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MiFIR trading obligation Post-It

ESMA has published the official register for the Trading Obligation for derivatives under MiFIR.  Although not quite in time for the commencement of the obligation, the register lays out: the derivatives classes subject to the obligation, the applicable trading venues, jurisdictions for which equivalence has been granted and the start dates for Categories 1-4. The register will be maintained and updated as changes are made. Subject to the caveat that ESMA frequently changes its URLs without notice, market participants should bookmark the Register’s address as the authoritative reference. There are no changes to the asset classes specified in the final draft RTS of September 2017:

  • 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

US SEFs and DCMs are curently the only 3rd country venues to have equivalent status.

A brief primer on the trading obligation for those readers rendered punch drunk by the estimated 1.7 million paragraphs of MiFID 2/MiFIR texts-

MiFIR implements a G20 commitment absent from EMIR to mandate the trading of standardised derivatives on authorised exchanges and electronic platforms by requiring certain derivatives to be traded on a RM, MTF or OTF or their recognised third country equivalents. The obligation has a wider scope than is typical under MiFID II, applying with extraterritorial effect to third country entities that would be classified as FC or NFC+ under EMIR if they:

  • trade with in-scope EU entities;or
  • their transactions could have a “direct, substantial and foreseeable effect within the EU”; or
  • their inclusion is necessary to prevent evasion of the obligations under MiFIR

The precondition for the trading mandate is that the derivatives must be traded on at least one trading venue and be considered to be sufficiently liquid, taking into account:

  • the average frequency and size of trades over a range of market conditions
  • the number and type of active market participants and the average size of spreads

ESMA must also consider the likely impact of listing a derivative on its liquidity and the commercial activity of end users, and may determine that a particular derivative is only sufficiently liquid in transactions below a certain size. Note that ESMA does have the power to ignore the above, subjecting classes of derivatives which are currently purely OTC to the trading obligation.

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