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Forex Markets Related Regulations After Pandemic

Jun 18, 2020

The COVID-19 has had large impact on our daily lives and it has changed the way we do business. Of course, there are many aspects of life that pandemic hasn’t changed, but the effects can be clearly found in the Forex and trading markets. In particular, coronavirus pandemic brought a surge of volatility back into the markets in February and March. This volatility, which has been widely reported on in the news and other media platforms, has brought a new interest in trading – with brokers seeing new clients or the return of dormant traders, who had not been active in years.

Whilst the pandemic has provided a boost for the markets and the brokers, there have been additional challenges – many trading platforms struggled with the higher levels of trading activity, pandemic related scams were brought to the light, and security systems were tested as hackers tried to take advantage of many employees working from home.These changes have strongly impacted regulations, but the question is whether the authorities across the world will adjust to these changes.

FCA (Financial Conduct Authority) has announced that they will capture the lessons from this emergency, but they also need to review entire system, from the data and intelligence they have collected and how they decide which firms and individuals are allowed to operate and how these firms are supervised. FCA ensure that unacceptable firms and individuals are stopped and removed from the regulated sector as quickly as possible.

The European Securities and Markets Authority (ESMA) and other regulators have decided to extend a few upcoming reporting obligations or proposed amendments to upcoming regulations accounting for pandemic uncertainty and disruptions, so far there is no evidence that further regulation is proposed as a response to Coronavirus pandemic.

In ESMA’s Quarterly Risk Dashboard release, ESMA acknowledged that pandemic induced activity did not have an impact on EU infrastructure although problems with system security, in particular for online trading attempts by hackers to infiltrate trading systems remained high. Considering this currently attention of regulators emphasis on business sustainability and ensuring of a solid system, managing risks and adherence with The Markets in Financial Instruments Directive (MiFID). By doing this introduction of new regulations will be set aside. Europe might not see any regulatory changes before the final quarter of this year, as MiFID II is currently in its third year of implementation. The European Commission published an impact assessment on MiFID II in February 2020 as well as invited feedback from market participants on various aspects. The feedback phase closed on the 18th of May 2020. However, the Commission does not expect to propose any new rules before the 4th quarter of 2020. As such, Commission do not expect any additional regulation in the medium term but rather enhanced supervision and guidance in the form of Guidelines, Circulars within the existing regulatory framework.

In August last year, the Australian Securities and Investment s Commission (ASIC) revealed its consultation paper which introduced to ban binary options and place leverage restrictions on CFDs and regarding this paper ASIC has large response. ASIC has not implemented any changes yet, but in relation to coronavirus pandemic regulator has readjusted its priorities so some of the issues will be postponed. Although the regulator has yet to announce anything further regarding its product intervention measures, client losses and retail investor protection when trading CFDs still remains as the priority.

It is believed that a newer version of the product intervention against CFDs will be released before the end of 2020 and ASIC will strengthen its enforcement on retail client money rules as recent audits have shown gaps in the current drafting which have allowed for a variety of interpretations and implementations. Similarly, the increased amount of information being fed to the regulator on at least a monthly basis in client money reconciliations necessitates that they review and analyses the meaning and implications of what they are receiving. The very nature of the information being provided opens itself up to manipulation by dishonest participants wanting to feign compliance and probably doesn’t really pass an integrity test.

Coronavirus pandemic has highlighted many issues - infrastructure resilience, security and risk management, which has been identified as the biggest area for improvement in many businesses. Requirements like preparing risk registers which analyses likelihood, impact, treatments and controls for a variety of risks are difficult to turn your mind when trying to run a small business and therefore have been largely ignored by many providers. This also applies to conflicts of interest and business continuity requirements that apply to licensees.

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