September 29, 2017

ESMA issued the final draft regulatory technical standard implementing the trading obligation for derivatives under the Markets in Financial Instruments Regulation (MiFIR). The draft regulatory standard provides the implementing details for on-venue trading of interest rate swaps (IRS) and credit default swaps (CDS). This draft standard has been submitted to EC for its endorsement. EC has expressed, to ESMA, its strong commitment to apply the trading obligation from the start date of the MiFID II framework. Therefore, ESMA envisages January 03, 2018 to be the application date.

MiFIR, which implements parts of the MiFID II framework, outlines the process for determining which derivatives should be traded on-venue. The trading obligation only applies to classes of derivatives that are sufficiently liquid and available for trading on at least one trading venue. Therefore, ESMA has decided to make the following fixed-to-float IRS and CDS indices subject to on-venue trading:

 
  • Fixed-to-float interest rate swaps denominated in EUR
  • Fixed-to-float interest rate swaps denominated in USD
  • Fixed-to-float interest rate swaps denominated in GBP
  • Index CDS – iTraxx Europe Main and iTraxx Europe Crossover

Under MiFIR, trading obligation will move over-the-counter (OTC) trading in liquid derivatives onto organized venues. Trading derivatives on-venue will bring transparency into the OTC sphere, benefiting investors and regulators alike. Enhanced transparency will provide better information on prices, liquidity, and risk, thus fostering market integrity. The trading obligation for derivatives under MiFIR is closely linked to the clearing obligation under the European Market Infrastructure Regulation (EMIR). Once a class of derivatives needs to be centrally cleared under EMIR, ESMA must determine whether these derivatives, or a subset of them, should be mandatorily traded on-venue on a regulated market (RM), multilateral trading facility (MTF), organized trading facility (OTF), or an equivalent third-country trading venue.

 

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Effective Date: January 03, 2018

Keywords: Europe, EU, Securities, Trading Obligation, MiFID/MiFIR, OTC Derivatives, On-Venue Trading, IRS, CDS, ESMA

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