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Exchange-traded derivative (ETD)
European Union Electricity Market Glossary

 

 

'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).

 

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.

 

 

 

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

 

 

 

 

 

 

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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

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

 

 

 

 

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Last Updated on Friday, 05 July 2019 13:25
 

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