The Last Look…

What some see as an “unfair” imbalance in the regulatory treatment of trading platform and technology providers remains a touchy subject, especially for those platforms that have registered and undertake their responsibilities as an MTF or similar, and I suspect the issue could become even more sensitive as the FX market landscape evolves.

Last month, my colleague Eva Szalay penned a piece looking at the Trading Perimeter, an article that has prompted some response in my circles, although largely along existing lines – if you’re an MTF you think the issue needs rectifying, if you’re not, you don’t. From my perspective, and this is something pointed out by Eva, a big issue is the absolute lack of enforcement from the European and UK authorities. This is likely because they still, in spite of the work that went into the guidance in the first place, don’t properly understand the nuances.

I think it is fair to say that having one rule for one, and another for second firm (and third etc) is less than ideal. There are “technology providers” out there seeing over $50 billion per day in FX business across their platform that remain, for some reason, outside the guidance, whereas there are regulated venues that are seeing less than that. This is, through most eyes, an unfair imbalance, but to date, nobody outside of the regulated entities seems to care.

This could change in the coming year, however, especially as more NDFs, swaps and options shift to these platforms. In Copenhagen on the sidelines of our conference last month, multiple people told me how they were seeing more market participants moving, or looking to move, more volume to a non-regulated venue because they were cheaper. Interestingly though, and the big difference to previous conversations I have had about this, is these people already largely use these venues for spot, which is not in scope of the guidance, and what they are looking to move is their non-spot business.

This should create a challenge for the “technology providers”, because swaps, NDFs and options are very much in scope, and therefore should attract the attention of the regulators if the venue remains outside of the MTF sphere. As a small digression on this, if this does play out and the regulators continue to ignore the imbalance, I think that can be taken as a pretty strong signal that the regulation is toothless. That means it will be ignored, until such time of course, when the regulators bring the fines – who said it’s a fair world!

A central theme of discussions I have been having for some time now is how we grow automation levels in non-spot FX. In NDFs I think it can be argued, where there is sufficient liquidity, that it has been achieved, but in swaps and options, it most definitely has not. As that changes, however, we need regulatory clarity on exactly what the trading perimeter means. More pertinently, are we seeing an appropriate regulatory response to the landscape in NDFs, where non-regulated venues are seeing significant volume?

For me, I think it should be simple – if multiple LPs are involved with multiple liquidity consumers, that is a trading platform and should be registered as such (and you can argue, convincingly in my view, that none of the platforms should be seen as an MTF, but realistically that’s not going to happen). It does not have to be an all-to-all mechanism, and it doesn’t matter how they trade with each other, it should just be where more than one client connects with more than one LP. Simple, clean and easy to understand.

The risk is that the growing automation of FX swaps and options leads to greater, not less, confusion around this issue, because obviously the credit factor plays a much bigger role. Consumers can only connect to certain LPs for these markets, which limits the number of LPs – and it is for this reason that a simpler, and enforced, regime would help.

Someone also argued to me in London on my recent trip, that the lack of enforcement around the trading perimeter is actually holding back the automation push. The view pushed by my conversant, was that the existing registered venues were unlikely to invest heavily in building automation in swaps and options, while there was a chance that greater automation would attract firms that ignore the regulation altogether. I see the point, but I am unsure I agree with it, but it is a valid view nonetheless, and highlights how this issue needles away in some areas.

In an ideal world, being a regulated entity would be a differentiator for a firm, but in this instance, it seems to make no difference whatsoever. The consumers care less about whether the rules apply to the platform, more pertinently, they probably recognise that registration means higher costs, which will be passed through to them. This should not stop a push from all directions to level this playing field, however – sometimes clients need to accept that they also, have to pay a price for all the efficiencies that the industry has delivered to them, to date at minimal, if any, cost.

Do I expect this to happen? Probably not. Should it? Absolutely.

colin@thefullfx.com