Every investor, broker or consultant who works in EU financial markets should review the MiFID regulations, specifically the newer MiFID II. This is the second EU Directive of its type – MiFID came into effect in 2007. Its main goals include harmonising EU member nations, broadening the scope of the regulations, protecting investors, and achieving transparency.
What you should know about the MiFID regulations is that they have dramatically change the workflows in the European marketplace. Since the MiFID II went into effect in January 2018 the whole financial industry has been adapting to these changes with relative success. The companies who work in the forex market have to clearly identify which group of clients each product is aimed at, with an appropriate level of risk and advice for each of them.
MAIN CHANGES OF MIFID II
The 2008 crisis sparked a conversation about a possible improvement of MiFID I due to seismic changes in the market. MiFID I was not enough to tackle the big transformation we all suffered so the European Parliament decided to take a step forward. The parties most impacted by these regulations are investment, wealth, and asset managers operating in the fixed income, derivative, and commodity markets. These are the main changes regarding MiFID I:
TRAINING REQUIREMENT
Employees of financial institutions have to acquire specific knowledge to inform and advise on financial products and investment services. Knowledge that will be renewed every certain time to make investors feel they are being well advised. Additionally, the authority will do control inspections, so if you run a forex brokerage keep it in mind.
DIFFERENTIATED COSTS
The European Parliament designed it as an important piece of investor protection which is why the cost of brokerage and the cost of analysis offered by brokers go separately. The investors will have access to more information and managers will have to see if they finance the costs or charge them to the funds.
Certainly, there is more information before you invest, during the process and after, when you receive the exact amount you have spent. Firms have always had to provide details of charges.
SUITABILITY
Firms have to give clients whatever product is more suitable for each of them according to:
- Objectives
- Risk level
- Knowledge
- Financial Position
The new rules include:
- Suitability test extended to all advice.
- The brokerages must document changes of circumstance (family, assets)
- Firms must report every client transaction by the end of the day – requires a legal identifier.
REPORTING FREQUENCY
Firms have always had to provide regular reports and some documents must be sent more often than others. Every time a portfolio drops by 10% or more, on a quarterly basis, this occurrence needs to be flagged and explained. Let’s hope these 10% letters or electronic notifications don’t trigger a sort of panic selling and undue worrying.
TAKING INTO ACCOUNT
IT HAS BECOME A MORE COMPETITIVE MARKET
This could increase the cost for the investors but also, it will reduce the value of services offered to them. As a result, smaller fund managers cannot compete with large fund managers that have large in-house research teams. In particular, investment firms with a heavy focus on research will struggle to adjust to the new rules.
CONCENTRATION ON THE BROKER SIDE
With only the biggest brokers now providing some form of coverage. They are the only one with the economies of scale and economic interest that allow them to provide subsidized research.
IT IS NOW OBLIGATORY TO REPORT TRANSACTIONS
The degree and type of details necessary are also new and much more extensive than previous requirements. Additionally this includes reporting requirements for investors, regulators and risk managers. Firms have to check their reporting framework regularly using a testing system to ensure that reporting is happening accurately.
BROKERS WITH MIFID LICENSE
Etoro, Plus500 and FXDD Malta Ltd
They provide clients with the benefit of negative balance protection at its own cost which means that any client trading losses cannot exceed the available funds in the client accounts. Consequently, client account balances will never become negative. There is a requirement for forex brokers to place their clients into 1 of 3 categories, “eligible counterparties”, “professional clients”, and “retail clients”. This is to better serve the clients and give them the protection they need. You can find more details in this document.
FINAL THOUGHTS
MiFID II has been a game changer not only for Europeans but also for other markets connected to it. Currently, EU consumers should know what they are buying and why, how much it will cost and how it is subsequently performing.
As MiFID II brings transparency on costs and charges, this in itself will bring competitiveness in the marketplace. On the sales-side, the erosion of mid-tier asset managers will continue. Fees will come under growing pressure. The impact will be felt slowly, but it will be felt.
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