MiFID II and MiFIR's derivatives trading obligation: common approach to equivalence determination between US and EU
What’s new?
The European Commission (EC) and the US Commodity Futures and Trading Commission (CFTC) recently announced a common approach towards equivalence determinations for trading venues. Under the contemplated framework, the EC would recognise certain US swap execution facilities (SEFs) and designated contract markets (DCMs) as equivalent trading venues. This would enable EU firms to comply with their MiFID II/MiFIR derivatives trading obligation (DTO) by executing transactions in the specified derivatives either on an EU authorised trading venue or on a CFTC-authorised SEF or DCM. In return, the US CFTC would recognise certain EU multilateral trading facilities (MTFs) and organised trading facilities (OTFs), allowing US counterparties to comply with the US swap trading mandate when trading on recognised MTFs and OTFs as well as SEFs and DCMs.
What does this mean?
Importantly, an official decision on equivalence for trading venues has not yet been reached; the announced common approach was the first public step towards official equivalence determinations. The news related only to a political agreement established between senior representatives of the EC and the Chairman of the CFTC. Although the EC and the CFTC stated that they will work as fast as possible to ensure the arrangement is put in place and operating in a coordinated manner, it may take some time for the details of any agreement to be finalised and announced.
ESMA in its RTS set the start date for the DTO as January 3, 2018. Ideally, based on the EC’s and the CFTC’s commitment, by that time the following can be achieved:
- The EC recognises CFTC-authorised US SEFs and DCMs as eligible venues for the execution of all derivatives transactions subject to the EU DTO, as long as the relevant requirements of MiFID II/MiFIR and the Market Abuse Regulation are met. Similarly, the CFTC could, via a single exemption order, propose an exemption of the CFTC SEF registration requirement for trading venues authorised in accordance with MiFID II/MiFIR and notified to the CFTC by the EC.
- The CFTC staff then notifies the EC of its eligible SEFs and DCMs, while the EC notifies the CFTC of its list of eligible MiFID II/MiFIR and MAR compliant trading venues. We expect that the CFTC and staff of relevant EU national competent authorities under the coordination of the EC will work towards concluding cooperation arrangements to ensure effective exchange of information and coordination of supervisory activities.
How Tradeweb can help
We expect both the Tradeweb SEF and the Tradeweb MTF to be recognised as equivalent as part of this process, thereby providing our clients with the flexibility to access the deepest pools of liquidity to trade derivatives on either our US or EU derivatives platforms. If this is the case, we will clearly indicate to clients if they are trading on our SEF or MTF.
Clients will thus benefit from the strength of our market-leading global offering in interest rate swaps (IRS) and credit derivatives (CDS). We introduced our IRS platform in 2005 and, since then, more than $40 trillion notional volume has been executed across more than half a million trades. With liquidity provided by 35 market participants it is a leading market for USD, EUR and GBP IRS across a range of tenors. Our global CDS Index platform offers various types of execution for our clients in both iTraxx and CDX indices. The platform is supported by all market making dealers via both SEF and MTF.
IRS activity on Tradeweb’s SEF for institutional trading has surpassed $25 trillion since its launch in October 2013. CDS volumes on Tradeweb have also risen in 2017 to record levels with ADTV now at 4.8 billion notional value. In Europe, Tradeweb has been regulated by the UK’s FCA since 2000, and has operated an MTF since 2007.
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