With MiFID II and the FX Global Code now bedding down, innovation rather than regulation can finally be the driving force of the global FX market.
- MiFID II and the FX Global Code are well on the way to achieving their objectives of enhancing conduct, fairness and transparency.
- FX market participants can now apply themselves more wholly to innovation and business growth.
- New opportunities for global FX businesses include tapping into algorithmic execution and transaction cost analysis.
From the financial crisis to the Eurozone crisis, the benchmark scandal to the FX Global Code, this has been a decade of unprecedented change in foreign exchange.
Yet for the first time in years, the industry has finally reached a point where the bulk of regulatory implementation is complete, freeing up participants to concentrate on innovation and business growth.
While innovation has not always been the priority in recent years, there are now exciting opportunities for FX businesses to advance into new areas, tapping algorithmic execution and transaction cost analysis (TCA) to achieve better results for end investors.
MiFID II requirements
For all European participants, and indeed many further afield, MiFID II loomed large on the horizon for much of 2017, consuming vast amounts of time and resources during the fourth quarter.
This led to subdued turnover at the tail end of the year, and intense anticipation over how the business might be impacted on the vaunted implementation date of 3 January.
Mercifully, the day came and went without any major market dislocation or liquidity gapping, and a large chunk of trading transitioned onto regulated platforms in line with MiFID II requirements.
For us, it was something of a light-bulb moment as substantial derivatives volume moved immediately onto our regulated Multilateral Trading Facility (MTF).
Now, the majority of our global FX derivatives trade on venues that were enhanced and launched for MiFID II.
Transparency and reporting are also central to MiFID II and it is here that some fine-tuning will still be needed in the months ahead.
It will be up to regulators to assess the accuracy of reporting and to make sure all trades are being reported correctly across asset classes.
Some institutions still have work to do on their legal entity structures and reporting processes to ensure they are fully compliant in the most efficient way.
During the course of this year, the industry can expect to begin work on the next phase of MiFID II – pre-trade transparency.
Once implemented, this will truly give market participants access to a new layer of information that has never previously been available when making trading decisions.
FX Global Code
Meanwhile, the FX Global Code has driven a gradual evolution of conduct in the years since the drafting first began in 2015.
Such was the intensity of industry dialogue during the drafting that when the Code was finally published in May 2017, internal conduct was for the most part already aligned with its principles.
One of the greatest benefits of this initiative is that the whole industry is now far more informed on what constitutes accepted market behavior.
This is particularly valuable for buy-side firms, as there can now be no differences in understanding over which disclosures and processes are required when an order is handed over to a bank, and what expectations each party should have of the other.
High levels of conduct
Looking forward, we must ensure the Code is as widely adopted as possible.
After the initial round of adherence ends, there will still be a need to monitor those smaller pockets of the industry that have not adopted the Code.
The industry will need to determine whether additional work is needed in those quarters to ensure consistently high levels of conduct are being maintained.
The Code must also not be allowed to become out-dated, but must be constantly reviewed and upheld as the industry evolves.
This is something to which the Global Foreign Exchange Committee has committed and working groups are already considering three specific areas of further work, including disclosures and hedging during the last look window.
Exciting times for global FX
Both MiFID II and the FX Global Code are now well on the way to achieving their objectives of enhancing conduct, fairness and transparency.
With these recent successes, the FX industry stands at a very exciting juncture in 2018.
Arguably more prepared for future changes than at any point in recent history, market participants can now apply themselves more wholly to innovation and business growth.
Broadly, we see three distinct categories of market participant. The first is those firms still focused largely on multi-bank risk transfer to meet their FX execution needs. The second tier comprises those traders that seek a more sophisticated solution to minimize market impact and improve execution, which typically leads them to algorithmic tools. Finally, the most advanced clients are those that want to develop their own proprietary algos and keep them in-house to gain a competitive edge.
We are actively looking to deliver the technology and data that clients will value most, supporting the transition — where appropriate — from a reliance solely on request-for-quote (RFQ) platforms to a mixed RFQ and algo execution environment.
These are exciting times for global FX, with innovation driving smarter ways of doing business at every level of the industry.