In her speech at IDX 2015 this week, Verena Ross, Executive Director, European Securities and Markets Authority, addressed the two major EU legislative projects affecting derivatives trading: MiFID II and EMIR.
Here we present some of the key issues she highlighted.
1. MiFID II timeframe and technical standards
- The decisive date for application of MiFID II remains 3 January 2017
- During the summer, ESMA’s draft technical standards will be legally reviewed before final and formal submission
- At the end of September 2015, ESMA expects to submit its draft technical standards for formal adoption by the European Commission (EC)
- The technical standards should become applicable in the second half of 2016
- For the trading obligation, ESMA wants a different timing solution, the obligation will “in any case not apply any earlier than 3 January 2017”.
2. The transparency regime for derivatives
- Ross noted ESMA is taking on board some key concerns raised in public consultations that “triggered significant changes” while finalising the RTS. We will have to wait to see what these significant changes will be exactly, but the problems Ross specifically mentioned were on:
Data issues: Although only trade repositories (TRs) have comprehensive information on OTC derivatives, the quality of reporting by firms is still poor. The use of data from TRs is, at this point, considered to be of “too low a quality and not granular enough” and even “after performing intense cleaning, suffers currently from deficiencies”. ESMA argues, however, that data will improve once MiFID II applies and more sources will become available.
Liquid market concept: Stakeholders support the COFIA approach proposed by ESMA, but ask for more granularity and higher liquidity thresholds to avoid false positives problems. Stakeholders also favoured replacing the static approach with an approach better capable of reflecting the dynamic market environment for derivatives.
Calibration of SSTI and LIS thresholds: Consultation responses point to the need to set different thresholds for pre and post-trade purposes and to improve the methodology for setting the SSTI-threshold.
Package transactions: ESMA understands concerns to exempt package transactions from the transparency regime, but the possibilities of introducing such a regime are limited.
3. Position limits for commodity derivatives (ESMA’s “snake in the tunnel approach”)
- Ross argued that the EU’s position limits regime will be the “most ambitious and comprehensive” in the world.
- She described ESMA’s approach as one where the methodology has to allow enough flexibility for the competent authorities to set limits on a vast array of contracts, but these would have to be set in a consistent way to “reach similar levels for similar contracts“.
- The final approach and quantitative limits in ESMA’s draft RTS may still change based on feedback from the consultations.
4. Designing the trading obligation for derivatives
- The implementation of the trading obligation is “a technically complex and data intensive challenge” for ESMA
- The trading obligation will not apply until 3 January 2017
- ESMA will: (1) look at the classes of derivatives declared subject to the clearing obligation, (2) check whether those classes are already traded on-venue and (3) perform a liquidity test
- If the class of derivatives is sufficiently liquid, it will be subject to the trading obligation
- For interest rate derivatives, ESMA will be required to conduct a liquidity assessment, conduct a public consultation and draft technical standards in the second half of 2015
- However, ESMA will not have the data to make its first assessments and is proposing a different timing solution.
5. Proposals for mandatory clearing (EMIR)
- The mandatory clearing obligation will be implemented in Europe in the coming months, beginning with:
– A clearing obligation on several classes of interest rate swaps (IRS) denominated in EUR, GBP, JPY and USD.
– This is likely to be followed by a clearing obligation for IRS denominated in Czech, Danish, Hungarian, Norwegian, Polish and Swedish currencies.
– At a later stage, ESMA also expects to put forward a proposal on mandatory clearing on certain CDS indices.
– Furthermore, ESMA is considering whether a clearing obligation will also be proposed for non-deliverable forwards (NDFs).
6. EMIR reporting rules
- ESMA is reviewing reporting rules to improve them by:
– Clarifying the description and purpose of certain reportable fields
– Aligning existing fields to the reporting logic prescribed in the Q&A document, or to reflect specific ways of populating them
– Introducing a number of new fields and values to reflect market practice of trading in specific derivative contracts or accommodate specific regulatory requirements.
- However, Ross emphasised that despite this review reporting parties “need to comply with those [rules] that are actually in force”.