On September 29, the European Securities and Markets Authority (ESMA) published the text of the final draft regulatory technical standards (TO RTS) for implementing the mandatory trading obligation under the Markets in Financial Instruments Regulation (MiFIR) for certain standardized over-the-counter (OTC) derivatives. Article 28 of MiFIR mandatory trade execution obligations affect OTC Derivatives that are subject to mandatory clearing under the European Markets Infrastructure Regulation (EMIR), have been entered into between certain types of counterparties and that have been determined to be subject to the mandatory trading obligation.
The TO RTS affect this final criterion in regards to certain interest rate swaps (IRS) and credit default swaps (CDS). For the trading obligation to take effect, MiFIR requires that an OTC derivative subject to mandatory clearing be admitted to trading, or traded, on at least one European trading venue, and also be sufficiently liquid to be restricted to trading on a trading venue. The final report accompanying the TO RTS—as well as the earlier consultation paper—focuses primarily on a liquidity assessment of the IRS and CDS under consideration. Notably, ESMA has determined to expand the classes of IRS that were originally proposed to be subject to the trading obligation, based on industry feedback, as well as to better align the European approach with the trade execution requirements in the United States.
The TO RTS propose applying the mandatory trading obligation to fixed-to-floating IRS denominated in Euros (with the floating leg referenced to three-month or six-month EURIBOR); US dollars (with the floating leg referenced to three-month or six-month USD LIBOR); and Sterling (with the floating leg referenced to three-month or six-month GBP LIBOR); in all cases on a constant notional basis and without optionality. The obligation also applies to two, three, four, five, six, seven, 10, 15, 20 and 30-year tenors in all cases, with 12-year tenors also included for the IRS denominated in US dollars and a portion of the IRS denominated in Euros. The TO RTS also propose to apply the mandatory trading obligation to the iTraxx Europe Main and iTraxx Europe Crossover index CDS for the on-the-run and first off-the-run series with five-year tenors.
The European Commission must now endorse the TO RTS. It is expected that such endorsement will be forthcoming, in which case the TO RTS will take effect on January 3, 2018. There will be no transitional implementation period for the largest market participants—designated as “Category 1” and “Category 2” for purposes of EMIR’s mandatory clearing requirements—who will need to comply with the trading obligation from the date the TO RTS take effect. By contrast “Category 3” counterparties will have until June 21, 2019, to comply with the trading obligation for all in-scope IRS and CDS, and “Category 4” counterparties will have until December 21, 2018, to comply with the trading obligation for in-scope IRS and May 9, 2019, for in-scope CDS.
The TO RTS are available here.