Regulation in the EU
Some brokers are proud to announce that they provide their services within the framework of the European regulation. For many traders it is a kind of quality sign - Europe is Europe.
It is time to understand exactly how regulation is carried out in the EU.
Legal Basis for Regulation in the EU
It should be noted at once that in the European Union, unlike other countries, there is no single regulator. Nevertheless, this does not mean that no one controls brokers in Europe. Each state, which is a member of the EU, has its own organization, the functions of which include the regulation of the financial markets, and each of the regulators has its own rules and requirements within the framework of their countries' legislation.
In some countries, regulators are the Central Bank (Ireland, Czech Republic), in some countries they are specially created organizations. The best known of them are:
- UK Financial Conduct Authority (FCA);
- Federal Office of Financial Control (BaFin) of Germany;
- Cyprus Securities and Exchange Commission (CySEC);
- Malta Financial Services Authority (MFSA).
Despite this, each regulator imposes its own requirements for brokers, which may differ, their regulation of activities in the foreign exchange market is regulated by a key document for all EU countries.
MiFID II and MiFIR directives
This document, which was initiated by the British FCA, is Directive 2004/39/EC on financial marketswhich is better known by the acronym MiFID (Markets in financial instruments directive).
The directive was in effect from January 31, 2007 to January 2, 2018. In June 2014, the directive 2014/65/EUThe MiFID II, abbreviated MiFID II, as well as directive 600/2014 Markets in Financial Instruments Regulation (MiFIR).
Since January 3, 2018, the MiFID II and MiFIR directives are the key documents under which EU regulators operate, and their requirements are binding on all financial market participants.
Any broker operating in the EU is required to have a MiFID II license.
Requirements and features of the MiFID II directive
One of the key features of the MiFID II directive is the possibility of so called passporting across the EU territory. That is, a broker who has a MiFID II license issued by one of the regulators has the right to operate in the entire EU territory, not only in the country whose regulator issued this license.
As mentioned above, each regulator has its own requirements for applicants. In turn, the MiFID II directive defines the minimum regulatory threshold, and the regulator's management can tighten them according to their national legislation.
This is the reason why most brokers seek to obtain a MiFID II license from the regulators in Malta and Cyprus, where the requirements for them are not as stringent as, for example, in the UK.
The MiFID II Directive contains the following key requirements:
- the amount of minimum capital;
- compulsory availability of compensation funds;
- a clear separation of corporate and client funds;
- Providing quality services to clients.
At the same time, for example, the definition of the amount of leverage is the prerogative of the EU country regulator, so many brokers offer leverage up to 1:500.
In general, the MiFID II directive is not some rigid law, but rather defines the framework within which EU regulators are required to operate.
Accordingly, some regulators are satisfied with the minimum, while others are moving towards tightening their requirements to the values allowed by the directive. The MiFID II directive has become quite an effective tool, and licensed brokers enjoy a very high level of trust among traders.