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 (MiFIR Article 24(1)).
MiFIR draft text enclosed to the Report of the Committee on Economic and Monetary Affairs Rapporteur Markus Ferber on the proposal for a regulation of the European Parliament and of the Council on markets in financial instruments and amending Regulation [EMIR] on OTC derivatives, central counterparties and trade repositories(COM(2011)0652 –C7-0359/2011 – 2011/0296(COD)) of 27 September 2012 (Report) confirms the basic points for the new financial market infrastructure in that regard.
The issue of trading obligation on regulated markets, MTFs or OTFs does not obviously relate only to emissions derivatives but to derivatives as a whole (Article 24 of MiFIR is placed in MiFIR’s Title V under the heading: “Derivatives”, it seems that ultimately the scope for revised MiFID will be relevant), however, given the current structure of emission trading volumes (where the spot plays only minor part) and future plans to classify emission allowances as financial instruments, it is recommended for far-sighted carbon market participants to monitor legal developments in that regard (cause the appropriate internal procedures must be implemented, as always, on time).
Article 24 of the MiFIR draft as worded by the Report (hereinafter referred to as: “MiFIR”) specifies that subject to this obligation will be:
(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 threshold.
The content of the trading obligation
The trading obligation as drafted by MiFIR consists in that relevant counterparties must conclude relevant transactions only on regulated markets, MTFs, OTFs (but in relation to OTF only where the derivative is not admitted to trading on a regulated market or traded on an MTF) or 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 other non-financial counterparties as indicated above 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.
The exceptions to the said rule pose intragroup transactions and transactions covered by the transitional provisions of EMIR (I don’t enter into details for these exceptions in this place).
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 in the website form.
The register pursuant to MiFIR will specify ‘in an exhaustive and unequivocal manner’, 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.
The ESMA’s register for classes of derivatives declared subject to the trading obligation inevitably must be regularly verified by market participants since there has been an obligation placed on ESMA to monitor the activity in derivatives market and identify cases where a particular class of contracts may pose systemic risk as well as to prevent regulatory arbitrage between derivative transactions subject to the trading obligation and the ones which are not.
Trading obligation procedure
Level 1 regulation is rather laconic with respect to specificities of the new obligation. The emphasis is placed on regulatory technical standards (to be developed by ESMA and adopted by European Commission) 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 Commission for adoption.
The prerequisites in the matter are that in order for the trading obligation to take effect:
(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.
It follows that in effect of EMIR and MiFIR legal developments from the entire set of to-date OTC derivatives contracts there can be differentiated 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.
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.