MTF), which offers all to all trading

Initially, the SI regime seems obvious, as they can deploy their own capital, and trade with clients on a bilateral basis, which is what most SDPs currently do.

The test for an SI is that it Continue reading

Getting to grips with MiFID II

Following the release last month of the Draft Regulatory Technical Standards (RTS) and Regulatory technical and implementing standards Annex 1 for MiFID II / MIFIR firms and their regulatory experts and consultants will by now be deep into the technical details.

Whilst some firms have voiced concern that they will struggle to implement the technology changes required, others are already looking to turn regulatory compliance into competitive advantage. The clock’s ticking towards MiFID II implementation on 3rd Jan 2017, and the FCA has indicated that new authorisation could take up to six months, so really no time to lose.

As can be seen from the impact assessment heat-map below Continue reading