MiFID II trading obligation for derivatives

 


 

 

MiFIR (Markets in Financial Instruments Regulation) will for the first time require certain derivatives contracts – those that are both cleared through a central counterparty (CCP) and deemed sufficiently liquid – to trade on a ‘trading venue’.

 

The trading obligation on regulated markets, MTFs or OTFs is probably the area where the important interdependencies between MiFIR and EMIR are most highlighted, given that the MiFIR trading obligation applies to non-intra group transactions in clearing eligible and sufficiently liquid contracts when traded by counterparties subject to clearing under EMIR.

 

As ESMA underlines, the primary purpose of the MiFIR trading obligation is to determine which of those derivatives subject to the EMIR clearing obligation should also be required to trade on a regulated market, MTF, OTF, or equivalent third country venue when traded by relevant counterparties.

 

 

G20 commitment:

 

"All standardised OTC derivatives contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by the end of 2012".

 

Moreover, this link to the clearing obligation does mean that the trading obligation cannot apply to any derivatives contracts which are not traded OTC and already trade exclusively on venues, since such contracts will fall outside of the scope of EMIR and can never be said to be subject to the clearing obligation.

 

On the other side, not everything that becomes subject to the clearing obligation will necessarily pass the MiFIR venue and/or liquidity tests.

 

It appears that the EMIR and MiFIR classes will not be forced into alignment and it consequently means that there may be contracts that are mandatorily clearable but which do not become subject to the trading obligation, as is the position in the US (ISDA MiFID II Discussion Paper Submission of 31 July 2014).

 

The issue of trading obligation on regulated markets, MTFs or OTFs in principle relates to derivatives as a whole, emissions derivatives including (the relevant provisions of MiFIR are placed under the heading: “Derivatives”). 

 

 

 

Derivatives' trading obligation preconditions

 

Before being considered for the trading obligation, any class (or sub-class) of derivatives must pass three tests:

 

1) clearing test - be subject to the clearing obligation under EMIR,

 

2) venue test - be traded on at least one trading venue, and

 

3) liquidity test - be considered sufficiently liquid to trade only 'on venue'. 

 

 

Entities covered

 

 

MiFIR specifies that subject to the trading obligation will be transactions concluded between:

 

(1) financial counterparties as defined by the EMIR Regulation (in Article 2(8)), broadly investments firms and credit institutions, and

 

(2) non-financial counterparties that meet the conditions stipulated by EMIR to be covered by the clearing obligation (referred to in Article 10(1b) thereof) i.e. in brief, when the rolling average speculative positions (as opposed to hedging, that is “which are not objectively measurable as reducing risks directly relating to the commercial activity or treasury financing activity of the non-financial counterparty”) over 30 working days exceed the clearing threshold.

 

When it comes to the scope covered by point 2 above, i.e. non-financial counterparties above the clearing threshold, trading obligation goes beyond the traditional domain of financial legislation. However, such an extension can be seen as a landmark of a post-crisis era, where not purely financial, but systemically important entities, are put into the area of financial regulators' attention.

 

Trading obligation is thus among the points where MiFID II imposes legal requirements on entities not being classical financial institutions.

 

The consequence of such an approach is, however, that contracts concluded by the above entities with, for instance, NFCs- are clearly beyond the scope of the new requirement.

 

 

The substance of the trading obligation

 

 

The trading obligation as designed by MiFIR consists in the requirement placed on counterparties to conclude relevant transactions only on:

 

1) regulated markets,

 

2) MTFs,

 

3) OTFs or

 

4) third country trading venues (subject to the European Commission decision on equivalence and reciprocity).

 

Covered transactions encompass the trades with other such financial counterparties or NFCs+ in derivatives pertaining to a class of derivatives that has been declared subject to the trading obligation by the European Commission in accordance with the special procedure and listed in the register set by ESMA.

 

Hence, the focus is on regulatory technical standards (see Discussion Paper, The trading obligation for derivatives under MiFIR, 20 September 2016, ESMA/2016/1389) and the contracts potentially endangered in the first place are those subjected to EMIR clearing obligation.

 

The trading obligation may relate to classes of derivatives as well as individual derivative contracts.

 

Intra-group transactions and transactions referred to in the transitional provisions of EMIR (Article 89) are not covered.

 

 

Cross-border application

 

 

MiFIR determines that the trading obligation applies to third-country entities, that would be subject to the clearing obligation if they were established in the Union, which enter into derivative transactions pertaining to a class of derivatives that has been declared subject to the trading obligation, provided that the contract has a direct, substantial and foreseeable effect within the Union or where such obligation is necessary or appropriate to prevent the evasion of any provision of the MiFIR.

 

What is covered by this enigmatic legal formula is specified in more concrete way in the level 2 legislation - Commission Delegated Regulation (EU) 2017/579 of 13.6.2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council on markets in financial instruments with regard to regulatory technical standards on the direct, substantial and foreseeable effect of derivative contracts within the Union and the prevention of the evasion of rules and obligations.

 

The said delegated Regulation of 13.6.2016 specifies the types of contracts with third country counterparties that are subject to the trading obligation, as well as the cases where the trading obligation is necessary and appropriate to prevent avoidance of the provisions in MiFIR.

 

These rules are mostly identical to the Commission Delegated Regulation (EU) No 285/2014 adopted under Article 4(4) of EMIR, which specifies the types of contracts with third country counterparties that are subject to the clearing obligation as well as the cases where the clearing obligation is necessary and appropriate in the cross-border application.

 

Given both regulations governing the clearing and the trading obligations, when it comes to cross-border effects, are in the intrinsic relationship, legislators saw no reasons to have in each area divergent premises and thresholds.

 

Also the technical terms necessary for a comprehensive understanding of the technical standards have the same meaning in both delegated regulations.

 

One thing is particularly important in the application of the said delegated Regulation of 13.6.2016.

 

Article 33(3) of the MiFIR states that the conditions laid down in Articles 28 and 29 of that Regulation (governing the trading and clearing obligations) are deemed to be fulfilled when at least one of the counterparties is established in a country for which the European Commission has adopted an implementing act declaring equivalence in accordance with Article 33(2) of MiFIR.

 

Therefore, the the said delegated Regulation of 13.6.2016 also applies to contracts where both counterparties are established in a third country whose legal, supervisory and enforcement arrangements have not yet been declared equivalent to the requirements laid down in that Regulation.

 

The said Commission Delegated Regulation of 13.6.2016 refers specifically to:

 

- guarantees provided on a cross-border basis by financial counterparties established in the European Union,

 

- OTC derivative contracts concluded between the European Union branches of financial counterparties established in third countries,

 

- indicators of the evasion of rules.

 

The pertinent provisions are quoted in the boxes below.

 

 

 

Cross-border guarantees

 

Recital 5 and Article 1 and Article 2(1) - (5) of the Commission Delegated Regulation of 13.6.2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council on markets in financial instruments with regard to regulatory technical standards on the direct, substantial and foreseeable effect of derivative contracts within the Union and the prevention of the evasion of rules and obligations

 

Recital 5

OTC derivative contracts concluded by entities established in third countries covered by a guarantee provided by entities established in the Union create a financial risk for the guarantor established in the Union. Given that the risk would depend on the size of the guarantee granted by financial counterparties in order to cover OTC derivative contracts and given the interconnections between financial counterparties compared to non-financial counterparties, only OTC derivative contracts concluded by entities established in third countries that are covered by a guarantee which exceeds certain quantitative thresholds and is provided by financial counterparties established in the Union should be considered as having a direct, substantial and foreseeable effect in the Union.

 

Article 1 and Article 2(1) - (5)

 

Article 1
Definitions

 

For the purposes of this Regulation the following definition shall apply:
'guarantee' means an explicitly documented legal obligation by a guarantor to cover payments of the amounts due or that may become due pursuant to the OTC derivative contracts covered by that guarantee and entered into by the guaranteed entity in favour of the beneficiary where there is a default as defined in the guarantee or where no payment has been effected by the guaranteed entity.

 

Article 2
Contracts with a direct, substantial and foreseeable effect within the Union

 

1. An OTC derivative contract shall be considered as having a direct, substantial and foreseeable effect within the Union when at least one third country entity benefits from a guarantee provided by a financial counterparty established in the Union which covers all or part of its liability resulting from that OTC derivative contract, to the extent that the guarantee meets both following conditions:

 

(a) it covers the entire liability of a third country entity resulting from one or more OTC derivative contracts for an aggregated notional amount of at least EUR 8 billion or the equivalent amount in the relevant foreign currency, or it covers only a part of the liability of a third country entity resulting from one or more OTC derivative contracts for an aggregated notional amount of at least EUR 8 billion or the equivalent amount in the relevant foreign currency divided by the percentage of the liability covered;

 

(b) it is at least equal to 5 per cent of the sum of current exposures, as defined in Article 272(17) of Regulation (EU) No 575/2013 of the European Parliament and of the Council5, in OTC derivative contracts of the financial counterparty established in the Union issuing the guarantee.

 

2. When the guarantee is issued for a maximum amount which is below the threshold set out in paragraph 1(a), the contracts covered by that guarantee shall not be considered to have a direct, substantial and foreseeable effect within the Union unless the amount of the guarantee is increased, in which case the direct, substantial and foreseeable effect of the contracts within the Union shall be re-assessed by the guarantor against the conditions set out in points (a) and (b) of paragraph 1 on the day of the increase.

 

3. Where the liability resulting from one or more OTC derivative contracts is below the threshold set out in paragraph 1(a), such contracts shall not be considered to have a direct, substantial and foreseeable effect within the Union even where the maximum amount of the guarantee covering such liability is equal to or above the threshold set out in paragraph 1(a) and even where the condition set out in paragraph 1(b) has been met.

 

4. In the event of an increase in the liability resulting from the OTC derivative contracts or of a decrease of the current exposure, the guarantor shall re-assess whether the conditions set out in paragraph 1 are met. Such assessment shall be done respectively on the day of the increase of liability for the condition set out in paragraph 1(a), and on a monthly basis for the condition set out in paragraph 1(b).

 

5. OTC derivative contracts for an aggregate notional amount of at least EUR 8 billion or the equivalent amount in the relevant foreign currency concluded before a guarantee is issued or increased, and subsequently covered by a guarantee that meets the conditions set out in paragraph 1, shall be considered as having a direct, substantial and foreseeable effect within the Union.

 

 

 

 

Cross-border branches

 

Recital 6 and Article 2(6) of the Commission Delegated Regulation of 13.6.2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council on markets in financial instruments with regard to regulatory technical standards on the direct, substantial and foreseeable effect of derivative contracts within the Union and the prevention of the evasion of rules and obligations

 

Recital 6


Financial counterparties established in third countries can enter into OTC derivative contracts through their Union branches. Given the impact of the activity of those branches on the Union market, OTC derivative contracts concluded between those Union branches should be considered to have a direct, substantial and foreseeable effect within the Union.

 

Article 2(6)

 

An OTC derivative contract shall be considered as having a direct, substantial and foreseeable effect within the Union where the two entities established in a third country enter into the OTC derivative contract through their branches in the Union and would qualify as financial counterparties if they were established in the Union.

 

 

 

 

Prevention of the evasion of rules

 

Article 3 of the Commission Delegated Regulation of 13.6.2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council on markets in financial instruments with regard to regulatory technical standards on the direct, substantial and foreseeable effect of derivative contracts within the Union and the prevention of the evasion of rules and obligations

 

Article 3
Cases where it is necessary or appropriate to prevent the evasion of rules or obligations provided for in Regulation (EU) No 600/2014

 

1. An OTC derivative contract shall be deemed to have been designed to circumvent the application of any provision of Regulation (EU) No 600/2014 if the way in which that contract has been concluded is considered, when viewed as a whole and having regard to all the circumstances, to have as its primary purpose the avoidance of the application of any provision of that Regulation.

 

2. For the purposes of paragraph 1, a contract shall be considered as having for primary purpose the avoidance of the application of any provision of Regulation (EU) No 600/2014 if the primary purpose of an arrangement or series of arrangements related to the OTC derivative contract is to defeat the object, spirit and purpose of any provision of Regulation (EU) No 600/2014 that would otherwise apply including when it is part of an artificial arrangement or artificial series of arrangements.

 

3. An arrangement that intrinsically lacks business rationale, commercial substance or relevant economic justification and consists of any contract, transaction, scheme, action, operation, agreement, grant, understanding, promise, undertaking or event shall be considered an artificial arrangement. The arrangement may comprise more than one step or part.

 

 

 

Register for classes of derivatives declared subject to the trading obligation

 

 

The register for classes of derivatives declared subject to the trading obligation will be published and maintained by ESMA on its website.

 

The said register will specify the derivatives that are subject to the obligation to trade, the venues where they are admitted to trading or traded, and the dates from which the obligation takes effect.

 

 

Trading obligation procedure

 

 

General rules for identifying derivatives that will be subject to the trading obligation are stipulated in Article 32 of MiFIR (see box below).

 

As the Level 1 regulation is rather laconic with respect to specificities of the new framework, the details are further specified in secondary legislation.

 

The emphasis is placed on regulatory technical standards (developed by ESMA) to determine the following:

 

(1) which of the class of derivatives declared subject to the clearing obligation must be traded on the venues referred to above;

 

(2) the date or dates from which the trading obligation takes effect, including any phase in and the categories of counterparties to which the obligation applies.

 

Public consultation is envisioned before ESMA’s submitting the draft regulatory technical standards to the European Commission for adoption.

 

The prerequisites for the trading obligation to take effect are:

 

(1) the class of derivatives or a relevant subset thereof must  be admitted to trading on a regulated market or must be traded on at least one regulated market, MTF or OTF, and

 

(2) the class of derivatives or a relevant subset thereof must be considered sufficiently liquid.

 

ESMA sees its role mostly to "respond to decisions taken under the clearing obligation".

 

It is noteworthy, Article 32(4) of MiFIR empowers ESMA to identify and notify to the European Commission also on its own initiative the classes of derivatives or individual derivative contracts that should be subject to the trading obligation but for which no CCP has yet received authorisation under EMIR or which are not admitted to trading or traded on a trading venue.

 

Following the notification, the European Commission may publish a call for development of proposals for imposing the trading obligation on those derivatives.

 

ESMA's Discussion Paper of 20 September 2016, The trading obligation for derivatives under MiFIR (ESMA/2016/1389) contains in this regard an important information that "at this stage, ESMA does not intend to identify on its own initiative classes of derivatives that meet the conditions in Article 32(4) of MiFIR and should be subject to the trading obligation. This is without prejudice that ESMA may use this possibility at a later point in time if considered necessary."

 

 

 

 

Article 32 of MiFIR 

Trading obligation procedure

 

1. ESMA shall develop draft regulatory technical standards to specify the following:

(a) which of the class of derivatives declared subject to the clearing obligation in accordance with Article 5(2) and (4) of Regulation (EU) No 648/2012 or a relevant subset thereof shall be traded on the venues referred to in Article 28(1) of this Regulation;

(b) the date or dates from which the trading obligation takes effect, including any phase-in and the categories of counterparties to which the obligation applies where such phase-in and such categories of counterparties have been provided for in regulatory technical standards in accordance with Article 5(2)(b) of Regulation (EU) No 648/2012.

ESMA shall submit those draft regulatory technical standards to the Commission within six months after the adoption of the regulatory technical standards in accordance with Article 5(2) of Regulation (EU) No 648/2012 by the Commission.

Before submitting the draft regulatory technical standards to the Commission for adoption, ESMA shall conduct a public consultation and, where appropriate, may consult third-country competent authorities.

Power is conferred to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1095/2010.

 

2. In order for the trading obligation to take effect:

(a) the class of derivatives pursuant to paragraph 1(a) or a relevant subset thereof must be admitted to trading or traded on at least one trading venue as referred to in Article 28(1), and

(b) there must be sufficient third-party buying and selling interest in the class of derivatives or a relevant subset thereof so that such a class of derivatives is considered sufficiently liquid to trade only on the venues referred to in Article 28(1).

 

3. In developing the draft regulatory technical standards referred to in paragraph 1, ESMA shall consider the class of derivatives or a relevant subset thereof as sufficiently liquid pursuant to the following criteria:

(a) the average frequency and size of trades over a range of market conditions, having regard to the nature and lifecycle of products within the class of derivatives;

(b) the number and type of active market participants including the ratio of market participants to products/contracts traded in a given product market;

(c) the average size of the spreads.

In preparing those draft regulatory technical standards, ESMA shall take into consideration the anticipated impact that trading obligation might have on the liquidity of a class of derivatives or a relevant subset thereof and the commercial activities of end users which are not financial entities.

ESMA shall determine whether the class of derivatives or relevant subset thereof is only sufficiently liquid in transactions below a certain size.

 

4. ESMA shall, on its own initiative, in accordance with the criteria set out in paragraph 2 and after conducting a public consultation, identify and notify to the Commission the classes of derivatives or individual derivative contracts that should be subject to the obligation to trade on the venues referred to in Article 28(1), but for which no CCP has yet received authorisation under Article 14 or 15 of Regulation (EU) No 648/2012 or which is not admitted to trading or traded on a trading venue referred to in Article 28(1).

Following the notification by ESMA referred to in the first subparagraph, the Commission may publish a call for development of proposals for the trading of those derivatives on the venues referred to in Article 28(1).

 

5. ESMA shall in accordance with paragraph 1, submit to the Commission draft regulatory technical standards to amend, suspend or revoke existing regulatory technical standards whenever there is a material change in the criteria set out in paragraph 2. Before doing so, ESMA may, where appropriate, consult the competent authorities of third countries. Power is conferred to the Commission to adopt regulatory technical standards referred to in this paragraph in accordance with Articles 10 to 14 of Regulation (EU) No 1095/2010.

 

6. ESMA shall develop draft regulatory technical standards to specify the criteria referred to in paragraph 2(b).

ESMA shall submit drafts for those regulatory technical standards to the Commission by 3 July 2015.

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1095/2010.

 

 

 

Criteria for determining whether derivatives subject to the clearing obligation should be subject to the trading obligation 

 

 

Commission Delegated Regulation (EU) 2016/2020 of 26.5.2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council on markets in financial instruments with regard to regulatory technical standards on criteria for determining whether derivatives subject to the clearing obligation should be subject to the trading obligation provides clarity in the determination of a class of derivatives or relevant subset thereof which is sufficiently liquid, in particular, through specifying some metrics for indication of the level of third-party buying and selling interest (Article 1), and in particular:

 

- the average frequency of trades (Article 2),

 

- average size of trades (Article 3),

 

- number and type of active market participants (Article 4), and

 

- average size of spreads (Article 5).

 

Where the ESMA has established that a class of derivatives should be subject to the clearing obligation under EMIR and that the derivatives are admitted to trading or traded on a trading venue, ESMA should follow the criteria stipulated in the said Regulation to determine whether the derivatives or subset thereof are considered sufficiently liquid to trade exclusively on trading venues.

 

ESMA's preliminary assessments in that regard can be found in the Discussion Paper, The trading obligation for derivatives under MiFIR of 20 September 2016 (ESMA/2016/1389).

 

 

Application of the derivatives trading obligation to package transactions

 


Derivatives' industry identified concerns regarding package transactions comprised of at least one components subject to the derivatives trading obligation and of at least one other component.

 

The scale of the problem is underlined by the "enormous number of conceivable permutations including but not limited to packages consisting of cash equities, cash bonds, exchange traded derivatives, and all other types of OTC derivative (including those subject to mandatory clearing under EMIR, those not subject to mandatory clearing but otherwise generally accepted for clearing at several CCPs, and those not clearable at any CCP" - see the above-mentioned ISDA MiFID II Discussion Paper Submission).

 

It was observed that the simultaneous execution of a package with a single counterparty using a single execution method alleviates the timing and mechanical risks and lowers bid/offer costs to those of the intended risk of the package.

 

Exposing one component transaction to the derivatives trading obligation will jeopardise the ability of market participants to execute the entire package, particularly where no trading venue offers trading in the intended package


In turn, inability to execute packages will result in significantly increased costs and risks to market participants. These costs and risks ISDA sees primarily in three sources:

 

1) separately trading the components of a packaged tansaction incurs the possibility of the market moving between executions of each component because such executions cannot be precisely time-matched,

 

2) there are likely to be differences in contract specifications, mode of execution, clearing/settlement workflows and relative liquidity when components of a packaged transaction are executed separately and/or on different venues, and 

 

3) accessing different sources of liquidity for the various components when traded across different venues or over-the- counter incurs additional bid/offer spreads.

 

Inevitably, ESMA in its draft MiFID/MiFIR implementing legislation need to pay special attention to package transactions in the context of trading obligation and to propose solutions that will not inadvertently increase market risks.

 

 


 

 

 

Conclusions on trading obligation for derivatives

 

 

To summarise this part of trading obligation considerations, MiFIR framework requires clearing eligible and sufficiently liquid derivatives to trade on a trading venue.

 

The only derivatives contracts that will in future continue to trade OTC are those that do not meet the test of being ‘clearing eligible and sufficiently liquid’.

 

In effect of EMIR and MiFIR legal developments, the entire set of to-date OTC derivatives contracts is categorised into mutually interlinked subsets of:

 

(1) classes of derivatives declared subject to the clearing obligation, and

 

(2) classes of derivatives declared subject to the trading obligation.

 

The former of the above groups will inevitably be more spacious.

 

Moreover, finalizing subordinate legislation on the trading obligation for derivatives will be closely interlocked with OTF developments (necessary for passing trading venue and liquidity tests).

 

Another aspect are dynamic adjustments of both a clearing and trading obligations to fluctuating market arrangements and conditions with regard to trading venues compositions and liquidity flows.

 

EU law-making process may occur not entirely fit-for-purpose in that regard, due to its potential delays in issuing or adjusting the relevant regulatory technical standards.

 

ESMA made an interesting observation that this might lead to a de facto ban on trading in an instrument, if it was no longer capable of trading on venues, but was required to do so by the trading obligation.

 

ESMA also noted the risks involved in the potentially misaligned lists of contracts subject to the clearing and the trading obligations.

 

The emphasis should be placed, therefore, on ensuring that the trading obligation is only applied to derivatives where reasonable expectation exists to remain liquid in the foreseeable perspective taking into account variable market conditions and an instrument life cycle.

 

Furthermore, it seems that it would be useful for market participants to incorporate in their IT trading infrastructure feeds from ESMA’s website registers for the above categories in order, for instance, automatically stop any potential OTC trading that would infringe on the class of derivatives declared subject to the regulated market trading obligation.

 

 

Date from which the trading obligation will take effect and phase-in

 

 

Article 32(1)(b) of MiFIR requires ESMA to specify the dates from which the trading obligation takes effect, including any phase-in and the categories of counterparties to which the obligation applies, where such phase-in and such categories of counterparties are envisioned in the regulatory technical standards pertinent to EMIR.

 

The earliest date from which the trading obligation can apply is the date of application of MiFIR, i.e. 3 January 2018.

 

Important considerations are:

 

- trading obligation must be aligned with the clearing obligation, and

 

- mandatory trading with respect to a class of derivatives should not apply to a category of counterparties prior to such category of counterparties being subject to mandatory clearing with respect to that class of derivatives.

 

Given the regulatory technical standards on the clearing obligation provide for a phase-in for different categories of counterparties, it is considered necessary to ensure that the trading obligation applies at the earliest from the date the respective counterparty is subject to the clearing g obligation.

 

Regulatory technical standards (RTS) adopted so far for the purposes of the clearing obligation provide, in particular, for a phase-in for four different categories of counterparties which covers a period of three years following the entry into force of the RTS.

 

 

Dates at which the the trading obligation will take effect - earliest application dates

    

 OTC derivatives class 

Counterparty 

Category 1  

Counterparty

Category 2 

Counterparty

Category 3

 

Counterparty 

Category 4

 

 IRD (EUR, GBP, JPY, USD)

 

03 January 2018

 

03 January 2018

 03 January 2018

 21 December 2018 

IRD (NOK, PLN, SEK)

03 January 2018

 03 January 2018  09 February 2018    09 July 2019
Credit derivatives

 

03 January 2018

 

03 January 2018

09 February 2018

09 May 2019

  

 

ESMA considers applying the same categories of counterparties for the purpose of the trading obligation.

 

It is to be considered yet whether to provide for some longer phase-in periods for operational reasons.

 

It is argued, this may be necessary as counterparties that will be subject to the trading obligation may require sufficient lead time to update their systems and procedures to comply, to ensure connection to trading venues etc.

 

 

Trading obligation for investment firms for shares and equity like instruments

 

 

The entirely separate point is MiFIR requirement imposed only on MiFID-licensed investment firms.

 

Such firms must ensure that the trades they undertake in shares admitted to trading on a regulated market or traded on a trading venue take place on:

1) a regulated market,

2) MTF or

3) systematic internaliser, or

4) a third-country trading venue assessed as equivalent in accordance with Article 25(3)(a) of MiFID II Directive, as appropriate;

unless their characteristics include that they:

- are non-systematic, ad-hoc, irregular and infrequent, or

- are carried out between eligible and/or professional counterparties and do not contribute to the price discovery process.

 

Moreover, an investment firm that operates an internal matching system which executes client orders in shares, depositary receipts, exchange-traded funds, certificates and other similar financial instruments on a multilateral basis must ensure it is authorised as an MTF under MiFID II Directive and comply with all relevant provisions pertaining to such authorisations.

 

As in the previous case of derivatives' trading obligation, the central role in implementation of the new requirement will be places on ESMA, which has been assigned the task to develop draft regulatory technical standards specifying the particular characteristics of those transactions in shares that do not contribute to the price discovery process as referred to above, taking into consideration cases such as:

a) non-addressable liquidity trades; or

b) where the exchange of such financial instruments is determined by factors other than the current market valuation of the financial instrument.

 

Further procedure envisions ESMA submitting those draft regulatory technical standards to the European Commission, which, in turn, is delegated power to adopt the relevant RTS.

 

 

Documentation

 

 

Commission Delegated Regulation (EU) 2017/579 of 13 June 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council on markets in financial instruments with regard to regulatory technical standards on the direct, substantial and foreseeable effect of derivative contracts within the Union and the prevention of the evasion of rules and obligations, OJ L 87, 31.3.2017, p. 189–192

  

Commission Delegated Regulation (EU) 2016/2020 of 26 May 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council on markets in financial instruments with regard to regulatory technical standards on criteria for determining whether derivatives subject to the clearing obligation should be subject to the trading obligation, OJ L 313, 19.11.2016, p. 2-5

 

Discussion Paper, The trading obligation for derivatives under MiFIR, 20 September 2016, ESMA/2016/1389

 

 

Attachments

 

1. extracts from the ESMA's Consultation Paper – Annex B Regulatory technical standards on MiFID II/MiFIR of 19 December 2014 ESMA/2014/1570, p. 196-200 and 201-206 (respectively):

 

- Draft regulatory technical standards on criteria for determining whether derivatives should be subject to the trading obligation,

- Draft regulatory technical standards on criteria for determining whether derivatives have a direct, substantial and foreseeable effect within the EU;

 

2. extracts from the ESMA's regulatory technical and implementing standards – Annex I, 28 September 2015 (ESMA/2015/1464), p. 186-192 and 193-199 (respectively): 

 

- Draft regulatory technical standards on criteria for determining whether derivatives should be subject to the trading obligation,

 

- Draft regulatory technical standards on criteria for determining whether derivatives have a direct, substantial and foreseeable effect within the EU.

 

 

 

 

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Attachments:
FileDescriptionFile sizeLast Modified
Download this file (Draft regulatory technical standards on criteria for determining whether derivat)RTS trading obligation criteria for derivatives - draft December 2014Draft regulatory technical standards on criteria for determining whether derivatives should be subject to the trading obligation185 Kb20/11/15 22:38
Download this file (Draft regulatory technical standards on criteria for determining whether derivat)RTS direct substantial foreseeable effect within the EU - draft December 2014Draft regulatory technical standards on criteria for determining whether derivatives have a direct, substantial and foreseeable effect within the EU186 Kb14/05/16 14:44
Download this file (rts trading obligation.pdf)RTS trading obligation criteria for derivatives - draft September 2015Draft regulatory technical standards on criteria for determining whether derivatives should be subject to the trading obligation296 Kb14/05/16 15:03
Download this file (rts cross-border.pdf)RTS direct substantial foreseeable effect within the EU - draft September 2015Draft regulatory technical standards on criteria for determining whether derivatives have a direct, substantial and foreseeable effect within the EU296 Kb14/05/16 15:02

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