FCA Thematic Review Signals Professional Clients Assessment

The push by the UK financial regulator to acquire a raft of data which we reported on yesterday appears to be turning some heads in the industry. Below we will be presenting some key points as voiced by a number of UK brokerage executives. Professional clients eligibility assessment is the major point driven home.

While for obvious reasons we are not going to reveal the sources of the comments, we would welcome more comments in the section down below the article.

The data which the FCA requested from brokers made an impression on the London-based part of the retail brokerage industry for a number of reasons. First, the FCA has requested separate data sets comparing the months of August, September, and October of this year with 2017.

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The second major aspect of the request that stood out was the separation between professional and retail clients.

There are several major chains of thought among industry execs about the reasons why the FCA requested the data.

Professional Clients Review

While I was at the Finance Magnates London Summit a couple of weeks ago, the prevailing sentiment across industry execs was that some firms might not be diligent enough when it comes to professional clients.

The definition under MiFID for professional clients has been lacking details and the broad sentiment across the industry was that high trading volumes coupled with a relevant professional background or a large portfolio would be enough.

Under the MiFID definitions, professional clients need to meet at least two out of the three criteria above. The FCA’s questions and requests for data on the behavior of professional clients could provide valuable insight into whether clients which are categorized as such really are behaving differently to retail traders.

The risk here is that for some companies these numbers could be very close to each other. The UK regulator can conduct a review of only a couple of firms which it considers diligent enough when executing the reclassification from retail to professional and extrapolates their data to assess information from other brokers.

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The time-saving effort will then deliver an assessment on the client behavior of different companies and the FCA can determine whether the professional clients of a given brokerage really have the characteristics of more experienced traders.

Regulatory Arbitrage

The data is sure to also provide some insight on which companies are engaging in regulatory arbitrage. The number of clients which they are holding on their books in the UK is provided to the regulator.

Any drastic changes to the figures would provide some extra insights into which companies have managed to switch clients away from their FCA-regulated subsidiaries into other jurisdictions.

Of course, the regulators would also need some data from other subsidiaries, but in the case of some jurisdictions such as Australia, that shouldn’t be that difficult, due to the interconnectedness between global regulators.

Reassessment of Retail Rules

The final segment which we will pay special attention to is the possibility of further reassessment of trading rules. As we know, the official designation of the new regulatory measures in Europe is as “temporary”.

For the time being, the regulators have only got three months worth of data as to what has changed after the introduction of the measures. Each quarter they are reviewing whether to extend the period with another three months.

As we have previously expressed, we doubt that the measures taken by EU regulators will last less than a year. Executives across the industry are in broad agreement and regulators will apparently be monitoring the data every three months to assess the effectiveness of their measures to protect retail traders.

We are well aware of the problems with EU citizens fleeing to offshore brokers. We believe that the EU regulators are also worried. Hence their coordinated effort with Google, VISA, and MasterCard earlier this year. For now, brokers have not much to do but diligently comply with any data requests and hope that regulators are fair when assessing the data.

FCA Data Request

Finally, below is the detailed questionnaire which the FCA requested from brokers. Remember that brokers had to provide data for August, September, and October separately for last year and for this year. Data for retail and professional clients were also reported separately.

1. Total number of funded client accounts
2. Total client monies held (in € equivalent) for the accounts reported at Q.1.
3. Number of active client accounts during period (i.e. client accounts with at least one trade during the period or an open position ‘marked-to-market’ throughout the period).
4. Number of client accounts opened during period.
5. Number of client accounts closed during period.
6. Total volume of trades by clients, for CFDs of any underlying asset class (All CFDs) in EURO (€).
7. Total volume of trades by clients, major FX CFDs
8. Total volume of trades by clients, minor FX CFDs
9. Total volume of trades by clients, major indices CFDs
10. Total volume of trades by clients, minor indices CFDs
11. Total volume of trades by clients, gold CFDs
12. Total volume of trades by clients, Commodities (other than Gold) CFDs
13. Total volume of trades by clients, cryptocurrency CFDs
14. Total volume of trades by clients, other CFDs
15. Number of trades by clients, for CFDs of any underlying asset class (TOTAL).
16. Number of trades by clients in CRYPTOCURRENCY CFDS ONLY (TOTAL).
17. Total exposure of all client accounts on the last trading day of the month, for CFDs of any underlying asset class (TOTAL) in EURO (€).
18. Total exposure of all client positions in CRYPTOCURRENCY CFDS ONLY (TOTAL) in EURO (€).
19. Total client equity in client accounts on last trading day of month in EURO (€).
20. Total number of active accounts that made a profit over the relevant period (including spreads, fees and charges incurred and excluding any bonus received) (all CFDs).
21. Total number of active accounts that made a loss over the relevant period (including spreads, fees and charges incurred and excluding any bonus received) (all CFDs).
22. Total profits from profit making accounts over the relevant period (excluding spreads, fees and charges incurred and excluding any bonuses received) (all CFDs) in Euros (€).
23. Total profits from profit making accounts over the relevant period (including spreads, fees and charges incurred and excluding any bonuses received) (all CFDs) in Euros (€).
24. Total losses from loss making accounts over the relevant period (excluding spreads, fees and charges incurred and excluding any bonuses received) (all CFDs) in Euros (€).
25. Total losses from loss making accounts over the relevant period (including spreads, fees and charges incurred and excluding any bonuses received) (all CFDs) in Euros (€).
Questions 26-37 only to be filled out by brokers offering CFDs with cryptocurrencies as an underlying
26. Total number of active accounts that made a profit over the relevant period (including spreads, fees and charges incurred and excluding any bonus received) (Accounts that have at least one cryptocurrency CFDs).
27. Total number of active accounts that made a loss over the relevant period (including spreads, fees and charges incurred and excluding any bonus received) (Accounts that have at least one cryptocurrency CFDs)
28. Total profits from profit making accounts over the relevant period (excluding spreads, fees and charges incurred and excluding any bonuses received) (Accounts that have at least one cryptocurrency CFDs) in Euros (€).
29. Total profits from profit making accounts over the relevant period (including spreads, fees and charges incurred and excluding any bonuses received) (Accounts that have at least one cryptocurrency CFDs) in Euros (€).
30. Total losses from loss making accounts over the relevant period (excluding spreads, fees and charges incurred and excluding any bonuses received) (Accounts that have at least one cryptocurrency CFDs) in Euros (€).
31. Total losses from loss making accounts over the relevant period (including spreads, fees and charges incurred and excluding any bonuses received) (Accounts that have at least one cryptocurrency CFDs) in Euros (€).
32. Total number of active accounts that made a profit over the relevant period (including spreads, fees and charges incurred and excluding any bonus received) (Accounts that have no cryptocurrency CFDs).
33. Total number of active accounts that made a loss over the relevant period (including spreads, fees and charges incurred and excluding any bonus received) (Accounts that have no cryptocurrency CFDs)
34. Total profits from profit making accounts over the relevant period (excluding spreads, fees and charges incurred and excluding any bonuses received) (Accounts that have no cryptocurrency CFDs) in Euros (€).
35. Total profits from profit making accounts over the relevant period (including spreads, fees and charges incurred and excluding any bonuses received) (Accounts that have no cryptocurrency CFDs) in Euros (€).
36. Total losses from loss making accounts over the relevant period (excluding spreads, fees and charges incurred and excluding any bonuses received) (Accounts that have no cryptocurrency CFDs) in Euros (€).
37. Total losses from loss making accounts over the relevant period (including spreads, fees and charges incurred and excluding any bonuses received) (Accounts that have no cryptocurrency CFDs) in Euros (€).
38. Total number of active accounts that were active accounts in both 2017 and 2018 that made a profit over the relevant period (including spreads, fees and charges incurred and excluding any bonus received) (all CFDs).
39. Total number of active accounts that were active accounts in both 2017 and 2018 that made a loss over the relevant period (including spreads, fees and charges incurred and excluding any bonus received) (all CFDs).
40. Total profits from profit making accounts that were active accounts in both 2017 and 2018 over the relevant period (excluding spreads, fees and charges incurred and excluding any bonuses received) (all CFDs) in Euros (€).
41. Total profits from profit making accounts that were active accounts in both 2017 and 2018 over the relevant period (including spreads, fees and charges incurred and excluding any bonuses received) (all CFDs) in Euros (€).
42. Total losses from loss making accounts that were active accounts in both 2017 and 2018 over the relevant period (excluding spreads, fees and charges incurred and excluding any bonuses received) (all CFDs) in Euros (€).
43. Total losses from loss making accounts that were active accounts in both 2017 and 2018 over the relevant period (including spreads, fees and charges incurred and excluding any bonuses received) (all CFDs) in Euros (€).
44. Number of automatic close-outs during the period on client accounts.
45. Number of occurances in which the client went in to negative equity
46. Sum of client account balances that went in to negative equity at the time the relevant account was closed.

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