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AMAFI
The amendments to EMIR brought an important distinction between small and other Financial counterparties and, with respect to Non-financial counterparties limits the clearing obligation to OTC derivatives pertaining only to any class of OTC derivatives subject to the clearing obligation, acknowledging the low level of systemic risk presented by small Financial and Non-financial counterparties and the necessity to exclude them from the clearing obligation with regard to derivative contracts. This Consultation paper acknowledges the linkage between the clearing obligation and the derivatives trading obligation. AMAFI believes that this linkage is apparent in the intention of the legislators and strongly supports the alignment of the MiFIR provisions relating to the Derivatives trading obligation with the new provisions introduced by EMIR Refit regarding the scope of the clearing obligation.
AMAFI agrees with ESMA’s legal interpretation about the amendments in relation to financial counterparties regarding their impact on the MiFIR DTO. The cross-reference in MiFIR to the definition of “financial counterparties” in Article 2(8) of EMIR does not make room for the new distinction between FC+ and FC- as introduced by the amendments to EMIR. This means that all the financial counterparties are subject to the DTO, including small financial counterparties, regardless of their exemption from the CO.
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ISDA and FIA
The Associations strongly support ESMA’s analysis, but furthermore believes that the scope of transactions subject to the DTO should be a subset of transactions subject to the CO i.e. In order for a derivative transaction to be subject to the DTO, it should, as a precondition, be subject to the CO (i.e. alignment should not be expressed solely in terms of counterparties covered). This would ensure that future amendments to EMIR (and supplementary regulations) would not lead to misalignment, i.e. cross references in MiFIR to specific EMIR articles could be replaced by a broader clarification to this effect. Furthermore, the Associations understands that trading venues and a wide variety of counterparties are working on the basis of such a CO/DTO alignment and wish to continue to do so.
The Associations believe that, in order for a transaction to be subject to the DTO, it should, as a precondition, be subject to the CO.
The Associations believe that ensuring this principle will ‘future-proof’ the articulation of the CO and DTO, particularly to the extent changes may, in the future, be made to the scope of the CO.
The Associations agree with ESMA’s legal analysis of the amendments in relation to financial and non-financial counterparties but believes there plenty of indications from reading of EMIR, MIFIR and related RTS that the co-legislators and the European Commission intended alignment between the CO and the DTO.
In relation to non-cleared transactions executed on trading venues, the Associations have concerns regarding the pricing of such transactions and non- proportionate administrative burdens for smaller counterparties.
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ALFI
Mid-June 2019, ESMA updated last week the Public Register for the Trading Obligation for derivatives under MIFIR.
Since EMIR enforcement ESMA gradually increased the scope of both the OTC derivatives clearing obligation (CO) and trading obligation (TO), and so far TO calendar has always been aligned to the CO calendar (i.e. TO not to start before the CO). As ESMA has not updated the Table 5 (Dates from which the TO takes effect) to maintain consistency between TO and EMIR-Refit revised CO calendar, the industry might fall under the on-venue trading obligation starting June 21st, so ahead of the CO for the bulk of Category 3 which benefits from the SFC clearing exemption.
On 12 July, ALFI publicaly welcomed the statement published the same day by ESMA, which proposed a short-term solution to address the misalignment of the scope of entities subject to the clearing and the trading obligations on a temporary basis.
ESMA’s statement addresses two areas:
Clearing and trading obligations for small financial counterparties and non-financial counterparties; and,
Date of application of the trading obligation for financial counterparties (FC) which are in Category 3 and subject to the CO.
The statement advises National Competent Authorities (NCAs) not to prioritise their supervisory actions in relation to the TO towards counterparties exempted from the CO following the entry into force of EMIR Refit.
Additionally, for financial counterparties (FC) in Category 3 which are subject to the CO, the date of application of the TO should be the same as the new date of application of the CO as amended by EMIR Refit. This date of application should hence be four months following the notification from FC to ESMA and NCA as required under EMIR Refit, rather than 21 June 2019.
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EFAMA
EFAMA also considers that, thanks to the successful implementation of EMIR clearing obligation and the risk mitigations techniques, the DTO could be removed entirely as:
DTO is creating undue complexity as CCPs are the counterparties to each party in a clearable derivatives transaction, ensuring execution of the transaction in a systemic risk-free OTC derivatives market;
Imposing a Trading Obligation on transactions that are centrally cleared would potentially lead CCPs to become venues or members of a venue, with all the additional capital requirements that would supersede the ones requested from CCPs; and
in the context of the updated clearing obligation under EMIR Refit, small financial counterparties (e.g. UCITS/AIF) are required by exceeding the clearing threshold for at least one class of OTC derivatives (e.g. FX) to comply with the clearing obligation for all classes of OTC derivatives. However, some of the relevant clearing eligible asset classes are not subject to the EMIR clearing obligation. ESMA has not mandated such asset classes to the DTO, especially Foreign Exchange derivatives are not mandated for the clearing obligation. Highly regulated investment funds use Foreign Exchange derivatives in their investment portfolios to hedge their position or for investment purposes.
Should the DTO be nevertheless applied, FC- should be exempted from the DTO, in application of EMIR Refit.
Lastly, we would recommend that ESMA use identical terminology across legislations to identify counterparties, especially Financial Counterparties (“FC”) and small financial counterparties. The notions of FC+ and FC- proposed by ESMA could create confusion as they are not currently defined in any text. Therefore, we recommend adding the definition of a FC in the MiFID definitions to create a cross reference.
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