At a recent Euromoney FX conference, one buy-side participant told me how he had to have competitive quotes, backed up by full details of the deal from pre- to post-trade to satisfy his auditors every time he did a spot transaction. In contrast, whenever he did an option, he didn’t have to bother with any of that. I pointed out that, as far as I understood it, his policy ran contrary to what would happen in the post-Mifid environment.
For those who are unaware, the EU’s Markets in Financial Instruments Directive is intended to bring transparency and ensure best execution to the EU’s securities markets. It will supposedly be implemented from November. It seems some FX participants are completely unaware that it will also impact them.
Mifid is not going to just cover equities. Many sharper players are already aware that it also at least partially includes FX. Recently, FXall published a booklet in conjunction with Euromoney called Best practice in foreign exchange markets, which provided an update on the potential impact Mifid will have – it provides a nice snapshot of the current situation.
This week I managed to extract some clarity from the FSA on which FX products will be covered by the Directive. “Options and contracts for difference are covered under Mifid. Our view is that forward contracts are caught if entered into for investment purposes but not commercial purposes. There are a number of tests under the Regulated Activities Order which are used to determine whether a contract is an investment or commercial contract, the generally accepted position is that currency forwards in the wholesale interbank market are commercial contracts,” an FSA spokesman told me this week.
Now the debate about what constitutes best execution is endless and my admired editor won’t let me detail it because I’m paid to write by the word and work in the impoverished world of publishing. From the above though, it’s pretty clear that options are covered, that non-deliverable forwards could be because they are technically CFDs. Outright forwards will be if they are part of a securities related transaction.
Mifid represents an opportunity for the well prepared but a problem for those who choose to ignore it. There’s more to follow on this and I’d love to receive any thoughts on the subject.
