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This story was first published on theweeklyFiX, for more details please click here |
The imposition of a more stringent global regulatory regime for all financial markets is the talk of the town at the moment. So it is somewhat surprising to discover that the implementation of the Markets in Financial Instruments Directive (Mifid) in the EU in November 2007 resulted in a huge decrease in the number of FX brokers registered with the FSA.
Neither the FSA nor the broking firms I spoke to will say how many brokers have let their registrations lapse. Clearly there is a cost involved in registering, and while I’m not suggesting the firms are acting in any way improperly, I doubt Mifid was ever intended to give brokers a chance to save a few bob on their annual registrations. It was meant to tighten up propriety in all financial markets. But a loophole has been presented and the brokers have seen a chance to squeeze through it.
Chris Taylor, the London compliance manager of Tullett Prebon, explains the rationale of the mass deregistration. “As per FSA customer classification requirements (imposed by Mifid), the vast majority of our customers in this business are banks or regulated institutions. They are, by their definition, assigned the classification of eligible counterparty. This class of customer requires the least amount of protection,” he says. “When dealing on behalf of eligible counterparties by way of arranging or bringing about a deal, the broker does not need to be registered with the FSA for this function. Should he wish to give advice, then a registration would be required. However, given our clients’ classification, we act as execution only.”
FX has always been a grey area when it comes to Mifid, but to say it’s not covered is not entirely accurate. From what I can tell, forwards and options are classed as derivatives and therefore fall under the directive’s scope. Many brokers in these two products are among those no longer registered.
It’s all very well claiming that brokers don’t give advice. I asked Tullett what was the point of their existence if they never actually brokered anything but just regurgitated a bid and an offer; after all, this can just as easily be done by a computer. Good brokers do more than this, so the point about giving advice is interesting. At what stage does a comment, such as “This looks good” or “This is cheap”, become advice? And how about working an order?
Apparently, if I know any brokers giving advice I should tell the firm they work for and inform the FSA. This is nonsense. The reality is that most of their clients – all eligible counterparties – are unlikely to ever report them because they did a trade on the basis of a recommendation that went wrong; but what would happen if they did?
The relatively smooth functioning of FX has largely been because it was a self-regulating industry. Mifid has allowed the inter-dealer/broker market at least a chance to revert to that, even if that wasn’t the intention. But disputes do happen between brokers and clients. So it appears that the brokers might be sailing very close to the wind.
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This story was first published on theweeklyFiX, for more details please click here |
