Best Execution Clarity and MAR requirements for Spot FX raised by ESMA

With the summer clearly behind us, October has already been a busy month for ESMA. The European financial supervisor began the month published information of new responsibilities they are tasked with covering in 2020. This was followed by releasing a Q&A Update Paper for its EMIR regulation on Wednesday that focused on REFIT issues, then publishing additional reports around MIFID II and  Market Abuse Regulation (MAR) on Thursday.

RTS 27 & 28 Clarity

Focusing on MIFID II, ESMA published an update to their MiFID II Q&A on Investor Protection and Intermediaries Topics (link). The update included a modification to their Q&A on RTS 27 and RTS 28 reports.

Part of MiFID II’s focus on Best Execution, RTS 27 and 28 are quarterly and annual reports that disclose details about venue trading statistics and the top 5 venues where firms are executing client trades. As covered in the past by Cappitech, compliance of the reports has been plagued by poor data quality and lack of easy availability (more on this). As a result, investment firm clients that are supposed to benefit from these reports have reported little to no use with the data; thus, nullifying the best execution transparency the regulation is supposed to provide.

This is especially the case for the quarterly RTS 27 report which is required by venues, markets makers and liquidity providers. Issues cited with the report include a non-uniformity of data fields, hard to read file types and a lack of available explanations of the published information.

In their Q&A modification, ESMA removed their ambiguous language for a more concise focus on data quality. ESMA initially stated that “no particular formatting standard is prescribed” for RTS 27/28 reports and that “readability and comprehensibility” is crucial.

In replace, ESMA explained that the data should be “‘machine-readable’and (ii) enabling the public to search, sort and analyse all the provided data”. They defined this as “an electronic format that allows for computerised calculations and mass processing that is compatible with standard and easily accessible machine-reading processes”. They added that CSV and XML are acceptable files for this requirement.

In regard to RTS 28, ESMA emphasized that the reports are to enable “end investors, including retail clients, to better scrutinise execution quality and order routing practices, firms should ensure that the format they use is clear and easily readable for retail clients or offer alternative ways to visualise the data of the report”.

Spot FX to fall under MAR?

Also published on Thursday was a MAR Consultation Report (link). The paper included a review on several MAR topics and allows for industry participants to provide their response viewpoints.

Among the items covered was whether to include the FX Spot market under scope of MAR. When first put into effect, MAR excluded spot FX transactions from the regulation. This is mainly due to the type of regulation MAR covers as it focuses on manipulation and abuse taking place on venue traded markets. Examples include reviewing for insider trading of stocks and placing of phantom orders to trigger price moves in futures.

Despite the initial exclusion, ESMA stated that it is reviewing the scope of FX due to the size of the market and assessment of whether NCA’s have in place tools to supervise market abuse in spot FX trading.

The arguments for: ESMA’s reasons to include FX under scope:

  • Lack of jurisdiction for NCAs to act against misconduct for FX manipulation with only one NCA authorized by its country to penalize authorized firms
  • The 2014 FX rate rigging misconduct was slow to be uncovered by NCAs
  • Pricing of the spot FX market has a direct effect on exchange traded derivatives such as FX futures on the CME

The arguments against: ESMA’s reasons to exclude FX under scope:

  • In reaction to the FX rigging scandal, central banks created a FX Global Code of Conduct that has raised standards within the wholesale FX market
  • The Code of Conduct is up for review in 2020 and may include features that will overlap with MAR
  • As an OTC product, FX trading characteristics don’t fully fit under the existing MAR regulation which focuses on exchanged traded products
  • High costs to the market and NCAs to comply with requirements to monitor FX orders



Ron Finberg
About the author: Ron Finberg
Ron is Executive Director, Product Specialist at S&P Global Market Intelligence Cappitech and helps customers with their compliance of EMIR, MIFIR, SFTR, MAS and ASIC derivative reporting. Ron is an ongoing contributor of regulatory focused content and webinars and leverages his over 20 years’ experience in the financial industry. He was also awarded the Editor’s Recognition Award for Best RegTech Vendor Professional in the RegTech Insight Europe Awards 2021.