Mifid II is a chance for reinvention – FX Connect’s O’Malley

Following approval from the UK Financial Conduct Authority for State Street-owned FX Connect and Currenex to operate as multilateral trading facilities (MTFs) under the second Markets in Financial Instruments Directive (Mifid II), the bank has high hopes for the two platforms.

Currenex and FX Connect will operate as MTFs from the start date of Mifid II on January 3, 2018, having been upgraded to be compliant. Under the incoming rules, institutions captured by the regime will only be able to trade financial instruments on regulated venues or MTFs.

Outside of the reach of Mifid II, both Currenex and FX Connect will continue to operate unchanged, without the restrictions implemented in European regions.

“We see our MTF as a big opportunity to reinvent ourselves and our business, with the basis of an extremely robust platform that has served asset managers very well for 20 years,” says Mike O’Malley, a Mifid II specialist at State Street and head of FX Connect for Europe, the Middle East and Africa.

“It’s clear as day that this has provided us [with] the opportunity to be a better partner. We’ve had more interaction with our customers in the past six months than at any individual point in our 20-year history,” he says.

Mifid II was finally agreed on by European lawmakers in 2014. While MTFs were created by the original Mifid in 2007, the changes introduced by the second directive were designed to align their requirements with those of regulated markets.

We hope MTFs will become the global standard for FX execution in the near future for an industry that has had multiple and fragmented execution methods

Mike O’Malley, State Street

This included having systems and controls in place to ensure the performance of their activities would be adequate, effective and appropriate to ensure fair and orderly trading, the efficient execution of orders and the publication of non-discriminatory rules for access to trading venues.

Such restrictions do not apply in the US, but despite the regional differences between requirements, O’Malley hopes trading on MTFs will prove a popular means of executing globally.

“We hope MTFs will become the global standard for FX execution in the near future for an industry that has had multiple and fragmented execution methods,” he says. “This regulation will provide a more robust marketplace in Europe and probably globally because of its cross-border impact.”

Opportunity, not restriction

In O’Malley’s view, the advent of Mifid II has provided a great opportunity to bring together participants on the buy and sell side with regulators to build a more robust marketplace.

“At FX Connect and Currenex, we embrace the mindset that regulation is an integral part of the business,” he says. “We’ll continue to look for opportunities that reduce risks posed by regulation in our clients’ business.”

While O’Malley is confident that Mifid II will create a more transparent, efficient and harmonious market in Europe, he says the lack of harmony between jurisdictions is weighing on market participants. But he is optimistic the overarching principles of local legislation are sufficiently cohesive to come together eventually.

“Foreign exchange is obviously global in its nature. Since we currently have very fragmented regional regulations, global harmony of regulations should be next on the agenda,” says O’Malley.

“I think it’s doable because a lot of the same principles and values are there. The new regulations all point to transparency, underlying investor protection, fairness and equal marketplaces that provide the opportunity for participants to access liquidity in a fair way. The underlying principles are there in these regulations – it’s all about tying them together,” he adds.

Ambiguity, what ambiguity?

While some may debate the view, O’Malley doesn’t believe there is ambiguity in the Mifid II regulation and, from an FX perspective, he believes the guidelines are sufficiently clear.

“I think that [the rules] were clear enough to give people direction,” he says. “Regulators were striving for accuracy, but didn’t want to cast too wide a net where people over-report to be safe, or be so prescriptive that the smart people in this industry might find a way to meet the regulation but not adhere to the principles of the regulation.”

Still, the burden associated with getting systems and technology in place has been significant. As Mifid II introduces such a drastic shift in execution and reporting to an FX industry that has been unregulated for so long, O’Malley says it may be difficult to account for every single workflow from January 2018, when the legislation goes live.

“We think we covered most client and regulatory needs in our platform functionality and current design, but that’s not to say new requirements won’t arise in February or March,” says O’Malley. “From our perspective, we feel very comfortable with our [MTF] design, but post-January 3, we can refine the platform accordingly.”

Whichever direction European regulators decide to take from January, O’Malley believes Mifid II is going to propel the electronification trend in the FX market, which in turn will consolidate the shift towards more transparent execution.

“We believe Mifid II is going to create more transparency, and create a much fairer and equal electronic landscape at the very least, all aimed at investor protection,” he says.