OTC derivatives
European Union Electricity Market Glossary

 


 

 

Over-the-counter (OTC) derivatives are privately negotiated and not traded on a regulated exchanges such as regulated markets.

 

OTC derivatives are generally less standardised and more complex than Exchange-Traded Derivatives (ETDs).

 

They may be bought for a variety of reasons, for example, they may work as a hedge for a particular position in the balance sheet, or might have been taken with the intent of benefiting from market movements.

 

OTC derivatives therefore have a significant impact on the real economy, from mortgages to food prices.

 

The definition of "OTC derivative" is not harmonised at a global level and varies among jurisdictions (Technical Guidance, Harmonisation of the Unique Transaction Identifier, Committee on Payments and Market Infrastructures, Board of the International Organization of Securities Commissions, February 2017, p. 6).

 

When it comes to the European Union legal framework, pursuant to Article 2(7) of EMIR Regulation, OTC derivatives are defined as derivatives contracts whose execution does not take place on a regulated market (or on a third-country market considered as equivalent to a regulated market in the prescribed manner).

 

ESMA has acknowledged in its Questions and Answers that under EMIR derivatives contracts whose execution takes place on Multilateral Trading Facility (MTF) and Organised Trading Facility (OTF) are OTC derivatives.

 

Article 2(7) of EMIR

 

'OTC derivative' or 'OTC derivative contract' means a derivative contract the execution of which does not take place on a regulated market as within the meaning of Article 4(1)(14) of Directive 2004/39/EC or on a third-country market considered as equivalent to a regulated market in accordance with Article 19(6) of Directive 2004/39/EC

 

 

The European Securities and Markets Authority (ESMA) in the Q&As on EMIR Implementation OTC Q.1(d) indicated some 'OTC derivatives' terminology complexities:

 

"Derivatives transactions, such as block trades, which are executed outside the trading platform of the regulated market, but are subject to the rules of the regulated market and are executed in compliance with those rules, including the immediate processing by the regulated market after execution and the clearing by a CCP, should not be regarded as OTC derivatives transactions.

 

Therefore, these transactions should not be considered for the purpose of the clearing obligation and the calculation of the clearing threshold by NFC that only relates to OTC derivatives.


Derivatives transactions that do not meet the conditions listed in the first paragraph of this sub-answer (d) should be considered OTC. For example, derivatives contracts that are not executed on a regulated market and are not governed by the rules of an exchange at the point of execution should be considered OTC even if after execution they are exchanged for contracts traded in a regulated market. However, the replacement contract itself may be considered exchange traded if it meets the relevant conditions."

 

 

Recital 2 of the 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

 

Regulation (EU) No 648/2012 sets out that derivatives are considered to be executed on an OTC basis when they are not traded on, or not subject to the rules of, a regulated market, whereas the definition of derivatives executed over-the-counter (OTC) under Directive 2014/65/EU of the European Parliament and of the Council is narrower, comprising derivatives not traded on, or not subject to the rules of, a regulated market, MTF or Organised Trading Facility (OTF).

 

Derivative contracts executed on a third-country market which has been considered to be equivalent to an EU regulated market by the European Commission in accordance with Article 2a of EMIR, are not OTC derivatives under EMIR and do not count for the purpose of the determination of the clearing threshold under Article 10 of EMIR.

 

However, derivative contracts executed on third-country markets which have not been considered to be equivalent to an EU regulated market, will count for the determination of the clearing threshold.

 

Article 2a states that the European Commission shall publish a list of those markets that are to be considered to be equivalent.

 

ESMA maintains on its website a consolidated list of third-country markets that have been considered to be equivalent to an EU regulated market for the purpose of the OTC derivative definition under EMIR (see here the list of non-EU exchanges equivalent to a regulated market).

 

The comparison of the meaning of the term: "OTC derivative" under EMIR on the one hand, and the MiFIR on the other, exhibits some nuances - MiFIR meaning being narrower than the EMIR one (see box).

 

Under EMIR derivatives are considered to be executed on an OTC basis when they are not traded on, or not subject to the rules of, a regulated market.

 

In turn, the definition of derivatives executed over-the-counter (OTC) under MiFID II comprises derivatives not traded on, or not subject to the rules of, a regulated market, multilateral trading facility (MTF) or organised trading facility (OTF).

 

The European derivatives are traded mainly OTC. According to the 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. 11) the OTC derivatives market is dominated:

 

- by interest rate derivatives (IRD) - when measured by outstanding notional amounts (75% of the volumes), 

 

- by foreign-exchange (36%), interest rates (28%), and equity (23%) - when measured by outstanding number of trades.

 

The ESMA Report on Trends, Risks and Vulnerabilities No. 2. 2017 “EU derivatives markets ─ a first-time overview” (ESMA50-165-421, p. 8) notes that the OTC transactions are predominant on FX, credit and interest rate derivatives markets.

 

A significant share of the OTC derivative market will eventually be brought to central clearing as a result of the clearing obligation gradually entering into force in Europe.

 

The OTC character of the product has several implications in particular as regards specific risks. Among them are:

 

- a counterparty risk,


- principal-to-principal contracts are concluded once the the position is opened, which means the position will have to be closed with the same counterparty,


- the risks of leveraged trading, both in a normal trading environment and in stressed market conditions, particularly for CFDs and rolling spot forex,


- further specific risks for CFDs and rolling spot forex such as negative price movement in the underlying can potentially lead to a margin call and the subsequent triggering of an automated margin close-out of positions.

 

See, moreover, general remarks on the 'OTC' notion, including, among others the REMIT Regulation context (having its specificities).

  

Commission Delegated Regulation (EU) 2017/104 of 19 October 2016 amending Delegated Regulation (EU) No 148/2013 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards on the minimum details of the data to be reported to trade repositories prescribes the following EMIR reporting format for OTC derivatives (Field 15 of the Table 2 (Common data)):

 

- where a contract was concluded OTC and the respective instrument is admitted to trading or traded on a trading venue, the MIC code 'XOFF' should be used;

 

- where a contract was concluded OTC and the respective instrument is not admitted to trading or traded on a trading venue, the prescribed MIC code is 'XXXX'.

 

Gross notional value of the global over-the-counter derivatives market amounted to US$544trn in the first six months of 2016, a 10% increase over the previous six months but down from US$696trn three years earlier. 62% of OTC derivatives notional was cleared through central counterparties as of June 2016. OTC derivatives market is dominated by interest rate derivatives with gross notionals totaling US$438trn at the end of June 2016 (Derivatives-Swaps notional jumps to US$544trn in first half - BIS).

 

As of end-June 2016, the outstanding notional of OTC derivatives amounted to USD 544.1 trillion, corresponding to 89% of the overall derivatives market (Bank for International Settlements, Triennial Central Bank Survey - OTC derivatives positions at end-June 2016, Table 1, Monetary and Economic Department, 11 December 2016).

 

 

 

 

 

Availability of exchanges and trading platforms for execution of OTC derivatives transactions in FSB member jurisdictions

 

Source: OTC Derivatives Market Reforms Twelfth Progress Report on Implementation, Financial Stability Board, 29 June 2017, p. 66, 67

 

China 

 

China Foreign Exchange Trade System – IR, FX, CR

 

EU

 

A list of regulated markets in the EU can be found here:

https://registers.esma.europa.eu/publication/searchRegist er?core=esma_registers_mifid_rma

 

A list of MTFs in the EU can be found here: 

https://registers.esma.europa.eu/publication/searchRegist er?core=esma_registers_mifid_mtf

 

France 

 

Euronext is licensed to offer services EQ derivative and CO derivatives.


Powernext is also licenced to offer services on natural gas derivatives.

 

Germany

 

Chicago Mercantile Exchange (CME) - CO, IR, CR

Chicago Board of Trade (CBOT) - CO, IR, CR

360 Treasury Systems - FX

 

Italy

 

Chicago Mercantile Exchange, Inc.

New York Mercantile Exchange – NYMEX

CO Exchange - COMEX

 

Spain

 

MEFF

 

 UK  

UK BGC Brokers LP – IR, FX, CR
Baltex Freight Derivatives Market – CO
Bloomberg Trading Facility Limited – IR, CR, FX, CO GFI CreditMatch – CR
GFI ForexMatch – FX
GFI EnergyMatch – CO
GFI RatesMatch – IR
ICAP Global Derivatives Limited – IR
ICAP Europe MTF – IR
ICAP Energy MTF – CO
ICAP Securities – CR
ISWAP Euro Limited – IR
MarketAxess Europe Limited – IR
NEX SEF Ltd - FX
Reuters Transaction Services Limited – FX

SpectronLive Trayport – CO

TPEnergy - Tullett Prebon (Europe) Limited – CO

TPTradeBlade - Tullett Prebon (Europe) Limited – FX

Tradition Energy – CO VolBroker – FX

TPCRDeal - Tullett Prebon (Securities) Limited – CR

TPForwardDeal - Tullett Prebon (Europe) Limited – FX

TPSwapDeal - Tullett Prebon (Europe) Limited – IR

Trad-X – IR Tradeweb/The Tradeweb System – IR

TPEnergyTrade - Tullett Prebon (Europe) Limited – CO

 

Argentina

 

Mercado Abierto Electrónico

 

Australia 

Bloomberg Tradebook: CO, CR, EQ, FX, IR

BGC Brokers LP: CR, IR, FX
BrokerTech Europe Limited: FX
CRex Brokerage LLP: CR
Currenex: CO, FX
EBS Service Company Limited: FX

EquiLend LLC: EQ
GFI Brokers: FX, CR
GFI Swaps Exchange LLC: CR, IR, FX
GFI Group Pte Ltd: IR , CO, FX, EQ
ICAP Brokers: CR , IR
ICAP Europe: FX
ICAP Securities: CR, IR
Integral Development Corp: FX
Mercari Pty Ltd: CO, FX, IR
Reuters Transaction Services: CO, FX, IR

State Street Bank & Trust Company: FX

TFS-ICAP Ltd: FX
TradeWeb Europe Limited: CR, EQ, IR
Tullet Prebon (Singapore) Limited: FX, CO

Tullet Prebon (Australia) Limited: CR, IR, FX

Yieldbroker Pty Ltd: IR, CR
360 Treasury Systems: FX, IR
Tri-Optima AB Sweden: CR, IR, FX

 

Canada   

BGC Derivatives Markets, L.P.

Bloomberg SEF LLC
GFI Swaps Exchange LLC

ICAP SEF (US) LLC
ICAP Global Derivatives Ltd.

ICE Swap Trade LLC
INFX SEF Inc.
Javelin SEF LLC
LatAm SEF LLC

MarketAxess SEF Corporation

SwapEx LLC
Tera Exchange LLC
Thomson Reuters (SEF) LLC

tp SEF Inc.
Tradition SEF, Inc.
TW SEF LLC
360 Trading Networks, Inc.

  

 India

 

Anonymous System for Trading in Rupee OTC Interest Rate Derivatives (ASTROID)

 

Japan 

 

Bloomberg Tradebook Japan Limited

Tradeweb Europe Ltd.(Tokyo branch)

BGC Capital Markets, LLC.(Tokyo branch)

Ueda Tradition Securities Ltd.
Totan ICAP Co., Ltd.
Tullett Prebon ETP (Japan) Limited
Clear Markets Japan, Inc.

 

 Mexico  

Mexico Enlace Int,

S.A. de C.V. Remate Lince,
S.A. de C.V. SIF Icap,
S.A. de C.V. Tradition Services,
S.A. de C.V. GFI Group México,
S.A. de C.V. Mercado Electrónico Institucional, 

S.A. de C.V Tullett Prebon México, S.A. de C.V.

 

 Russia

 

Moscow Exchange MICEX-RTS (MOEX)

 

Switzerland

 

Eurex Zürich AG

 

US

 

Permanent Registration

 

Bloomberg SEF LLC (IR, CR, FX, CO)

DW SEF LLC (IR, EQ)
TW SEF LLC (IR, CR)
trueEx LLC (IR)

MarketAxess SEF Corporation (CR)
GFI Swaps Exchange LLC (IR, CR, FX, EQ, commodities)
SwapEx LLC (FX)
Javelin SEF, LLC (IR)
ICE Swap Trade LLC (CR, CO)
tpSEF Inc. (IR, CR, FX, EQ, CO)
360 Trading Networks, Inc. (FX)
ICAP SEF (US)
LLC (IR, CR, FX, EQ, CO)
BGC Derivatives Markets, L.P. (IR, CR, FX, EQ,CO)

Thomson Reuters (SEF) LLC (FX)
Tradition SEF, Inc. (IR, CR, FX, EQ, CO)
Chicago Mercantile Exchange, Inc. (CO)
LatAm SEF, LLC (FX)
ICAP Global Derivatives Limited (IR)
TeraExchange LLC (IR, CR, FX)
GTX SEF LLC (FX)
Clear Markets North America, Inc. (IR)
FTSEF LLC (FX)
Seed SEF LLC (expected to list commodities swaps)

LedgerX LLC (expected to list commodities swaps)

 

Temporary Registration or No-action relief

 

NEX SEF Limited (expected to list FX)

The CFTC has also granted conditional relief to

Yieldbroker Pty Limited (expected to list FX)

 

 

 

The legal, supervisory and enforcement arrangements applicable in the USA for OTC derivative contracts are laid down in title VII of the Dodd Frank Wall Street Reform and Consumer Protection Act (‘Dodd-Frank Act’) and in the specific implementing rules adopted by the Commodity Futures Trading Commission (‘CFTC Regulations’).

 

The Dodd-Frank Act, which entered into force in July 2010, established a new regulatory framework for certain OTC derivatives defined as swaps in section 1a(47) of the Commodity Exchange Act (‘CEA’), aiming at reducing systemic risk, increasing transparency and promoting market integrity within the financial system.

 

The CFTC has jurisdiction over swaps and most of the operative provisions of title VII of the Dodd-Frank Act became applicable in 2011 (Recital 6 of the Commission Implementing Decision (EU) 2017/1857 of 13 October 2017 on the recognition of the legal, supervisory and enforcement arrangements of the United States of America for derivatives transactions supervised by the Commodity Futures Trading Commission as equivalent to certain requirements of Article 11 of Regulation (EU) No 648/2012 of the European Parliament and Council on OTC derivatives, central counterparties and trade repositories).

 

 



Last Updated on Thursday, 02 November 2017 23:09
 

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