MiFID Regulations: Implications for Spread Betting and CFDs

Q. What is MiFID and what are its objectives?


A: MiFID is an acronym for the Markets in Financial Instruments Directive (2004/39/EY), part of the EU Commission Financial Services Action Plan which seeks to create a single market in financial services for the Union. The scope of this directive is to harmonise practices in national securities markets by facilitating provision of investment services across borders and by removing barriers to trading whilst boosting investor protection and strengthening confidence in the market.

Investors from all European Union countries will now get access to information on the service provider, choice of financial services, instruments and underlying risks, costs, safekeeping of clients funds, execution of orders and management of conflicts of interest. Moreover investors are requested to provide more detailed information about their investment experience, financial position and investment objectives/knowledge.

Contracts for Differences providers already offer their service to clients from many parts of the world, with one of the leading companies CMC Markets claiming to have clients in more than 100 countries. However for the most, UK traders currently provide the majority of revenue since the UK is the country in which they have previously focused their marketing efforts. However, the likelihood of spread betting seeing growth in Europe as rapid as in the UK is low, both because spread-bets are tax-free in the UK but not elsewhere, and because European regulation has hitherto prohibited some firms of spread-betting as gambling. CFDs on the other hand, while not wholly tax-free, are still popular because they are traded on margin, requiring only a percentage of the total bet to be put up at the start of the bid, making them an attractive proposition to market across Europe to traders and investors eager to leverage their capital. With the onset of MiFID therefore, CFDs have the potential to explode onto the global marketplace.

Q. What are the implications of the Markets in Financial Instruments Directive and how does this affect you?

A: In November 2007, the activity of spread betting providers, like every financial institution in the UK came under a new European Directive - the Markets in Financial Instruments Directive (MIFID). This is the first time that European legislation covered commodity derivatives, credit derivatives and financial contracts for differences (which is what spread betting essentially is...)

The passing of MiFID means that spread betting and CFD trading firms are now on a similar standing to stock broking firms so this greatly facilitates the entry of the products into other EU member states, without having to deal with local regulations in individual countries.

Under the directive spread betting companies will however be tied to offer best execution meaning that companies cannot make their own prices for shares. Best execution means that brokers are obliged to offer the 'best possible result' taking into consideration 'price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of an order'. This means that the spread will be fixed and the price offered to you must be the best price possible in the underlying market. With this we will probably also see the end of skewed spreads when markets are moving in a particular direction. Also, it will be very difficult for spread betting companies to widen spreads to balance their book and they won't be able to move spreads if they have an opinion that the markets are likely to move in one direction.

Not only that but any EU based company to be able to acquire a license to trade they now have to possess a pretty large balance sheet since they are a securities ISSUER. This amount used to be fixed but post MiFID last year, it's more or less negotiated with the regulator like the Financial Services Authority. Compare: Pre-MiFID a traditional agency-broker needed about 1/3 the balance sheet of a CFD/spread house. So a lot more room to be bucket-shoppy. Just check out the bankruptcy of Pacific Continental Securities which went to the wall.

Lastly, the new directive puts the onus on the provider to judge whether you are sufficiently experienced and understand what you are trading - this is the reason that almost all companies have launched trading academies. This implies that providers are likely to be more careful about their customers and what they allow them to trade - and you will have to prove to the provider that you are competent! So although the MIFID is primarily intended to protect the unwary it is also putting increasing pressure on spread betting companies which might in turn limit your choices.

As the MIFID directive applies across the whole of Europe, spread betting providers and brokers are busy opening up branches to tap these markets (IG Index has just opened a branch in Spain and another in France for instance) and making their websites multi-lingual - and note that binary betting does not fall under the Markets in Financial Instruments Directive.

Note: August 2011 - The only problem with MIFiD is that it's very much open to interpretation and it's almost impossible to 'prove' anything. In the early days of internet trading spread betting companies could get away with playing a few tricks, but nowadays I think they do their best to be fair. There's so much competition that if they don't, all the customers will soon vanish. Bid-offer spreads can't really get much tighter now, so I really believe the main improvement possible would be to make spread betting providers accountable for their mistakes, not their clients.

 ...Continues here - Working for a Spread Betting Company

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