The International Swaps and Derivatives Association (ISDA) has published a paper which aims to help inform the on-going European Council discussions on MiFID 2/MiFIR.
Pre-trade transparency for non-equities trading venues
ISDA has welcomed the re-worked pre-trade transparency waiver framework for non-equity instruments, and particularly the addition of an explicit waiver for derivatives which are not subject to the trading obligation. It has also welcomed the new provisions allowing for the temporary suspension of these pre-trade transparency requirements in certain situations. It has however, reiterated its view that there should be clearer recognition of the importance of Request-For-Quote or voice trading for OTC derivatives markets.
Systematic internalisation in non-equities instruments
ISDA is of the opinion that uncleared OTC derivatives transactions should not be subject to the requirement that a firm provide one client’s quote to other clients allowing them to transact on that basis. ISDA argues that it would be extremely undesirable from a risk management perspective if a firm were required to provide the same price to all clients for uncleared OTC derivatives transactions, given that such transactions are priced according to the credit risk of an individual client.
ISDA also feels that new language regarding quoting on illiquid instruments should be removed because it is unclear.
Derivatives trading obligation
ISDA is generally supportive of the provisions dealing with the obligation to trade particular OTC derivatives on an organised trading venue. Specifically, it has welcomed the proposed approach to assessing liquidity, including the reference to the nature and lifecycle of products within the class of derivatives. However, the paper highlights the need for a more explicit exemption from the derivatives trading obligation for large scale transactions and which therefore would not be suited to the sort of large scale transparency associated with trading venues.
Organised Trading Facility (“OTF”)
ISDA supports the creation of the OTF, however it is of the view that the ban on use of proprietary capital by the OTC operator is likely to limit its usefulness. It has suggested that this ban be removed completely, or alternatively, allowance should be made for client facilitation.
ISDA has also stated that the rules governing the interaction between an OTF and Systematic Internaliser are overly restrictive, as it feels that the conflict of interest rules could adequately deal with this interaction without prejudicing best execution.
Mechanism to avoid duplication or conflicting rules
ISDA has commended the introduction of a mechanism to avoid duplicative and/or conflicting rules on derivatives trading for parties which may be subject to both MiFIR and non-EU derivative trading regimes. The paper notes the proposed adoption of equivalence assessments by the European Commission, and stresses the importance of an approach to “equivalence” based on regulatory outcomes and not detailed correspondence of respective jurisdictions’ rules.
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