Changes in European Forex Regulation

June 14, 2016
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This article was written by Eleana Massoura, Head of Compliance at FXTM.


Eleana Massoura

The retail forex industry is advancing rapidly as the popularity of trading currencies and commodities online continues to boom. The general overview of regulated forex brokers and the role of internal compliance teams is evolving right alongside this growth.

A number of developments in particular have emerged, pointing to more transparency within the regulatory framework itself.

1. Risk Based Supervision Framework

Back in September 2014, it was announced by the Cyprus Securities and Exchange Commission (CySEC) that it would design and develop a Risk Based Supervision Framework (‘RBS-F’) as part of its efforts to best supervise the regulated entities and ensure their healthy operation.

During this time, CySEC has collected information from Cyprus Investment Firms (CIFs) and assessed these firms according to a number of factors, including their trading volume and market share. This gives CySEC a clearer overview of the structure of the industry, enabling it to better monitor the industry as a whole as well as the brokers within it.

In line with the above, earlier this year, CySEC also informed the CIFs of their individual ratings. In addition, CySEC tends to assign a relationship manager to a number of its regulated investment firms in order to help with clarifying compliance guidelines, amongst other things.

Through this relationship, it is expected that investment firms and CySEC will cooperate and resolve issues amicably and transparently.

This development provides greater accountability, which ultimately benefits the client as there is increased transparency within the regulated forex market. It is important to note here that selecting a licensed and regulated broker provides clients with security and trust.

Licensed brokers are obliged to guarantee the safety of clients’ funds, follow strict anti-money laundering procedures, and ensure the provision of the best execution of clients’ orders. Eligible clients’ funds are also protected under the Investor Compensation Fund rules in case the broker goes bankrupt.

2. Looking towards MiFID II

Examining the overall framework shows us that the Markets in Financial Instruments Directive (MiFID) – which is the regulatory structure followed by all EU-based investment firms, including companies engaged in forex services – has gone through considerable reform in recent years. MiFID II is the next phase of the framework, which is expected to come into force in January 2018.

These regulatory changes are seen as a positive development for the industry in general since they bring greater transparency and accountability to the market, which means more credibility for those regulated companies that are proactive in following such procedures.

Yes, regulation is becoming stricter, but this is expected to benefit clients’ long-term investment security. It’s also not only a matter of respect for the regulations, but also of the allocation of resources; with brokers needing to invest in their compliance departments to ensure that the MiFID II compliance measures are implemented when the regulations come into effect.

Going forward, we expect the forex industry and regulators to continue to open up communications and tighten compliance systems, thereby ensuring better protection for traders and all stakeholders.

3. Looking towards CRS

The main purpose of this new reporting obligation is to fight against the offshore tax evasion, as well as provide minimum set of standards and framework in order to increase efficiency.

CRS stands for the Common Reporting Standard and covers the automatic exchange of financial account information which is developed by OECD. It is a new reporting requirement for financial institutions in participating counties, including Cyprus, and aims at fighting against tax evasion and protecting the integrity of tax systems.

Since Cyprus is an early adopter with the regulation transposed into law from January of this year, all local financial institutions including regulated investment firms engaged in forex activities, are required to comply with the said requirements of the CRS.

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