MiFiD II took effect Wednesday, January 3rd, though many traders have yet to feel the repercussions. The legislation is, perhaps, the biggest regulatory adjustment in ten years, and it has been in process for seven years. The final result was 1.4 million paragraphs whose express goal is to offer increased protection for institutional investors by cracking down on banks, exchanges and brokers. Though the legislation isn’t aimed directly for retail traders, retail Forex traders will almost certainly notice a “trickle-down” effect, both in terms of additional security but also in terms of heightened costs associated with trading.
The Original MiFiD
The original MiFiD took effect in November 2007 with a specific goal of helping correct wrongs taking place in the equities market. The second iteration is aimed at nearly all aspects of trading within the European Union, and will also have an international impact. If a fund manager in the EU would like to purchase an option in Asia, for example, the trade will have to be MiFiD compliant, even if it is a cross-border purchase (or sale).
Reporting requirements for institutions under MiFiD II have been increased heavily, making phone trading less optimal to ensure a paper trail for all transactions. Trades will have to be timestamped down to 100 microseconds and this transaction data will need to be stored for five years in case of audits or investigations. Fund managers will now be required to budget separately for research and trading costs, itemizing their outlays and becoming more transparent to their clients. This demand for ‘unbundling’ will is expected to call into question whether research for investment purposes is as valuable as fund managers claim and cause funds to cut their research. If this spiral effect does happen, many funds may find themselves forced to cut inclusion and offering of lesser-traded stocks or assets which may have a direct impact on small-to-medium sized companies. It is expected, therefore, that MiFiD may not just be impacting traders and investment houses, but businesses as well.
How May Retail Traders Be Impacted?
Though it’s too early to tell how MiFiD II may trickle down to the retail level to the fullest extent, there are some predictions floating around that may hold some weight. Firstly, traders will most likely be required to provide additional documents for compliance. This may complicate or elongate the registration process for new traders, and long-term traders may find themselves suddenly having to provide additional paperwork at some point down the line. These additional reporting and compliance requirements may be difficult for many Forex brokers, especially new brokers that are running with a limited technical infrastructure and support team. Brokers may also be forced to invest in new technology to handle this private information securely, which can place a financial burden on the broker that may be passed down to the trader in some form, perhaps via higher fees or commissions.
On the other hand, increased reporting requirements due to MiFiD II will allow traders to see reports from brokers claiming to be ECN brokers to see whether they did, in fact, pass through the trade or whether they took the other side of the trade as a market maker does. This could be especially useful information for traders who are unsure of their broker’s true tactics.