The MiFIR Trading Obligation: Interest Rate Swaps and Credit Default Swaps
ESMA has published a final report setting out its draft regulatory technical standards (“RTS”) specifying the trading obligation for classes of interest rate swaps and credit default swaps, under the Markets in Financial Instruments Regulation 600/2014 (“MiFIR”).
According to the draft RTS, the following classes of derivatives will be subject to the trading obligation:
- 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.
According to the draft RTS, the trading obligation will apply from the later of the following dates:
the date the draft RTS start to apply (possibly 3 January 2018, see below); or
the date for which the clearing obligation takes effect in relation to a category of counterparties in accordance with the European Commission Delegated Regulations setting out the EMIR clearing obligation for interest rate swaps1 and credit default swaps2 respectively.
As the clearing obligation has already entered into effect for the following categories pursuant to the draft RTS those categories of counterparties could be subject to the trading obligation from 3 January 2018:
Category 1 - clearing members of a recognised or authorised central counterparty; and
Category 2 - financial counterparties as defined in EMIR, and alternative investment funds as defined in the Alternative Investment Fund Managers Directive that are non-financial counterparties as defined in EMIR, which belong to a group whose aggregate month-end average of outstanding gross notional amount of non-centrally cleared derivatives meets specified thresholds.
As set out in our earlier briefing (here), MiFIR requires certain classes of derivatives transactions to be traded on a regulated market, multilateral trading facility, organised trading facility or certain third country (ie, non-EU) trading venues.
To be subject to the trading obligation a derivative must be part of a class of derivatives that has been declared subject to the clearing obligation under the European Markets Infrastructure Regulation 648/2012 (“EMIR”).
MiFIR provides that once a class of derivatives has been declared subject to the EMIR clearing obligation, ESMA has six months to decide whether that class of derivatives should also be required to be traded on a trading venue when traded by relevant counterparties. In order for the trading obligation to apply, the relevant class of derivatives must be sufficiently liquid and must be available for trading on at least one trading venue.
The European Commission now has three months in which to endorse the draft RTS, starting from 28 September 2017. If it decides to endorse the draft RTS, the Commission will adopt a delegated regulation which will then need to be considered by the European Parliament and the EU’s Council of Ministers.
While ESMA envisages that the trading obligation will take effect on 3 January 2018, the same date as MiFIR, this obviously depends on the draft RTS being in place by that date.
You may access the draft RTS (here).
- European Commission Delegated Regulation (EU) 2016/592 applies the clearing obligation to Untranched iTraxx Index CDS (Main, EUR, 5Y) and Untranched iTraxx Index CDS (Crossover, EUR, 5Y).
- European Commission Delegated Regulation (EU) 2015/2205 applies the clearing obligation to fixed to float interest rate swaps, float to float swaps, forward rate agreements and overnight index swaps.
This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.
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