MiFID II Client Categorisation – Retail Vs. Professional Clients for Forex & CFD Brokers
In 2008, the European Union harmonized the regulation of financial services for all member states under the umbrella of the The Markets in Financial Instruments Directive, often referred to as MiFID II. As a result of MiFID II, licensed forex brokers throughout the European Union would follow the same guidelines as it related to capital requirements, physical substance requirements, reporting, and client categorisation. Given the sweeping changes set forth in 2018 by ESMA, it is necessary for licensed forex brokers in the EU to fully understand and implement MiFID II client classification.
ESMA Introduces Leverage Restrictions to the European Union
Prior to 2018, the leverage offered by licensed forex brokers within the EU was flexible; it wasn’t uncommon to see EU forex brokers offering retail clients 200:1 or even higher. This changed with the introduction of measures proposed by The European Securities and Market Authority, known more commonly as ESMA. With the implementation of ESMA guidelines in mid 2018, leverage was severely restricted for all EU licensed forex & CFD brokers. As a result, the classification of clients under MiFID II became crucial for EU licensed brokers to properly implement.
What is the Difference Between MiFID II Retail and Professional Client Categorisation?
MiFID II guidelines set forth 3 types of client categories: eligible counterparty, professional, and retail. For the purpose of this article, we will focus only on the difference between retail and professional as this is a common question posed by forex brokers with a large base of retail clients seeking regulation in the European Union.
It’s important to emphasize that most established financial institutions such as credit unions, investment firms, and derivatives dealers will fall under professional client categorisation. The subject of this post, however, is the criteria for retail traders. In the most simple terms, a retail trader can be understand as an individual (non-business owner) looking to speculate on forex & CFD products.
How Does MiFID II Classify a Professional Client?
Per MiFID II guidelines, in order to receive professional client classification, a minimum of 2 of the following must be applicable:
(a) the Client has carried out transactions, in significant size, on the relevant market at an average frequency of 10 per quarter over the previous four quarters;
(b) the size of the Client’s financial instrument portfolio, defined as including cash deposits and financial instruments exceeds EUR500,000;
(c) the Client works or has worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged.
Individuals who can satisfy the above requirements are not subject to the leverage restrictions set forth by ESMA and are able to enjoy higher leverage should they request it. If the above criteria does not apply to the individual in question, they will be categorised as a retail trader and subject to ESMA leverage restrictions.
Atomiq Consulting – Your Partner For Regulatory Guidance in the European Union and Beyond
Founded in 2014, Atomiq Consulting has years of experience assisting clients with regulation in the European Union, United Kingdom and offshore. Our successful track record of licensed forex brokers, payment institutions and cryptocurrency exchanges make us the ideal partner for all regulatory questions.
To learn more about our services, don’t hesitate to contact us today!
