New MiFID II Reporting Proposal: CFDs Brokers Need to Tag Retail and Professional Clients

The European Securities and Markets Authority (ESMA), under the Markets in Financial Instruments Directive II (MiFID II) framework, is proposing a new field in regulatory reporting that would require firms to indicate whether a client is a retail client, a retail client treated as a professional on request, a professional client, or an eligible client.

If implemented, this requirement will directly affect contracts for differences (CFDs) brokers, who offer separate services to both retail and professional clients.

Proper Identification of Clients

As revealed by LSEG’s Regulatory Reporting on LinkedIn, the introduction of such a field will allow local European regulatory agencies, also known as National Competition Authorities (NCAs), to identify retail clients to monitor the distribution of complex products or to spot market trends when analysing transaction data.

FinanceMagnates.com recently reported how some CFD brokers, including IronFX, BDSwiss, Exness, and FXTM, have exited the European retail markets despite building their brand reputation by offering services to retail clients on the continent. While some of these brokers have left the European markets, others now operate as institutional brokers, and some only onboard professional clients. However, most of them continue to take retail traders under their offshore businesses.

You may also like: Regulators Conducted Preliminary Reviews on Potential Prop Trading Regulations

Retail vs Professional Clients of CFDs Brokers

Under ESMA’s MiFID II framework, professional clients are those with the expertise, experience, and knowledge to make informed investment decisions and assess the risks. These include financial institutions and large companies that meet at least two of the following: a balance sheet total of €20 million, a net turnover of €40 million, or own funds of €2 million.

Individuals may also be treated as professional clients if they meet at least two of the following: have carried out an average of 10 relevant transactions per quarter over the past year, hold a financial portfolio of more than €500,000, or have worked in the financial sector for at least one year in a role requiring knowledge of the relevant services.

Unlike retail clients, professional clients receive fewer investor protections, as they are assumed to be capable of understanding the risks.

Meanwhile, the pan-European regulator recently started to accept feedback from retail investors and consumer groups on how current investment rules affect their experience and engagement. The consultation focuses on whether rules under MiFID II support investor protection or unintentionally discourage participation.