On September 20, the European Securities and Markets Authority (ESMA) published a discussion paper (Discussion Paper) on mandatory trade execution obligations for derivatives under the Markets in Financial Instruments Regulation (MiFIR).
Articles 28 and 32 of MiFIR establish an obligation for certain over-the-counter (OTC) derivative transactions to be concluded on a regulated market, multilateral trading facility, organized trading facility or a trading venue in a third country that is declared equivalent under MiFIR (Trading Obligation). The Trading Obligation is closely connected to the clearing obligation for derivatives under the European Market Infrastructure Regulation (EMIR), such that once a transaction is subject to clearing under EMIR, ESMA is required to determine which classes of those derivatives should be subject to the Trading Obligation. MiFIR also restricts the Trading Obligation to apply only to classes of derivatives that are: 1) admitted to trading or traded on at least one trading venue (the Trading Venue Test); and 2) sufficiently liquid and have sufficient third-party buying and selling interest (the Liquidity Test).
ESMA’s latest Discussion Paper is divided into nine sections, which cover the development of trading obligations in other jurisdictions (including the United States, Japan and Switzerland), the clearing obligation in the European Union, the Trading Venue test, liquidity assessment and the Liquidity Test, and proposed implementation and phase-in dates for the Trading Obligation (among others). Notably, ESMA has included a summary table of the dates when the Trading Obligation will apply and has proposed for the Trading Obligation to apply to the same four categories of counterparties identified for the clearing obligation under EMIR. ESMA has proposed for the Trading Obligation to apply to counterparties in EMIR categories 1 and 2, trading interest rate derivatives (in major currencies and other currencies) and/or credit derivatives, from January 3, 2018 (the MiFIR application date and the earliest date for the EMIR clearing obligation to go into effect).
Comments on the Discussion Paper must be submitted to ESMA by November 21. ESMA expects to publish a further consultation paper in the first quarter of 2017, and to submit draft technical standards to the European Commission in mid-2017.
For more information on the Trading Obligation and the development of categories of counterparties under EMIR, see our Corporate & Financial Weekly Digest edition of June 17, 2016 and August 7, 2015 (respectively).
The Discussion Paper is available here, and ESMA’s accompanying press release is available here.