03 December 2020

FT: Dispute brews between EU and currency traders on Mifid reform

EU regulators risk pushing currency trading abroad and saddling local market participants with costly new burdens if they press ahead with proposals to regulate cash foreign exchange markets, according to some industry veterans.

In late September, the European Securities and Markets Authority (Esma), the EU watchdog, left the door open to bringing the $2tn daily market under European Market Abuse Regulation (MAR) rules. The proposals, first floated in October 2019, face strong resistance from banks and investors. Some market participants fear that European regulators could break ranks with peers abroad and impose strict new rules on cash currency trading, which they say would cause costly disruption but achieve little.

Spot foreign exchange markets have never been directly regulated because currencies trade 24 hours a day around the world, with more dollars traded in London than in the US. Unlike equity markets, cash currency trading is privately negotiated among a mix of international participants. Deals are settled instantly and central banks are also active in the market. However, following the global currency-rigging scandal that led to $12bn in fines, major central banks endorsed a set of voluntary standards that sit within a broader and sanctionable regulatory framework, the Global Code of Conduct, rather than push for more detailed and specific regulation in the field.

Esma could yet decide to extend MAR to cover the previously exempt cash currency market, in a move that would require changes to the Europe-wide regulatory regime, Mifid II. Esma appears reluctant to move forward, but political pressure from some European countries is forcing the watchdog to explore the option, lawyers say. Without co-ordination with other regulators, Esma’s efforts could trigger an exodus from EU currency trading hubs to the UK, some participants fear. Centres such as Frankfurt, Paris and Amsterdam handle a small portion of daily volumes but these are cities in which many trading firms and banks created new outposts because of Brexit.“The market would just move but those that are left behind and have to trade in Europe would face enormous costs. It would be a disaster,” says Vikas Srivastava, chief revenue officer at Integral, a technology company.

According to the Bank for International Settlements, 43 per cent of daily flows were traded in the UK, with five large trading hubs — all outside Europe — responsible for 79 per cent of transactions. Germany, France and the Netherlands together accounted for less than 5 per cent of the $6.6tn market. Esma said in September that it would conduct more analysis of extending MAR to the previously unsupervised global market next year, when an international committee led by central banks finishes its review of the code. ....

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