A short overview of the final draft of the ESMA RTS on derivatives trading obligation submitted to the European Commission for endorsement on 28 September 2017.
The European Securities and Markets Authority (ESMA) has published its final draft Regulatory Technical Standards (RTS) in respect of the MiFIR derivatives trading obligation, which will bring into effect the obligation to trade certain interest rate derivatives and credit default derivatives on EU and recognised non-EU trading venues. This follows the public consultation held between September 2016 and July 2017.
The RTS has been submitted to the European Commission, which has up to three months in which to decide whether or not to endorse it. If it does, it is then passed to the European Parliament and Council for the usual non-objection period. Assuming it passes both these processes, it will then be published in the Official Journal and enter into force on the following day.
The RTS states that it will apply from 03 January 2018, so there appears to be an expectation that the derivatives trading obligation will apply from that date (although only to those counterparties in respect of which the EMIR clearing obligation is already live - ie Category 1 and 2 entities). However, it remains to be seen whether, as a practical matter, the RTS will complete the relevant legislative process in time and ESMA also notes that it is “not opposed” to a short phase-in period for the trading obligation of up to three months.
The final proposal is that the following products will be subject to the derivatives trading obligation (being a sub-set of the products subject to the clearing obligation under EMIR):
- Fixed-to-float interest rate swaps denominated in EUR
- Fixed-to-float interest rate swaps denominated in USD
- Fixed-to-float interest rate swaps denominated in GBP, and
- Index CDS - iTraxx Europe Main and iTraxx Europe Crossover.
Like the EMIR clearing obligation, the MiFIR derivatives trading obligation will apply to the relevant derivatives that are entered into between financial counterparties and non-financial counterparties above the clearing threshold (or their “hypothetical” equivalents, where one counterparty is outside the EU).
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