EU Final Draft Technical Standards on the Trading Obligation for Derivatives Published

The European Securities and Markets Authority has published a final Report and final draft Regulatory Technical Standards on the trading obligation for derivatives under the Markets in Financial Instruments Regulation. The trading obligation is applicable to classes of derivatives that: (i) have been declared subject to the clearing obligation under the European Market Infrastructure Regulation, (ii) are admitted to trading or traded on at least one EU trading venue (a regulated market, multilateral trading facility, organized trading facility or a third country equivalent trading venue) and (iii) are sufficiently liquid. The trading obligation will apply to financial counterparties and to non-financial counterparties. Where ESMA determines that a class of derivatives should be subject to the MiFIR trading obligation, third country trading venues would only be permissible for trading by EU entities when determined to be equivalent by the European Commission.

The final draft RTS on the trading obligation provide for the trading obligation to apply to fixed-to-float interest rate swaps denominated in euros, US dollars and pound sterling and to index credit default swaps (iTraxx Europe Main and iTraxx Europe Crossover). The trading obligation for both IRS and CDS will apply from January 3, 2018, unless the clearing obligation for a particular class of derivatives has not yet entered into force.

The Report sets out ESMA's responses to feedback on the trading obligation proposals published by ESMA in June 2017. ESMA has confirmed that, where exemptions from the clearing obligation are available under EMIR, the same exemptions will apply to the trading obligation for derivatives. ESMA will respond to requests for clarification on the treatment of packaged trades under the trading obligation by preparing a number of Q&As.

ESMA also noted that the trading obligation will be affected by the UK's exit from the EU. However, the final draft RTS have been prepared on the basis of the existing situation albeit that some amendments may be needed in the future.

By way of background, the related clearing obligation applies to IRS denominated in seven currencies (EUR, GBP, JPY, USD, NOK, PLN and SEK) and to two classes of CDS indices (iTraxx Europe Main and iTraxx Europe Crossover). The obligation to clear OTC IRS denominated in all seven currencies is in force for clearing members of EU CCPs as well as large financial counterparties and alternative investment funds. The IRS clearing obligation will apply to small financial counterparties and AIFs from June 21, 2019 and to non-financial counterparties from December 21, 2018 for IRS denominated in the G4 currencies, and from August 9, 2019 for IRS denominated in CZK, DKK, HUF, NOK, SEK and PLN. The CDS clearing obligation is in force for clearing members of EU CCPs, large financial counterparties and AIFs. It applies to non-financial counterparties from May 9, 2019 and to small financial counterparties and AIFs from June 21, 2019.

The final draft RTS have been submitted to the European Commission for consideration. Because these are only draft RTS, they are yet to become law.  It is to be noted that the European Commission has not yet issued any equivalence determinations for purposes of the trading obligation. As a result, it is possible that the final RTS and such equivalence determinations would be coordinated in their timings.

View the Report and final draft RTS on the trading obligation.

View ESMA's consultation paper on the trading obligation.