FIA and ISDA (together the Associations) recently responded to the European Commission’s consultation paper on the review of the regulatory framework for investment firms and market operators under MiFID II/R. The consultation was based on the requirements to carry out a post-implementation review of MiFID II.
Overall, the Associations’ members took a neutral position when it comes to rating the current operational MiFID regime, noting that much of the significant cost to implement changes has already been incurred. Market participants have consistently reported outstanding problems associated with the implementation of complex data and reporting rules and the calibration of transparency since the implementation of the framework. In addition, there are opportunities to streamline aspects of the investor protection rules, where certain obligations are currently applied to wholesale market participants.
Commodities
The Associations continue their support for a reform of the position limits regime by removing the limits for new and illiquid contracts. Instead, limits should focus on key critical contracts, and the Associations further suggest an expansion of the hedging exemption to financial counterparties. Regarding pre-trade transparency, we propose changes to Level 1 and Level 2. Several illiquid commodity contracts were categorised as liquid under the current rules and we advocate for a more tailored approach for commodity derivatives.
Consolidated tape
It is not clear that a consolidated tape would provide a significant improvement for derivatives and on market participants’ current visibility of trading data in ETDs. Delivery of a consolidated tape would not solve the problem of market data costs, and could in fact increase costs to market participants, especially those who will still require low-latency data. Therefore, members do not support a mandatory consumption of a consolidated tape. Members believe that the development of an EU consolidated tape should focus in the first instance on equities and bonds, for which there is a clearer use case. A standardisation of data submission (frequency, content and format) is essential as well as the reduction of market data costs and the administrative burden of reporting entities. Increasing data quality without further increasing associated costs of consuming data is a precondition to make this economically viable.
Post-trade transparency regime for non-equities
FIA and ISDA recommend harmonising the current post-trade deferral regime. A reduction or a deletion of the post-trade deferrals would lead to a decrease in market liquidity and higher costs to end-users. The post-trade transparency regime should remain carefully calibrated and no changes should be made without a robust cost and benefit analysis.
Derivatives Trading Obligation
Four series of adjustments are necessary to make the derivatives trading obligation more meaningful with respect to the functioning of markets and for consistency with other EU legislation:
- Amend article 28 of MIFIR to clarify that the scope of transactions subject to the DTO under MiFIR should be a subset of transactions subject to the Clearing Obligation (CO) under EMIR. This approach would generate greater legal clarity with respect to whether contracts could be subject to the DTO while also providing alignment on a more dynamic basis, i.e. amendments to the scope of the CO or relevant Level 2 legislation would be reflected in the scope of the DTO.
- Establish a Derivatives Trading Obligation suspension power, under a pre-defined mechanism and pre-defined criteria, to allow ESMA and the European Commission to swiftly react to unforeseeable market disruptions.
- Clarify that the introduction of benchmarks fallback clauses (under article 28(2) of the EU Benchmarks regulation) in legacy contracts do not trigger application of the Derivatives Trading Obligation.
- Provide equivalence decisions for trading venues in jurisdictions that already apply derivatives trading obligations.
Non-discriminatory access
The majority of members are in favour of retaining the open access provisions. These members noted that the risks are already adequately provided for in the regulation on the basis that financial stability concerns, will clearly be taken into account when determining the equivalence mechanics under Article 38, and also when determining whether a particular set up should be permitted under Articles 35 and 36. However, the Associations’ members are opposed to relaxing the rules and protections to facilitate open access. The opposing view would opine that while open access in exchange-traded derivatives might in theory be able to work, it carries significant potential risks for clearing members, CCPs and consequently for financial stability due to the view taken that some of the open access provisions in MIFIR may create conflict with the risk management provisions embedded in EMIR. Further, there are operational unknowns, as members are unable to comment in general terms ex ante on whether specific operational or technological questions arise in respect of all possible access models that might be proposed by venues and CCPs.
Foreign exchange (FX)
FIA and ISDA support GFXD’s response and consider that the inclusion of Spot FX instruments in the scope of MiFID II/MiFIR framework would significantly and negatively affect this market.
