European Securities and Markets Authority Issues Opinion on Application of MiFIR Trading Obligation to Package Orders

The European Securities and Markets Authority has published an Opinion on the treatment of package orders in the context of the trading obligation for derivatives under the Markets in Financial Instruments Regulation. The trading obligation requires that the trading of certain derivatives must take place on a regulated market, multilateral trading facility, organised trading facility or on an equivalent third-country trading venue.

Package orders are used by investment firms and their clients to conduct trades for risk management and hedging purposes. They are composed of two or more financial instruments that are priced as a single unit. The execution of each component is simultaneous and contingent upon on the execution of all the other components. Under MiFIR, the trading obligation is designed to apply at instrument level, not package level – the obligation attaches to the components of a package, but not to the package as a whole. Difficulties may arise where a package order contains a mixture of instruments, where some are subject to the trading obligation while others are not.

ESMA considers that the components of a package need to be executed on a trading venue only where it is feasible to do so without creating undue operational or execution risk. ESMA sets out three scenarios where the execution should take place on a trading venue:

• all components of the package are subject to the trading obligation;
• at least one component is subject to the trading obligation and all other components are subject to the clearing obligation for derivatives; or
• at least one component is an interest rate swap subject to the trading obligation and all other components are government bonds denominated in the same currency.

ESMA did not have a specific mandate to issue guidance on the application of the trading obligation in the context of package orders. However, due to concerns among national regulators and market participants that the trading obligation might be applied inconsistently and a recommendation from the European Parliament that the European Commission and ESMA might consider providing further clarification in this area, ESMA decided to publish the Opinion to ensure consistent approaches and consistent supervision across the EU.

View the Opinion.