Shearman & Sterling LLP | Financial Regulatory Developments Focus | <span >European Commission Considers it Unnecessary to Exclude Exchange-Traded Derivatives From the Open Access Provisions of MiFIR</span >
Financial Regulatory Developments Focus
  • European Commission Considers it Unnecessary to Exclude Exchange-Traded Derivatives From the Open Access Provisions of MiFIR

    The European Commission has published a Report to the European Parliament and the Council recommending that Exchange-Traded Derivatives (ETDs) do not need to be excluded from the scope of the provisions of the Markets in Financial Instruments Regulation that provide for open and non-discriminatory access to CCPs and to trading venues.
    The Commission has based its findings on a risk assessment carried out by the European Securities and Markets Authority in conjunction with the European Systemic Risk Board. The ESRB and ESMA published the outcomes of their assessment in February and April 2017 respectively. Both bodies concluded that there was no need to temporarily exclude ETDs from the scope of the access provisions.
    Providing open and non-discriminatory access to CCPs is intended to ensure that trading venues will be able to have their trades cleared at the CCP of their choice. Open and non-discriminatory access to trading venues will enable CCPs to clear trades concluded on the trading venues of their choice, which will in turn allow the members of a trading venue to select the CCP they wish to use for clearing. The intended aim of the provisions is to strengthen competition between venues and CCPs, to reduce costs for end-investors and to put an end to discriminatory practices that exist both at CCP and venue level.  However, these provisions are controversial since they also mean that valuable intellectual property and IT systems developed by exchanges effectively must be given away to competitors or new market entrants. The open access requirements have been argued to make the EU unattractive as a location for exchange businesses due to commercial disadvantages that result for those exchanges which have successfully invested in innovation.
    The Commission's Report considers the potential risks of allowing MiFIR's open access provisions to apply to ETDs, given the complexity that these instruments entail due to their long maturities and leverage effects. At the CCP level, the Report concluded that application of the open access provisions to ETDs may increase concentration risk and even, at its extreme, create a single point of failure in the event that one CCP becomes the single place for central clearing. It could also increase operational risk arising from, for example, increased trading volumes and complexity. For trading venues, applying the open access provisions to ETDs could also increase operational risk. Further risks may also arise from the multiplication of interoperability arrangements, which could substantially raise the level of complexity in the overall risk management of interoperable CCPs. There is scant discussion on the policy implications of these rules, which is a result of the scope of the review.
    After examining the risks, the Commission has concluded that there are sufficient safeguards in the current regulatory framework to address appropriately the risks that may arise in respect of ETDs. The Commission notes that the European Market Infrastructure Regulation already applies open access provisions to OTC derivatives, which are generally less standardized and more complex than ETDs at an EU-wide level. EMIR applies strict conduct of business, operational and prudential requirements to CCPs, as well as establishing macro-prudential rules for their treatment. MiFIR will provide another safeguard by allowing CCPs, trading venues and national regulators to deny access should the CCP, the trading venue or the market be put at risk. The Commission therefore concludes that there is no need for a temporary exclusion of the open access provisions for ETDs.

    View the Commission Report.