FX Spot is not covered by the regulation, as it is not considered to be a financial instrument by ESMA, the European Union (EU) regulator. As FX is considered “illiquid” it does not have pre-trade reporting requirements.

Recordkeeping – MiFID II requires firms to keep extensive records of all transactions, communications, services and activities for 10 years, in order for them to be able to provide transparency into the trade life cycle. This is to support trade reconstruction if required.

Overall there are 3 points in the text which we think will be of particular interest to foreign exchange brokers.

The EC has determined that FX Forward contracts remain outside the scope of MiFID II if they satisfy all of the following conditions:
The contract for deliverable FX is physically settled
At least one of the parties to the contract is a non-financial counterparty
The purpose of the contract is to facilitate payment for identifiable goods, services or direct investment
The contract is not traded on a trading venue

FX Forwards will qualify for the means of payment exclusion if they meet the following criteria:

  1. The counterparty is a corporate entity (a non-financial counterparty (‘NFC’) as defined under EMIR);

  2. The FX forwards are traded for the purpose of facilitating payment for identifiable goods or services (for example, entering into an FX forward in order to pay an upcoming invoice in a foreign currency, or in preparation of an upcoming purchase in a foreign currency, as opposed to trading FX forwards for speculative purposes); and

  3. The FX forwards are traded bilaterally, as opposed to on a regulated trading venue (note that Agile Markets is not a regulated trading venue and does not affect eligibility);

The Financial Conduct Authority has provided some examples of scenarios that would fit within the exclusion. Please find the examples provided on the link here.