MIFID II Impact on Forex Market

August 1, 2018

Starting with January 2018, MiFID II (Markets in Financial Instruments Directive) will be implemented in Europe and there is a whole debate about the impact on the Forex market.


Before discussing that, it is important to understand what the MiFID idea was and why there is a need for a change. When was first announce, and introduced, the MiFID program led to a substantial change in the cash equity markets?


The system started to supervise financial institutions in 2007 in UK and EU. The problem is that the Brexit happened, and the new system will have to adapt to this.


The idea was to remove cross-border financial services barriers, the same way other barriers were removed together with the Eurozone and creation of the common currency. The purpose was to have a more transparent marketplace, a balanced one, and, why not, safer for all the parties involved.


What is the MiFID II and What to Look For?


The MiFID II directive is intended to expand the transparency. It is supposed to affect everyone engaged in dealing with a financial product, Forex brokers included.


As it is now, Forex brokers are decentralized. Therefore, any broker has complete control over the business, operations, and records. While this is normal, it leads to many brokers being scammers or crooks.


MiFID II is intended to deal with this situation. In principle, one should expect a shift towards a more structured and organized marketplace, improved execution, market transparency, and detailed cost formation revealed.


It is intended to give the end customers (traders) a safer and a more transparent trading environment,


Over-the-counter (OTC) trading will be difficult under the new regulation. All brokers that deal with Forex, CFD’s (futures, options, binary options, etc.) will be regulated by the MiFID II legislation. So far, regulators had little or no reach to the modus operandi of these brokers.


Moreover, brokers will be required to submit a list of all trades that have been made. This is a daring task as data handling is a challenge when it comes to information of this size.


Under the MiFID II, some industries will change from scratch, like the binary options industry. Now, this is unregulated and full of frauds and the MiFID II will increase transparency.


Forex brokers will face limits in the leverage that they can offer to their clients. It is not going to be possible to see leverages like 1500:1, as it is considered too risky.


These and other unregulated financial assets will now be brought to a centralized trading venue to improve transparency. Even trading with expert advisors will change as will not be possible to offer them to the client without proper testing first.


One big impact on Forex brokers will be the way trades are executed. Now, in an ECN environment, a trade is subject to slippage if the position is opened when the market is volatile.


Under the new regulation, the quotes will be provided from a central point, and trades will be then executed at the desired price. Speed will be improved too.


MiFID II will affect UK brokers and other brokers if they deal with UK clients. But it will affect other brokers in other parts of the world as UK traders represent a big chunk of the overall trading activity.

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