See also Regulatory Fields.


Background

Since the collapse of Lehman Brothers in 2010, politicians have wanted to bring the Over The Counter (OTC) derivatives markets under greater control. Their approach to this in the US Congress was to pass a long and complex reform law now referred to as the Dodd Frank Act, named after Chris Dodd and Barney Frank, the two senators who sponsored the bill. Having approved the Dodd Frank Act, the two major regulators, the Securities and Exchanges Commission (SEC) and the Commodities and Futures Trading Commission (CFTC) have transformed the 2300 page law into practical rules to be implemented by banks and financial institutions.

Likewise in Europe, the political process resulted in the European Markets Infrastructure Regulation (EMIR). This is being translated into practical rules by the European Securities and Markets Authority (ESMA).

There are three major areas of change:

 A fourth area should also be considered:

 Each of these has had, or will have an impact on FX trading, however this page will only address the required Trading and Best Practice changes.

Also, whilst US and EU reforms are broadly parallel in nature, we should not assume that implementing one will satisfy the other. Eg Dodd-Frank requirements will not typically satisfy EMIR requirements or vice versa.

The sections below set out a summary of the key requirements.

Dodd-Frank / SEF

NOTE: The CFTC Division of Swap Dealer and Intermediary Oversight (DSIO) issued a no-action letter stating that DSIO will not recommend that the Commission take an enforcement action against a swap dealer or major swap participant for failure to disclose the pre-trade mid-market mark, as required by Regulation 23.431(a)(3), to a counterparty in a Covered Forex Transaction, provided that:

  1. real-time tradeable bid and offer prices for the Covered Forex Transaction are available electronically, in the marketplace, to the counterparty; and
  2. the counterparty to the Covered Forex Transaction agrees in advance, in writing, that the swap dealer or major swap participant need not disclose a pre-trade mid-market mark. The relief provided in the letter is applicable to all SDs and MSPs.


NOTE: Pre-trade mid-market quotation should not be required for FX deliverable forwards and swaps with a maturity date of one year or less and that involve a currency pair where both currencies are one of the top 13 deliverable currencies (by volume):


These 13 Currencies comprise the 13 most liquid currencies (excluding the Korean won, which is a restricted currency) of the set of 17 currencies settled on CLS.

Summary

Requirements

EMIR

SEF vs EMIR

UTI vs USI?

The concept of a Unique Trade Identifier (UTI) is similar to the Unique Swap Identifier (USI) which is required for CFTC reporting ( US Dodd-Frank regulation), but is nevertheless more complicated as – under EMIR – both parties report whereas for CFTC the USI is issued by the reporting party on the transaction.

MiFID II

The Markets in Financial Instruments Directive (MiFID) is a legislative regulation directive, composed by the European Union (EU) on the basis of advice provided by the European Securities and Markets Authority (ESMA). The directive is intended for application by the European Member States, their regulatory authorities, and financial firms and institutions registered within the European Economic Area (EEA). The legislation is for:

MiFID first appeared on the UK statute book from November 2007. However, in light of the financial crisis of 2008, the legislation went under additional revision ("MiFID II") to strengthen what was seen at the time as the failures of woefully lax regulations. MiFID II took effect on 03 January 2018,

The MiFID II Framework

MiFID II contains a framework separated into two parts:

'Level 1'  - established in 2014, and contains the following areas:

'Level 2' supplements this with a number of implementing measures, which take two forms;

The Main Changes to MiFID I

MiFID II establishes provisions that the author's state are aimed to ensure theat High-Frequency Trading (HFT) does not have an effect on market 'quality or integrity' by implementation of the following requirements:

Key Requirements

Refer to ESMA FAQ for market implementation details (original here).

See Also the FCA MiFID II material.

MarketFactory will play a role in the reporting regimes that the regulations impose on market participants, as the customers do not retain the original protocol messages from the venues. The Financial Conduct Authority (FCA) draws attention to this under article (26) of MiFIR:

MarketFactory along with other venues and market participants needed to support a series of new fields for reporting purposes, that include the following;

Personal Identification

Execution/Investment Decision Maker (EDM/IDM) values reference Personally Identifiable Information (PII) details previously registered by the market participant to unambiguously identify the one person considered to have primary responsibility for the transaction.

Under MiFID II, firms must report and record these details as part of their record-keeping and transaction reporting obligations.

Entity Identification

The key Entities involved in a transaction include the following:

Thee are typically identified for regulatory reporting purposes via Legal Entity Identifiers (LEIs) and Market Identification Codes (MICs):

Product Identification

Where necessary products are identified with the use of International Securities Identification Numbers (ISINs), as defined by ISO 6166. Refer to https://prod.anna-dsb.com/ for a definitive list of valid ISINs.

For swaps, ISINs are typically maintained at the Leg level. Product-level ISINs are sometimes still supported, but most of the venues have completely moved away from that now, due to the regulatory clarifications provided back in 2017. A Body-Level PackageID should (but usually isn't) be provided to link the two legs together.

Whisperer Enterprise supports both models:


Waivers and Flags

Pre-Trade Waivers and Flags are specified to indicate other details relating to the trade:

Excluded from Scope

FX Forward contracts are outside the scope of MiFID II if they satisfy all of the following conditions: 


Securities Financing Transaction Regulation (SFTR)

This EU regulation is intended to enhance the transparency of the securities financing markets by requiring those who enter into securities financing transactions to report these transactions to a trade repository. This is more relevant for Money Markets Loans than vanilla FX transactions, but some venues reference it in the FX context also.

Refer to https://www.esma.europa.eu/sections/securities-financing-transactions for further detail.