BNY Mellon said the implementation of new European Union regulation has been relatively smooth for foreign exchange trading as the firm launched a systematic internaliser for FX derivatives.

James Taylor, head of foreign exchange electronic markets sales at BNY Mellon, told Markets Media: “The implementation of MIFID II has been relatively smooth for FX trading. There have not been any liquidity disconnects and volumes are slightly higher than at this time last year.”

Systematic internalisers were originally set up for equities under the MiFID regulations in 2007 for all off-venue trading in the European Union. However only nine banks became SIs and very few trades took place on the back of an SI quote as off-venue trading moved to broker crossing networks.

As a result MiFID II, which went live on 3 January 2018 for European Union financial markets, prohibits broker crossing networks. Regulators have extended SIs to other asset classes in order to capture over-the-counter trading activity and increase transparency. Under MiFID II, the SI is responsible for meeting the post-trade transparency requirements and for trade reporting.

Taylor said the decision to set up an SI was client-driven. ”

“We have built the infrastructure to report trades on behalf of clients under the MiFID II requirements,” he added. “Furthermore, clients can carry on trading in the same way as they transacted previously, whether that is electronically or by voice.”

MiFID II does not cover spot foreign exchange and the asset class is considered illiquid, so there are no pre-trade reporting requirements. However the regulation does cover FX derivatives such as forwards, swaps and options. Therefore, FX derivatives need to comply with the MiFID II requirements including best execution, the security having a valid International Securities Identification Number (ISIN) as an identifier, and the counterparty having an legal entity identifier (LEI) in order to trade.

“Before MIFID II launched all of our clients who have traded FX with us in the last two years had secured their LEIs so we were very well prepared,” added Taylor.

ISINs were previously mainly used for bonds so the industry set up the ANNA Derivatives Service Bureau to generates ISINs for over-the-counter derivatives, a new requirement for MiFID II. Clarus Financial Technology, the derivatives analytics provider, has argued in its blog that the sheer number of ISINs has hampered, rather than increased, transparency.  For example, 500,000 FX Forward ISINs and 150,000 FX Swaps ISINs have already been created according to Clarus.

“There are differences in how SIs are reporting but the market will gradually become more consistent,” added Taylor. “The regulators requested a lot of information and that will take time to work through.”

Taylor joined BNY Mellon in September last year from JP Morgan Chase where he was most recently head of fixed income, currencies and commodities market structure. Based in London, he is responsible for sales and distribution of electronic FX products globally, and the Client Execution Services (CES) platform in Europe, Middle East and Africa.

At the time BNY Mellon Markets said his appointment is the latest step in the transformation of the FX business following the hire of Jeff Leal as global head of electronic markets for FX earlier in 2017.

Taylor said: ”BNY Mellon is working on upgrading our FX service and there is a real drive to move the service to the next level, including looking at various new technologies.”