10 August 2017

ESMA publishes the responses to its Consultation on trading obligation for derivatives under MiFIR

SIFMA

Asset managers and their funds and accounts use packages for a variety of reasons, including to manage (and minimise) execution costs and risks and to diversify their portfolio of investments or to achieve a better hedge for their exposures (compared to executing components of packages on a standalone basis).  ESMA’s position on packages appears to have the result that, if a single component of a package is a derivative in a class that has been declared to be subject to the trading obligation, all components of the package must be concluded on a trading venue, in order for the components to be transacted as a package.  SIFMA’s members are concerned that, even considering the flexibility of execution methods allowed under Articles 28 and 32 of MiFIR, it is not clear that, for all forms of packages, the combinations of instruments transacted as packages will be offered for trading by trading venues, at least, not by the time the MiFIR trading obligation is intended to apply.  Whilst it may be possible to trade certain standard, liquid packages on trading venues, on-venue trading of the package as a whole is unlikely to be possible in the case of more bespoke forms of package.

If the MiFIR trading obligation is imposed on package components, without allowing the venues and markets the time needed to develop the infrastructure and protocols to support transacting on-venue all the components as a package, market participants will be restricted.  Asset managers may be forced to transact the components of the package separately, leading to increased risks and costs of execution and ultimately to package users paying more to hedge their risks.

At this point in time (less than six months before the date from when it is intended that the trading obligation will apply), no equivalence determinations have been made in respect of non-EU venues under Article 28 of MiFIR.  Moreover, it is unclear whether progress has been made towards establishing the mutual recognition arrangements required by Article 28(1)(d) of MiFIR with regulators in important jurisdictions such as the United States and countries in the Asia Pacific region.  Consequently, even at this late stage, SIFMA’s members are unable to judge the impact that the EU trading obligation for derivatives will have on their trading activities.  If a derivative is in a class declared to be subject to the trading obligation in the EU and, at the same time, is also in scope of the CFTC’s MAT swaps determinations, in the absence of any mutual recognition by EU and U.S. regulators of EU venues or SEFs, it will be impossible for cross-border dealings in derivatives of that class to continue, unless the venue is of a type which benefits from dual-registration.  Market fragmentation was narrowly averted, when CCPs in the key non-EU jurisdictions were finally granted recognition under EMIR, just at the point when the EU clearing obligation for OTC derivatives was coming into effect.  If equivalence determinations are not in place well in advance of the application date of the MiFIR trading obligation, our members may be forced to commit time and resources to ensure they have access to qualifying EU trading venues, when ultimately that access may not be needed, or may be needed only for a short period of time.

EBF

The EBF appreciate the effort that ESMA has made to improve the data and methodology from the discussion paper to this consultation. For example, we agree to the change to effective date instead of the execution date.

The EBF would like to request further clarification on the treatment of packages. In the CP ESMA notes that it does not have the legal power to address packages in the context of TO. Its understanding is that the whole package could be subject to the trading obligation even if just one component is subject to the TO. That is in EBF’s view not a desired outcome.

The EBF would like to underline that entering into force of the trading obligation for category 1 and 2 by 3 January 2018 deadline would be extremely tight, especially given the final standards will not be available for some time and most likely venues not authorised until very close to the deadline. This leaves very little time for completing essential technical and operational deliverables in time for 3 January 2018. In this respect, we would ask for an extension to the deadline, or for the possibility to comply with these requirements on a best efforts basis for a period of time following their introduction. Moreover, it is important that amendments to EMIR in COM (2017) 208 are taken into account e.g. that the very small financial counterparties will not be subject to the clearing obligation.

Eurex

Eurex strongly appreciates that ESMA has revised its initial proposal to systematically exempt transactions above a certain size from the trading obligation. It agrees with ESMAs view as outlined in paragraph 95 that trading venues avail of an appropriate toolkit of waivers and deferrals to ensure that information leakage is efficiently avoided; hence, it shares ESMAs opinion that there is no need to generally exempt large trades from the trading obligation. Cutting out LIS trades from the picture would result in a misrepresentation of the potential products that could be traded on trading venues in principle and hinder the trading obligation to unfold in its full potential in Europe. With its revision ESMA acknowledged that it is crucial to thoroughly design the interplay between the transparency regime and trading obligation requirements. We are of the view that for the determination of liquidity the whole universe of trades and the degree of development of an asset class to be traded on trading venues should be taken into account; once the liquidity of asset classes has been determined accordingly, it should be combined with meaningful transparency LIS thresholds to allow for pre-trade transparency to be waived where appropriate.

The interplay between transparency and trading obligation requirements should be carefully designed and discrepancies between the two regimes should be aligned to the best extent possible. Misalignment would otherwise lead to complexity in implementation and application of the trading obligation provisions for derivatives, unnecessary confusion, and ultimately a sub-par achievement of the legislative objective to increase trading on multilateral trading platforms.

Thus, EurexE would consider a combination of trading obligation and adequate transparency regime in the following way to be ideal:

·         First, ESMA to define which asset classes are generally appropriate for trading on trading venues (i.e. trading eligible under the MiFIR trading obligation);

·         Moreover, trading venues to assess the application of pre- and/or post- trade transparency exemptions in order to mitigate any adverse effects, and consequently to apply for waivers and deferrals with competent authorities once the legislation is applicable.

ESMA has already put a lot of effort in designing thresholds for pre and post trade LIS in OTC derivatives. This effort has resulted in various threshold levels that allow trading venues to waive pre and post trade transparency where meaningful but allow the market structure to evolve in a way that the trading obligation sets the tone for the asset class to be traded on trading venues in the first place.

Bloomberg

Bloomberg welcomes the opportunity to comment on ESMA's proposals for a draft regulatory technical standard (RTS) to implement the trading obligation for derivatives under MIFIR. As ESMA finalises its work we would like to make a limited number of comments and suggestions, which we think would improve the RTS from the perspective of both market participants and regulators.

In summary, Bloomberg wishes to see the smoothest possible implementation of the trading obligation and we strongly believe that this calls for:

(i) Safeguarding liquidity through international consistency: A smooth implementation of the trading obligation will be hampered if the new EU rules conflict with the requirements of other jurisdictions. We therefore strongly support ongoing efforts by EU and third country regulators to reach mutual recognition and cooperation agreements in order to avoid fragmentation of liquidity.

(ii) Clarity: To implement the RTS correctly market participants need to be certain about what the rules actually require. This necessitates a sufficient level of granularity. For this purpose we have highlighted, in response to question 4, certain fields, which we think could be clarified further, so that market participants have additional certainty on the scope of the trading obligation.

(iii) Lead-time: Even if there is a high degree of international consistency and sufficient granularity in the rules, the smooth implementation of the trading obligation will likely be impaired unless market participants have adequate time to design solutions to implement the requirements.

Consultation paper trading obligation for derivatives under MiFIR

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