The recent scandal involving the HR startup Deel and My Forex Funds has placed regulators once again under intense public scrutiny. However, this time, it may not be entirely their fault.
The involvement of My Forex Funds in unregulated propriety trading that inadvertently ensnared Deel could potentially be more detrimental to the latter than the recent investor turbulence experienced by Papaya Global. It should be noted that compliance forms are not only the Achilles heel of financial institutions but also constitute the core "make it or break it" element for regulated firms.
Challenges to Prop Trading Firms
Regulating propriety trading has always been a challenging task. In the EU, this type of trading had been somewhat regulated under MiFID. However, with the introduction of the Investment Firms Directive (IFD), designed to foster a lighter regulatory framework for propriety trading, the primary goal was to alleviate market burdens, not create higher liquidity problems for trading institutions in comparison to banks.
Unfortunately, since its inception, the regulation of propriety trading has not been appropriately overseen due to a deficiency in expertise. When a regulatory framework does not foster competence that cannot be anchored to the Treaty on the Functioning of the European Union (TFEU), it poses a problem for all market actors and participants.
Currently, the EU finds itself in need of a newer and more efficient regulatory framework. Yet, given that the EU Commission's primary focus appears to be on Ukraine (a state not meeting the Copenhagen Criteria) and not on the EU Parliament's proceedings, it is clear that the present administration does not regard EU competence as a priority.
Moreover, with the President of the EU Parliament spending a considerable amount of time in Ukraine, it amplifies the notion that governing and operating within the EU's jurisdiction isn't their main concern at the moment.
Varied Regulatory Stance
In stark contrast to their European counterparts, American authorities are taking this issue seriously, playing a significant role in unfolding Deel’s recent regulatory troubles. Meanwhile, the Europeans seem to be on a protracted vacation, congregating in the conflict-ridden city of Kiev.
Interestingly, the UAE has emerged as a regulatory beacon amidst the regulatory failures of My Forex Funds. The Dubai Multi Commodity Centre's (DMCC) new crypto regulatory framework for propriety trading has demonstrated itself to be both accessible and enduring, presenting a neat clear-cut licensing path that can be achieved swiftly.
The grey listing endured by the UAE over the past two years appears to have spurred them to enhance their regulatory practices, including in the free zones, resulting in agile and robust regulatory frameworks. These improvements could serve as a model for the EU as they initiate a new Ordinary Legislative Procedure (OLP) on propriety trading.
Looking ahead, the EU should aim to address cases like that of My Forex Fund with the efficacy exhibited by their Emirati counterparts in the DMCC, facilitating streamlined and foolproof licensing processes. Excessive regulation through MiFID will not foster real market developments and is more likely to induce disruption and regulatory arbitrage than anticipated.
Perhaps, instead of venturing into issues beyond the purview of the TFEU, the EU could learn from the approaches of the Commodity Futures Trading Commission (CFTC) and Deel, or better yet, the UAE, which has repeatedly shown over a span of two years that no goal is unattainable or mountain too high to climb. It is crucial to adapt to the current needs, favoring sound regulatory frameworks over congested, stifling regulations.
