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Wall Street Has New MiFID Migraine, Now in Futures Market

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For Wall Street banks, the ripple effects keep spreading from sweeping new European rules that govern how brokerage clients pay for investment research.

The latest complication is in the multi-trillion-dollar futures and derivatives markets, where traders speculate on everything from currencies to oil and metals. Banks that handle client orders have provided market analysis for free — a perk that comes along with the lucrative fees customers pay them to execute trades. 

But the coming European rules require brokers to charge separately for research as part of an effort to eliminate conflicts of interest and give fund managers more transparency into what they pay for specific services. For Wall Street, the big worry is that complying with those restrictions may force their brokers who facilitate futures transactions to register as commodity trading advisers — a label that brings unwanted regulatory burdens.

To address the concerns, the Futures Industry Association has been lobbying the U.S. Commodity Futures Trading Commission for assurances that firms can adhere to the European constraints without facing costly new requirements in their home market. FIA members include Wall Street’s largest banks, such as Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley.

Unwanted Regulation

“It’s simply extra costs for no particular reason,” said  Nathaniel Lalone, a London-based partner at Katten Muchin Rosenman law firm. “Nobody wants to be regulated more than they have to.”

The FIA confirmed it has requested relief from the CFTC. The CFTC didn’t respond to requests for comment.

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The behind-the-scenes campaign at the CFTC comes just weeks after financial firms got a more significant reprieve from the U.S. Securities and Exchange Commission. Last month, the SEC said if brokers sell research on stocks directly to clients in Europe, the regulator won’t require them to register as investment advisers, a tag that also brings stricter oversight.

The effort now directed at the CFTC shows that with less than two months until Europe’s revised Markets in Financial Instruments Directive, or MiFID II, takes effect, global banks are still scrambling to identify all the potential consequences. Firms have to comply in early January, and a key goal is limiting MiFID II’s impact on earnings and all their various business units.

‘Solely Incidental’

Banks have relied on a legal exemption to avoid registering as CTAs when they provide research to their futures and derivatives clients. Firms are given a pass because offering analysis has been considered “solely incidental” to their businesses under U.S. rules, in large part because they don’t charge for it.

But firms now worry that breaking out the cost of the analysis for their European customers as required by the new rules will force them to register with the CFTC as CTAs.  

Discussions between the CFTC and industry over FIA’s request are ongoing, according to two people with knowledge of the matter who asked not to be named discussing private deliberations.

If granted, the relief could come as guidance telling industry that complying with the European rules won’t force them to register, according to one of the people. The CFTC could also issue what’s known as a no-action letter. The regulatory get-out-of-jail free cards allow firms to violate rules without the risk of being punished.

Regulation Overload

Bank subsidiaries that help clients buy and sell derivatives, known as futures commission merchants, could be particularly vulnerable to any added compliance costs. The industry has argued that it’s already under pressure from the litany of rules passed in the wake of the 2008 crisis, and that government red tape has discouraged many firms from staying in business.

CFTC Chairman J. Christopher Giancarlo, a former swaps industry executive, has echoed financial firms’ concerns. He’s warned that futures commission merchants have low profit margins and that regulations, including a rule requiring that banks put up capital for client transactions, are to blame. In May, he said the number of FCMs declined to 55 at the beginning of this year from 100 in 2002.

While he hasn’t commented on the FIA’s concerns specifically, Giancarlo told reporters this week while traveling in Asia that he was concerned about the cross-border reach of “some aspects of MiFID.”

His agency and the European Union are trying to complete a deal to ease some of those problems before January. The two sides said last month that they agree on the general terms of an agreement.

Bloomberg LP, the parent company of Bloomberg News, provides data and analytics for firms complying with MIFID II requirements. 


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