ESMA1 has published a consultation on whether the derivatives trading obligation under MiFIR2 should be aligned with the clearing obligation under EMIR3.
The misalignment the subject of the consultation arose from changes recently made to EMIR by EMIR Refit4 (see our previous briefing here) which, among other things, modified the scope of counterparties subject to the EMIR clearing obligation so that it is no longer aligned with the MiFIR derivatives trading obligation.
This misalignment is currently the subject of regulatory forbearance as outlined below and the purpose of the consultation is to determine the appropriate permanent solution.
Article 28 of MiFIR requires certain classes of derivatives transactions to be traded on a regulated market, multilateral trading facility, organised trading facility or third country (ie, non-EU) trading venue that is subject to a European Commission equivalence decision.
That “derivatives trading obligation”, or “DTO”, applies to financial counterparties (“FCs”), as defined in Article 2(8) of EMIR and any non-financial counterparty (“NFC”) “that meets the conditions referred to in Article 10(1)(b)” of EMIR which, at the time that MiFIR took effect, referred to an NFC that had become subject to the EMIR clearing obligation (an “NFC+”). In addition, the relevant derivative must be encompassed by a class of derivatives that has been declared subject to both the EMIR clearing obligation, or “CO”, and the DTO.
EMIR Refit made a key change to the CO as it applies to both FCs and NFCs, as follows:
- FCs: under EMIR, all FCs were subject to the CO. Under EMIR Refit, the CO only applies to an FC that either (1) exceeds any of the EMIR clearing thresholds; or (2) decides not to calculate whether it exceeds those thresholds; in practice this means that certain “small FCs” are no longer subject to the CO.
- NFCs: previously, an NFC was subject to the CO in all asset classes, when the volume of its OTC activity exceeded any of the clearing thresholds (which are defined per asset class). Under EMIR Refit, an NFC is subject to the CO only in the asset class in respect of which its volume of OTC activity exceeds the relevant clearing threshold.
As EMIR Refit was not accompanied by amendments to MiFIR, there is currently a misalignment between the scope of counterparties subject to the CO and those subject to the DTO. Specifically, while small FCs are no longer subject to the CO, they remain subject to the DTO. Moreover, as a result of the EMIR Refit amendments, reference to an NFC meeting the conditions set out in Article 10(1)(b) of EMIR (as provided for in Article 28 of MiFIR), no longer indicates an NFC+.
EMIR Refit had anticipated this misalignment between the parties subject to the CO and the DTO and provided for the European Commission to prepare a report assessing the necessity and appropriateness of their alignment post-EMIR Refit, which report is to be prepared on the basis of a report by ESMA. The consultation paper is seeking stakeholders’ views on the assessment and the proposals that ESMA intends to make in the context of that report.
In this regard, ESMA is seeking feedback on two main issues, namely on whether MiFIR should be amended to:
- align the DTO with the CO, and in particular with the scope of the entities that are subject to the CO; and
- provide for a standalone suspension of the DTO.
ESMA has indicated that it is inclined to recommend to the European Commission that the scope of counterparties subject to the CO on the one hand and the DTO on the other, should be aligned.
You can access the consultation here.
ESMA will consider all comments received by 22 November 2019 for the purpose of developing its report, which it will submit to the European Commission in early 2020. The European Commission will in turn prepare a report for submission to the European Parliament and to the Council by 18 December 2020. It is therefore clear that the misalignment between the CO and the DTO is likely to persist for some time. However, on 12 July 2019 ESMA advised5 MiFIR national competent authorities not to prioritise their supervisory actions in relation to the DTO towards counterparties exempted from the CO following the entry into force of EMIR Refit.
ESMA is also consulting on how to specify the conditions under which the commercial terms are to be considered to be fair, reasonable, non-discriminatory and transparent (FRANDT) when providing CCP clearing services to clients in accordance with Article 4(3a) of EMIR Refit. You can access this consultation here