The Impact of the Change in Transaction Reporting on Retail CFD Firms

MiFIR reporting requirements must be considered carefully given the recent enforcement actions concerning client onboarding and AML under FCA and

This article was written by Chris Dingley, Head of Sales at Abide Financial.

 

While it would be fair to say that no single firm can cause systemic failure in the retail CFD market, events like the random Swiss National Bank devaluation did show the vulnerability of individual firms in respect of market exposure. Further, recent enforcement actions under FCA and CySEC ‘rules’ have been damaging to certain retail CFD firms, if not catastrophic. Both of these events placed the retail CFD industry under the regulatory spotlight.

Chris Dingley
Chris Dingley

Now, new EMIR and MiFIR regulation around increasing market transparency and best execution require yet more, more granular, information to be reported to regulators and firms can be sure that once this data is in the regulated domain, regulators will seek to use it.

The major concern for retail CFD brokerages should be that both EMIR 2 and MiFIR extend the visibility of your book, positions and client base to the regulator. Once these measures are in place, anyone with access to these reports will able to “open the lid” on EEA regulated brokerage entities.

EMIR v2

Due in early 2017, the upgrade to EMIR reporting will capture detail that describes the full funding position of the firm. Namely:

  • extension to initial, variation and excess margin concepts
  • extension to received and posted margin

If the proper analysis is completed, and let’s remember that many capable commercial risk analytics systems exist in the market today, then the full position of your book will be available to the regulator. How much margin are you offering to clients? What value of risk is internalised? How far are you hedging your position? Clearly there is a lack of information about inbuilt structure, how limits and other balances are structured, but the data will be there in aggregate and available.

MiFIR

Now confirmed for delivery in January 2018, MiFIR focuses on market abuse provisions and requires more client detail to be captured. Primarily this introduces two concerns:

  • Lack of an LEI for corporate counterparties technically imposes a “do not trade” condition with these clients as trades will not be able to be reported
  • Individual traders must be identified by a passport number or equivalent (where available) in all but 5 jurisdictions worldwide. Note, the text does make mention of any “best endeavours” or “reasonable endeavours” leeway in this draft National Competent Authorities will have another means to look into the workings of a brokerage to identify information including: Who are your clients? What is their geographic concentration? How efficient is your data collection and AML process?

 

The consequences of the effort required to onboard a given customer and build-out and maintain of a reporting function could be large. Many firms are now looking at an outsourced solution that manages the complexity of this change, minimising the effort and impact of analysis and implementation. We have already seen a number of dislocations in the reporting provider market over the last couple of years, all of which confer cost of change onto a broker.

 

One final thing to consider is the net effect of all this transparency. With the base cost to operate in the EEA becoming higher, and the margin of error for compliance becoming lower, will we see a continuation in the growth of the onshore market? Furthermore, will firms look to optimise a global location strategy based on a wider cost/benefit appraisal of MiFID certification?

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