ESMA finalises MiFID II’s derivatives trading obligation

September, 2017

The European Securities and Markets Authority (ESMA) has issued today its final draft Regulatory Technical Standard (RTS) implementing the trading obligation for derivatives under the Markets in Financial Instruments Regulation (MiFIR). ESMA’s draft RTS provides the implementing details for on-venue trading of interest rate swaps (IRS) and credit default swaps (CDS).

Steven Maijoor, ESMA Chair, stated: “This MiFIR standard marks the last step in moving trading in liquid derivatives onto organised venues, being one of the key G20 commitments. On-venue trading, together with central clearing, will improve the transparency in European derivatives markets, mitigate systemic risk, and protect investors against market abuse.”

MiFIR’s trading obligation will move over-the-counter (OTC) trading in liquid derivatives onto organised 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.

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; and
  • Index CDS – iTraxx Europe Main and iTraxx Europe Crossover.

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), organised trading facility (OTF) or an equivalent third-country trading venue.

Next steps
ESMA’s draft RTS have been submitted to the European Commission (EC) today for its endorsement. The Commission expressed to ESMA its strong commitment to apply the trading obligation from the start date of the MiFID II framework. ESMA has therefore maintained 3 January 2018 as the envisaged date of application.