The Last Look…
Posted by Colin Lambert. Last updated: January 13, 2026
It has been pointed out to me by an observant reader, that the first column of every year since Michelle and I launched The Full FX in 2021 has taken a swing at something and generally sought to give someone, as my correspondent puts it, “a good kicking”.
“Is 2026, the year you start off on a positive note?” my correspondent wondered. No, it is not…morning ESMA!
The European regulator released its final report into derivatives reporting in mid-December, and, given it is written in ESMA-ese, it is a harder read than reports on England’s cricket tour of Australia and West Ham’s season full stop. That said, one thing seems clear to me (I did read it once when I was a few cold beverages in, and it seemed to make sense), ESMA is not buying a bar of the argument that FX is different to other markets.
It has declared FX derivatives an illiquid market, which is funny in its own way given how it’s built upon the biggest market in the world, and that means some of the pre-trade transparency stuff can be avoided, but it looks like trades are going on a Tape, which is ridiculous and actually does nothing to protect the end-user, which, if I am right in thinking, is what ESMA is meant to be doing?
The core problem with FX derivatives, compared to equity markets, which is basically what ESMA is trying to squeeze everything else into market structure-wise it seems, is that they are rarely an investment product, more often than not they are a hedging decision. Clearly, a lot of firms’ hedging strategies can be worked by a brief study of the business concerned, but having trades on a Tape just makes it easier for the wider world to work out what positions are out there.
We have seen in equities how well this plays out – GameStop anyone? – it baffles me why ESMA thinks it will benefit anyone to have the same framework in FX? Apparently, a number of “stakeholders” are all for the reporting of these trades; I think we can guess the trading style of these participants…
To be fair, which goes against my nature when it comes to ESMA normally, the final framework does note that hedging transactions do not need to be published, there’s just one problem with this in FX – unless the market maker is going to hold on to that half a yard in 6 months USD/SEK risk reversals, it’s going to register eventually, and the hedge will be there for all to see. If, of course, the original trade is published, good luck to the maker hedging out of that one – some “stakeholders” will ensure it becomes a costly exercise.
This is not a complaint about reporting trades – I think that is a good idea in case of market dysfunction – it is more about reporting them publicly, there is no need for that. I am all for transparency of action, but not transparency of order or market. I simply do not see what good it can do.
Looking at FX options, and to a degree NDFs and swaps (all of which are derivatives under ESMA rules), such a move could provoke some changes in the market. Will it, for example, encourage more e-FX option trading? After all, if it has to be reported, surely that is better suited to an electronic, straight-through environment? Of course, that also, often, lowers the transparency bar, but that’s OK, because it’s all about knowing what other people have on their books isn’t it? Not at all about protecting end investors in the funds whose trades are being reported, or the corporates who are using these products.
On the other hand, those traded off-venue are not in scope as far as I can work out, so does this discourage automation? I speak to quite a few people on the customer side of our business, and have yet to meet one who wants the world to know what they are doing – do they deliberately avoid in-scope venues and trade bilaterally? At the moment many of them do, I am not sure the impending framework will change that stance.
Ultimately, my point is that yet another regulator is ignoring the fact that the FX market structure – and participants’ reasons for doing business, are very different compared to the majority of markets they are looking to regulate. FX is largely a hedging vehicle for the buy side and end-users generally, the rest of the volume is noise generated by market makers exploiting or churning this business. There are also few retail players in FX derivatives, (although some transparency on the rolls would probably be welcomed in this sector) and the vast majority of trades could have multiple reasons for being done. Therefore, you could claim that the deal was a hedge for deliverable services, but if you had, for instance, to reverse that hedge, does that put you in contravention of MiFIR?
My new year message to the regulators would be leave FX alone; it works and it oils the wheels very efficiently – if hedgers and investors are to have their positions made public, there is only downside for all but a few speculators and market makers.
