David Woolcock 19-May-2017 15:49:03 7 min read

ACI Dublin – Voice trading under MiFID II and No Free Pass for Spot FX

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 One of the takeaways I had from numerous conversations at the ACI Congress in Dublin, where Eurobase participated, was the question “how do we continue to offer voice trading, which is what customers want, and be compliant with MiFID II?”

The question of course stems from the timestamping and best execution requirements that MiFID II entails. Trade capture within 1 second of voice execution is a challenge. Add the need to demonstrate that for Best Execution “all sufficient steps” must be made, compounds the problem. When implementing best execution, firms must take into account a number of different factors. Article 64(4) of the Delegated Acts is explicit that when executing orders or taking the decision to deal firms must check “fairness” of the price proposed to the client “by gathering market data used in the estimation of the price of such product”. Given all this is needed to be completed within one second of a UTC timestamp at the point of execution and you understand the reason for the questions.

The answer, of course, is to go for a hybrid model of execution.  A trader would source the price to be quoted electronically, including the systemic application of mark up, and then can only amend the price electronically (within the bank’s guidelines & permissioning) followed by a voice quote. If the customer then deals you click “deal done” and you have perfect capture of the deal comfortably within one second with all the relevant information such as benchmarks etc. captured. You have the additional advantage that if the customer does not deal you click “deal not done” but have the same record. This with a full audit trail, a link to the conversation on the ticket and additionally you have met the requirement to include all quotes whether successful or not. If I had been in Moscow (which I will be in early June to give a keynote address at the General Assembly), I would be tempted to say “simples”!

Another debate I had with a number of delegates was with regard to the spot FX exemption in MiFID II. The FX Regulation defined spot FX narrowly. It provides that for most major currencies settlement must occur within two trading days to be spot transactions. Longer settlement cycles apply for minor currencies or if settlement is in connection with a sale or purchase of securities. In practice, your humble scribe finds it difficult to understand why you would not apply the same principles to a spot transaction that you would apply to a one-week outright forward regardless of what the regulation says! For those subject to FCA regulation they may want to heed what I heard Edwin Schooling Latter, Head of Markets Policy, FCA say at a recent conference and to quote -

“As some of you will know, spot FX sits in an interesting place on what we call our regulatory perimeter. Spot FX trading is only within the perimeter in certain circumstances, for example where a spot trade is ancillary to a transaction in a regulated ‘financial instrument’ (for example, when buying currency to purchase a bond), or where manipulation of prices on spot FX markets impacts the prices on regulated markets such as those for FX derivatives, or impacts on a benchmark. Most other FX trading is, in formal terms, outside our perimeter. This does not mean that we as conduct regulator, or, and more importantly, you as market users, should accept lower standards of behaviour or conduct than in regulated markets. It does not mean that the FX spot market is not of acute interest to the FCA as a regulator.” My emphasis added.

To distinguish between spot transactions that a customer is doing are ancillary to a regulated instrument or not is no easy technological feat let alone the market manipulation point. The FX market is about to have unveiled part two of the Global Code for FX on the 25th of May (see my earlier blogs for more on this) and one of the main points of a code of conduct is that it should be followed to the “letter and spirit”. Also best execution is an obligation across jurisdictions, regulations, and products; it is not only a MiFID II issue. In addition, the FCA has in its power to find firms in violation of its Principles for Businesses.

Part one of the Global Code released in May last year showed that the Code is principle based and requires judgement on behalf of the individual and firm. Thinking about this along the lines of, “if it quacks like a duck, waddles like a duck it is probably a duck” makes me conclude a safer harbour is in applying these regulations and codes in a more thoughtful way! In part one of the Global Code, it is clearly stated firms should – “have clear standards in place that strive for a fair and transparent outcome for the Client”. Applying equal treatment to spot FX as you would for forward outrights seems a good place to start in following this important principle. It will be of no surprise that I also hold similar views regarding company transactions outside the technical scope of the legislation. Does not an equal duty of care apply in spite of the letter of law?

During the committee meetings, which occur pre-Congress a number of interesting debates took place. We discussed Systematic Internalisers (SI’s) due to start in September next year and how SI’s cannot interact directly with another SI by either phone or STP. The issue of Package FX in which FX Swaps are a package of two transactions or not was a lively discussion alongside the thorny issue of “Tradeable on a Trading Venue” (ToTV) and the nightmare ISIN’s threaten to become for the FX market. I shall return to these issues in future blogs, but for now, the launch of the Global Code for FX is next up following the launch on the 25th of May.

David Woolcock

David Woolcock is an independent consultant and Director, Business Consulting at Eurobase. In addition, David is Chair of the Committee for Professionalism at ACI – The Financial Markets Association as well as Vice-Chairing the ACI FX Committee. He is also a member of the Market Practitioners Group for the Bank of International Settlement's FXWG that wrote the FX Global Code.