'Exchange-traded derivative' (ETD) means a derivative that is traded on a regulated market or on a third-country market considered to be equivalent to a regulated market in accordance with Article 28 of this Regulation, and as such does not fall within the definition of an OTC derivative as defined in Article 2(7) of Regulation (EU) No 648/2012 (Article 2(32) of MiFIR).
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The size of the global ETD market in 2014 was USD 57.6tn based on notional outstanding, about one-tenth of the total global derivatives market which amounted to USD 687.2tn in 2014. ETD market size doubled from 1993 through 2000. From 2000 to 2007 this market grew six fold. Since then, the market has shown an overall declining trend in a more volatile environment. The market share of Europe has declined from 42% (2008-2013) to 25% in June 2015. An important feature of the derivatives market in general, and the ETD market in particular, is the importance of interest rate-related contracts, which constitute the bulk of notional amount outstanding and turnover.
In terms of notional outstanding, options represent 60% of the ETD market and futures the remaining 40%, a ratio broadly mirrored across Europe and North America.
In recent years there has been a divergence between European and North American markets, with the former declining and the latter increasing (Risk Assessment on the temporary exclusion of exchange traded derivatives from Articles 35 and 36 of MiFIR of exchange traded derivatives from Articles 35 and 36 of MiFIR, 04 April 2016, ESMA/2016/461, p. 7, 8).
When it comes to the proportion of OTC and ETD transactions in the derivatives markets, ESMA Report on Trends, Risks and Vulnerabilities No. 2. 2017 “EU derivatives markets ─ a first-time overview” (ESMA50-165-421, p. 8) notes that there is a slight majority of ETD transactions on equity and commodity derivatives markets, while OTC transactions are predominant in the FX, credit and interest rate derivatives asset classes.
Large part of the ETDs' market is relying on indirect clearing.
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Questions and Answers on MiFID II and MiFIR market structures topics, ESMA70-872942901-38
Question 32 [Last update: 03/02/2021]
When a firm submits an order through DEA, which is then executed on-venue, should the resulting transaction be considered, from the DEA user perspective, as an on-venue or OTC transaction?
Answer 32
As per Article 4(1)(41) of MiFID II, DEA is a mechanism allowing a client to “electronically transmit orders relating to a financial instrument directly to the trading venue” using the trading code of the DEA provider. Hence, a DEA trade should not be considered as a series of trades (i.e. one trade involving the DEA client and the DEA provider, one trade submitted by the DEA provider and executed on-venue), but rather as one single trade submitted by the DEA user and executed on-venue.
This interpretation is however without prejudice to other specific guidance provided by ESMA for ad hoc regulatory purposes as, for instance, in the Guidelines on “Transaction reporting, order record keeping and clock synchronisation under MiFID II” (ref. ESMA/2016/1452, p.162).
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As of end-June 2016, the global size of ETDs market was slightly above 10% of the global derivatives market which itself follows a declining trend since 2008. In terms of notional amount outstanding, ETDs market is mainly composed of interest rate derivatives (IRD) split into 60% of options and 40% of futures.
ESMA's risk assessment also highlights a consistency in the significant drop in the percentage of daily cleared outstanding notional for ETDs in recent years, with the progressive switch to longer-maturity instruments.
ESMA further describes European ETDs market as highly concentrated both at trading and clearing level, combined with a vertically integrated market infrastructure where dominant trading and clearing structures are part of the same integrated groups. In 2014, the biggest CCP in terms of number of ETDs trades cleared held a 58% market share while the three biggest held together 90% of the market. A number of smaller players share the remaining market shares.
When assessing the market structure on an asset class basis, ESMA concludes that the market is even more concentrated with one exchange holding over 70% of equity ETDs in terms of value traded and another holding about 80% of bond ETDs still in terms of value traded.
The case of commodity ETDs is slightly different – with the exception of energy ETDs – as the commodity ETDs market is characterised by a high level of specialisation and little overlap among trading venues and CCPs.
In parallel, in the OTC market, the ongoing implementation of EMIR clearing obligation has already and will continue to bring a significant share of the derivatives contracts traded OTC to central clearing. Following ESMA's regulatory technical standards under EMIR, the European Commission has indeed already adopted delegated acts for the central clearing of IRS (denominated in UR, GBP, JPY, USD, NOK, PLN and SEK) and Index Credit Default Swaps (CDS) denominated in EUR, bringing about 70% of the OTC derivatives market in these classes into clearing. It should also be noted that although the clearing offer is very concentrated, six different CCPs offer clearing services for IRS.
The Commission takes note that (i) interest rates derivatives represent the main share of the ETDs market; (ii) MiFIR trading obligation might bring into the ETDs definition a part of the interest rate derivatives; (iii) EMIR clearing obligation is already applicable to IRS and (iv) despite the market concentration the interest rate derivative market is split between six different CCPs. The Commission therefore agrees with ESMA's conclusions that interest rate derivative is the most relevant asset class when assessing the consequences of the implementation of the open and non-discriminatory access provisions for ETDs.
Report from the Commission to the European Parliament and the Council on the need to temporary exclude exchange-traded derivatives from the scope of Articles 35 and 36 of the Regulation (EU) No 600/2014 on markets in financial instruments, p. 5, 6
ESMA EMIR Q&As as updated on 21 December 2020
ETDs Reporting
Question 1 What is the scope of reporting covered by these questions and answers?
ETDs Reporting Answer 1
The questions and answers relating to the reporting of “ETD contracts” cover the reporting of the conclusion of derivative contracts in any of the classes referred to in paragraphs 1 and 2 of Article 5 of the Commission Implementing Regulation (EU) No 1247/2012 that meet all of the following criteria.
1. The contract is subject to the rules of a trading venue and is executed in compliance with those rules or on a similar trading venue outside the EU (note that this similarity point is only to be interpreted for the purpose of deciding which trades are covered by this section of questions and answers and does not imply any status for non-EU trading venues for any other purpose);
2. The rules of the trading venue provide for processing of the concluded contract by the trading venue after the execution and the subsequent clearing by a CCP within one working day of execution; and
3. The trade is cleared by a CCP.
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ESMA Q&As on EMIR (ESMA70-1861941480-52), 2 February 2024,modified answer to the ETDs Reporting Question: “Which parties have to report ETD contracts?”
One of the main purposes of the EMIR reporting obligation is to enable the authorities to identify and analyse risk positions, although the reports will have other uses as well.
Therefore, an authority analysing EMIR reports would expect to see the counterparties where the risk lies once the contract has been concluded.
Under the principal clearing model, upon clearing, the risk lies on the clearing member ("CM") vis-à-vis the CCP and on the client of the CM vis-à-vis the CM.
Under this clearing model, when the client of the CM is an investment firm, the latter bears the risk arising from the derivative transaction vis-a-vis the CM, regardless of the investment service provided to its own clients.
In order to achieve the objective of identifying risk positions, all of the following will be deemed to be counterparties of the trades arising from a derivative transaction and thus having an EMIR reporting obligation:
- The CCP clearing the derivative contract.
- The clearing members of the CCP that are clearing the derivative contract.
- The MiFID investment firms involved in the trade chain anytime they bear the risk arising from the derivative transaction by virtue of its contractual relationship with their counterparties (in particular, with the clearing member).
- Other parties that do not fall into any of the categories above and that take the risk arising from the derivative transaction, except when they are exempt because of their status.
All these parties have an obligation to report any trades with their own counterparties arising from a derivative contract.
The latter holds true irrespective of whether they are in a "back to back" situation between two other parties or whether they bear the risk arising from a derivative contract vis-à-vis their counterparties according to a different arrangement, whereby the legal and economic effects of the contract are transferred to them.
Where an entity is fulfilling more than one of these roles (for example, where the investment firm is also the clearing member) then it does not have to report separately for each role and should submit one report identifying all the applicable roles in the relevant fields.
To show how this approach would work in practice to report the conclusion of a derivative contract, we use as an example a trade scenario in which a derivative contract is executed via an investment firm and cleared through a separate clearing member of the CCP. Only one side of the trade is described.
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Regulatory chronicle
2 February 2024
ESMA Q&As on EMIR (ESMA70-1861941480-52), modified answer to the ETDs Reporting Question: “Which parties have to report ETD contracts?”
13 July 2021
Public Statement, ESMA, Supervisory approach on the MiFIR open access provisions for exchange traded derivatives (ETDs), ESMA70-156-4714
3 February 2021
ESMA updates the Questions and Answers on MiFID II and MiFIR market structures topics, ESMA70-872942901-38 - when a firm submits an order through DEA, which is then executed on-venue, the resulting transaction are considered, from the DEA user perspective, as an on-venue transaction (and not OTC).
Documentation
MiFIR, Article 2(32)
Report from the Commission to the European Parliament and the Council on the need to temporary exclude exchange-traded derivatives from the scope of Articles 35 and 36 of the Regulation (EU) No 600/2014 on markets in financial instruments, p. 5, 6
ESMA Annual Statistical Report EU Derivatives Markets 2019, 9 December 2019 ESMA 50-157-20, p. 10, 11
Risk Assessment on the temporary exclusion of exchange traded derivatives from Articles 35 and 36 of MiFIR of exchange traded derivatives from Articles 35 and 36 of MiFIR, 04 April 2016, ESMA/2016/461, p. 7, 8
EU derivatives markets ─ a first-time overview, ESMA Report on Trends, Risks and Vulnerabilities No. 2. 2017, ESMA50-165-421, p. 8
Reporting Exchange Traded Derivatives under EMIR, Surveying the impact, challenges and recommending a path forward for ETD reporting in 2019, FIA, June 2019, https://fia.org/file/9024/download?token=kDyL15aT
ESMA EMIR Q&As
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