MiFID II Impact on Forex Market

MiFID II Impact on Forex Market
by Olivier Becquet

January 2018, (Markets in Financial Instruments Directive) MiFID II was implemented in Europe and this has spurred up a debate about how MiFID II has impacted the Forex Market.

Before we talk more on the Impact of MiFID II on Forez Markets, it is monumental that we have a proper understanding of what the MIFID was and why it calls for a change. When the MiFID was first announced and introduced, the program brought about a major rift in the cash equity markets.

In 2007, the program started monitoring financial institutions in the UK and EU. At this time the Brexit occurred, and the MiFID was forced to adapt to changes.

The goal was to get rid of cross-border financial services barriers, just like other barriers thrown out alongside Eurozone and the creation of the common currency. The Aim was to develop a marketplace with the highest level of transparency, one that is not only balance but also safe for all.

What is the MiFID II and What to Look For?

The MiFID II directive aims at expanding transparency. And it is directed towards all the individuals/firms who are working with financial products, including Forex brokers.

Right now Forex brokers are not decentralized, meaning they have total control over their business operations and records. This may seem normal but it proves detrimental as this feeling or sovereignty/sole control gives many brokers the confidence to be scammers and crooks since there’s no one to hold them responsible.

The MiFID II directive is intended to handle this situation by creating a more structured and organized marketplace, thereby improving execution, transparency in market operations as well as a detailed revelation of coat formation.

This will provide the traders (end customers)/victims of fraud in most cases a more structured, transparent and safe trading environment.

Under the MiFID, OTC (Over-the-counter) trading will be difficult. All the brokers dealing with CFD’s, Forex, Options, Futures, Binary Options, etc.) will be under the regulation of the MiFID II directive. Before the MiFID II, other regulators had a very minimal reach to brokers modus operandi.

Furthermore, brokers are made to suit a list of all the trades that have been executed. This is somewhat difficult because it has to deal with handling information/data in huge sizes.

Under the MiFID II regulation, many industries will change completely; binary options industry, for example, is one of these. It is unregulated and many brokers are defrauded traders, this is going to change because of the MiFID IIs directive to improve transparency.

One of the major changes that will be affected is that Forex brokers will have a limit in the leverage they offer to clients (traders). There’s most likely not going to be any leverages like 1500:1, because this is recognized as too risky.

All the unregulated financial assets will be introduced to a structured trading environment where transparency is improved. Even trades offered by expert financial/trade advisors will be impossible if they haven’t been testing properly.

The major impact it will have on forex brokers will be in how trades are made. Currently in an ECN environment, if a trade is opened when the market is volatile, it will be subject to slippage.

Under the MiFID II regulation, the quote will be determined from a central point, and trade execution will be done at the desired price, the speed will be improved as well.

MiFID II will have an effect on UK brokers and other brokers as well, so long they deal with clients from the UK. It will also affect brokers from other parts of the world as UK traders cover a large number of the worlds total trading activity.