The European Securities and Markets Authority (ESMA) has published a discussion paper on the trading obligation for derivatives under the Markets in Financial Instruments Regulation (MiFIR).

The application of the trading obligation is defined by Article 32 of MiFIR which outlines the process for deciding which derivatives should be declared subject to mandatory trading. According to Article 32(1) of MiFIR once a class of derivatives has been mandated as subject to the clearing obligation under the European Market Infrastructure Regulation (EMIR), ESMA must determine whether those derivatives (or a subset of them) should be subject to the trading obligation, meaning they can only be traded on a regulated market, multilateral trading facility, organised trading facility or a third country trading venue deemed to be equivalent by the European Commission. Article 32(2) of MiFIR specifies that whether or not a class of derivatives subject to the clearing obligation should also be made subject to the trading obligation will be determined by two tests:

  • the venue test: the class of derivatives must be admitted to trading or traded on at least one admissible trading venue; and
  • the liquidity test: whether the derivatives are ‘sufficiently liquid’ and there is sufficient third party buying and selling interest.

The discussion paper includes options on how to determine the trading obligation by applying both of the above tests, including an initial liquidity assessment on the basis of trading data for the six month to end-2015.

In the discussion paper, at paragraph 5, ESMA states that the legislative deadline of when to prepare the standards for the trading obligation has not been amended in the context of the overall delay of MiFID II. However, the application of any trading obligation standard has been affected by the MiFID II delay so that any trading obligation can at the earliest only apply from 3 January 2018. ESMA therefore considers that a better regulatory approach to finalise its legislative project is to draft the trading obligation standards closer to the application date of MiFID II, to ensure that the standards give an up to date picture of the liquidity in derivatives classes based on data that has been collected reasonably close to 3 January 2018.

Article 32(4) of MiFIR empowers ESMA to identify and notify to the Commission on its own initiative the classes of derivatives or individual derivative contracts that should be subject to the trading obligation but for which no central counterparty has yet received authorisation under EMIR or which are not admitted to trading or traded on a trading venue. Following the notification, the Commission may publish a call for development of proposals for imposing the trading obligation on those derivatives. At this stage, ESMA does not intend to identify on its own initiative classes of derivatives that meet the conditions in Article 32(4) of MiFIR and should be subject to the trading obligation. This is without prejudice that ESMA may use this possibility at a later point in time if considered necessary.

The deadline for comments on the discussion paper is 21 November 2016. ESMA will use the feedback to continue working on implementing MiFIR’s trading obligation and, if deemed appropriate, draft technical standards specifying which derivatives should be subject to the trading obligation.

View ESMA consults on trading obligation for derivatives, 21 September 2016