RTS 27: A Regulatory Thorn in CFD Brokers Sides

Within Europe, the past few years have seen a tightening of Regulation Regulation Like any other industry with a high net worth, the financial services industry is tightly regulated to help curb illicit behavior and manipulation. Each asset class has its own set of protocols put in place to combat their respective forms of abuse.In the foreign exchange space, regulation is assumed by authorities in multiple jurisdictions, though ultimately lacking a binding international order. Who are the Industry’s Leading Regulators?Regulators such as the UK’s Financial Conduct Authority ( Like any other industry with a high net worth, the financial services industry is tightly regulated to help curb illicit behavior and manipulation. Each asset class has its own set of protocols put in place to combat their respective forms of abuse.In the foreign exchange space, regulation is assumed by authorities in multiple jurisdictions, though ultimately lacking a binding international order. Who are the Industry’s Leading Regulators?Regulators such as the UK’s Financial Conduct Authority ( Read this Term, with the aim to protect retail traders from losses. However, amid this tightening, some aspects of the regulation have caused confusion for brokers, such as RTS 27.

To explain it simply, RTS 27 is a quarterly requirement for execution venues, Market Makers Market Makers Market makers or called dealing desk brokers represent a type of broker that internalize flows and are taking the opposite side of a transaction submitted by their clients. The market making broker is only quoting a feed of prices to its clients. These feeds may or may not be the exact same as the prices quoted on the interbank market.Any order a client enters is processed internally and never goes out to the market, except in rare cases where a market making brokerage identifies a client as a v Market makers or called dealing desk brokers represent a type of broker that internalize flows and are taking the opposite side of a transaction submitted by their clients. The market making broker is only quoting a feed of prices to its clients. These feeds may or may not be the exact same as the prices quoted on the interbank market.Any order a client enters is processed internally and never goes out to the market, except in rare cases where a market making brokerage identifies a client as a v Read this Term and Systematic Internalisers (SIs) to publish best execution reports, however, it is a common mistake for firms to think RTS 27 is the same as Best Execution.

As explained by TRAction: “Though they are related and often ‘packaged’ together, they are not the same. Best Execution deals with rules and processes to achieve a good outcome for clients. RTS 27 is disclosing publicly on your website a report on execution statistics.”

RTS 27 wasn’t designed for CFD brokers

One of the reasons why contracts for difference (CFD) brokers might be confused with the regulations could be because the regulation was not designed for CFD providers, it was actually designed for trading venues.

As highlighted by the provider of trade and transaction regulatory reporting services, recent guidance from ESMA on RTS 27 effectively means that although CFD providers that offer services with little affinity to trading venues, still need to collect, collate and report on information they don’t have access to and from a perspective from which they don’t operate.

So what is it specifically about RTS 27 that is causing confusion for brokers? Speaking to Finance Magnates Quinn Perrott, the co-CEO of TRAction Fintech believes it is the lack of clarity surrounding the regulation.

"RTS 27 incorporates a lot of terms and concepts which don't feel directly applicable to FX and CFD brokers. Any regulation which requires a lot of interpretation to make it fit with real-life circumstances of an investment firm causes a lot of grief until more guidance is issued or an industry norm is developed," he said.

Do RTS 27 reports provide value?

Ron Finberg, Product Specialist, Regulation at Cappitech, however, doesn't believe the regulation is overly difficult for brokers to understand. He did, however, point out that the actual value the information generated from the quarterly reports is questionable.

"I don’t think its that difficult to understand what the regulators want," he told Finance Magnates. "The problem I see with it is not a matter of whether it's difficult to understand what they want but whether the data itself provides a use. And regardless of whether it’s a CFD provider or a market maker... the data itself is very difficult to get any benefit from."

In light of the coronavirus pandemic, ESMA has allowed execution venues that are unable to publish RTS 27 reports due by the 31st of March 2020 to publish them as soon as reasonably practicable after that date as long as it is before the following reporting deadline.