What Will MiFIR’s Impact Be on Retail Derivatives?

An assessment of what MiFIR will mean for different market sectors when it comes into play in January 2018.

Now that we have received official confirmation of MiFIR’s delay until January 2018, we can take a step back and assess just what it will mean for different market sectors, and perhaps take a measured approach to our preparations.

The entities most impacted by the reporting and other requirements will be the trading venues and complex investment firms which incorporate systematic internalisers.  The venues have the unenviable task of approaching non-EEA and other non-reporting users of their platforms and gleaning sufficient information on a trade by trade basis to report from the perspective of those counterparties.

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Whether non-EEA trading firms will care to hand over passport details for their traders remains to be seen, but we can probably anticipate a sharp fall in non-EEA usage of EEA venues from 2018.

Venues and systematic internalisers alike have the additional reporting requirements of pre-trade and post-trade transparency (ie publication of quotes and just-traded prices) as well as summarising all of their traded and listed products into reference data submissions which must be made nightly to the National Competent Authority (forming the basis for the instrument reference data which ESMA will publish every morning).

At the other end of the pain spectrum, as many Finance Magnates readers will be pleased to hear, are the pure FX retail brokers who, under certain conditions, may not need to report at all.

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The reason for this is that the basic reporting requirement covers venue-traded products (each of which will have an allocated ISIN) and OTC derivatives which are based on one of those ISIN instruments.

If you avoid basing your contracts on anything traded on an EEA venue (for example by using the inter-bank EUR/USD rate or the spot price of gold) then you may avoid MiFIR reporting altogether, although of course EMIR reporting will continue unchanged for such products.

Note however that common indices, such as the FTSE 100, will have an ISIN allocated and this will be incorporated into the daily ISIN reference data from ESMA.  Your contracts based on such indices will therefore become reportable (which doesn’t apply in the UK at the moment).  Any contracts based on single stocks or on bond futures will continue to be reportable as at present (in the UK and certain other EU countries).

Now for the unsettling news as to how some binary options and forex firms could upset the above lenient landscape.

Imagine for instance that a binary options platform, matching buying and selling interests for downstream brokers, decided to register as an Organised Trading Facility, as being the structure most appropriate to their current business model.  Now each instrument they trade (eg 5 minute binary call option on EUR/USD underlying) must be allocated an ISIN, all trades need to be reported in quasi-realtime and the product ISINs and other details must be sent in to the national regulator each night.  A major headache for the platform provider.

However, all of the brokers using this platform are now trading a venue-listed product and must also therefore report all such trades, including both the market and client side details.

The decisions taken by retail derivatives firms over the next eighteen months in respect of what, how and where they trade will absolutely determine the reporting complexity they experience from January 2018.  Abide Financial will pick up on this theme at the FX Expo in Cyprus next month and we look forward to fielding your questions during the course of that event.

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