European regulator looks at execution of on-exchange derivatives on different venues

As the European rulings on electronic trading continue to become ever more evolved in the advent of the full implementation of the Markets in Financial Instruments Directive (MiFID II), the European Securities and Markets Authority (ESMA) has issued its perspective on exchange-traded derivatives (ETDs) and how these are executed in relation to similar products on […]

regulation

As the European rulings on electronic trading continue to become ever more evolved in the advent of the full implementation of the Markets in Financial Instruments Directive (MiFID II), the European Securities and Markets Authority (ESMA) has issued its perspective on exchange-traded derivatives (ETDs) and how these are executed in relation to similar products on different exchanges, and the swapping of data.

Five years ago, the Dodd-Frank Act Wall Street Reform Act in the United States set in place full infrastuctural and execution requirements for all exchange-traded derivatives, with ESMA following suit, albeit some considerable time later.

ESMA has ruled that it sees no need to temporarily exclude exchange-traded derivatives (ETDs) from non-discriminatory access to central counterparties (CCPs) and trading venues, which will be introduced by the (MiFID II) and Regulation (MiFIR). MiFIR requires ESMA to assess whether ETDs should be exempted for a period of 30 months from the non-discriminatory access provisions.

ESMA’s analysis found that open access to ETDs does not create undue risks to the overall stability and orderly functioning of European financial markets. As potential risks relating to open access are already addressed by the legislative frameworks of MiFID II, MiFIR and EMIR – the European Markets Infrastructure Regulation – ESMA proposed to the European Parliament and Council not to introduce an ETD specific phase-in regarding the access provisions of MiFID II.

Steven Maijoor, ESMA Chair, stated:

“Trading venues and CCPs are important market infrastructures and crucial for well-functioning EU capital markets. Strengthening competition and choice between venues and CCPs is an important step to further the integration of the EU’s capital markets. The open access provisions of MiFID II will help to achieve these goals for all instruments without creating undue risks to stability.”

According to ESMA, this means that trading venues can clear their trades at the CCP of their choice and CCPs can access trade feeds from trading venues.

Trading venues and CCPs may, however, deny access under certain circumstances as well as National Competent Authorities (NCAs) may refuse access to a particular CCP or trading venue. This is the case where granting such access would require an interoperability agreement for ETDs, or threaten the smooth and orderly functioning of the market – in particular due to liquidity fragmentation – or affect systemic risk.

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