How Does The MiFID Affect Forex Trading?

Forex Trading

What MiFID is and how it affects Forex trading

The vast nature of the Forex market, a global financial sector that operates five days a week around the clock, is such that regulation is key. Regulation isn’t just key, but due to the constant evolvement of various aspects associated with the industry, regulation needs to remain on the cusp of the latest developments. In Europe each country has its own set of rules governing their financial systems. However, there exists an all-encompassing regulatory body instituted by the European commission known as the Markets in Financial Instruments Directive (MiFID). The MiFID provides the blueprint or framework if you will, that the rest of the countries are required to subscribe to, all with varying degrees of application. Some play it fast and loose while others follow things down to a tee. So what exactly is the MiFID and what is its mandate in the lucrative world of forex trading?

Firstly, what is the MiFID?

The Markets in Financial Instruments Directive (MiFID) is a European law that was drafted back in 2004 and enacted in the European Union in 2007. The regulatory practices of the MiFID seeks to create uniformity and standardisation across the various financial markets within the European Union. Under the mandate of the MiFID, measures such as pre-trade and post-trade transparency came into effect. Its inception was followed just shy of a year later by the 2008 financial crises, after which it was revisited and restructured to provide a more robust and intricate set of governing financial rules – summed up as the MiFID II. Informative sites for EUR – USD trading have started to implement the changes proposed in the document.

The aim of the MiFID II 

The MiFID II, while drafted just after the 2008 financial crises, was only enacted in 2018. It employs a more intricate and streamlined set of rules with a broader scope to the various financial markets of the European union. More specifically, it places greater importance on reporting and tests with the aim being to shed more light on a number of practices while also curtailing the use of dark pools. It needs to be noted that a dark pool involves a private exchange in which the investor does not reveal his or her identity – we’re looking at you, blockchain technology. The MiFID II also imposes that the algorithms employed in automation trading be registered and undergo regular scrutiny. The scope of the MiFID II also extends to debt instruments, futures and options, equities, commodities, and currencies.

The effects felt by forex traders

When it comes to forex trading the document provides a fair amount of ambivalent information. However, experts agree that there are certain elements that affect online traders specialising in forex. For instance, greater transparency means that traders can request more information from their brokers. Who the counter party for their trade was, the price received, and the location for the execution of the trade – all of this can be requested. Of course with increased transparency comes increased costs. The implementation of the MiFID II came with a price tag of €2.5 billion and part of the fallout of that tremendous cost has been the price of transparency and reporting. More systems, more paperwork, more administration; it has all raised the cost on the side of the broker, which in turn has to be carried by the trader. Another challenge facing traders is actually getting brokers to hand over the information that is rightly there to purview. Only time will tell how the MiFID II ultimately affects forex traders.

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