The European Securities and Markets Authority (ESMA) has today published a final report suggesting amendments to the derivatives trading obligation (DTO) under MiFIR following the introduction of EMIR Refit.

Background

The changes introduced to EMIR by EMIR Refit, amongst other things, modified the scope of counterparties subject to the clearing obligation. These changes mean that:

  1. so-called “FC-s” (being financial counterparties that, following the calculation of their aggregate month-end average gross notional value of OTC derivative transactions (AANA), do not exceed any of the clearing thresholds) are not subject to the clearing obligation; and
  2. so called “NFC+s” (being non-financial counterparties that, following the calculation of their AANA, exceed any of the clearing thresholds) are subject to the clearing obligation only in respect of those asset class(es) in which the NFC exceeds the relevant clearing threshold (provided that, if an NFC does not undertake the AANA calculation, it is understood to be subject to the clearing obligation in respect of all asset classes).

However, the introduction of EMIR Refit was not accompanied by corresponding amendments to MiFIR, meaning that there is currently a misalignment between the scope of counterparties subject to the clearing obligation under EMIR and the scope of counterparties subject to the DTO under MiFIR.

This misalignment arises because the scope of the DTO under MiFIR:

  • in respect of FCs, is defined with a cross-reference to the definition of FC in EMIR (as amended by EMIR Refit), which itself does not distinguish between FC+s and FC-s; and
  • in respect of NFCs, is defined with a cross-reference to NFCs+ in EMIR (i.e. “non-financial counterparties that meet the conditions referred to in Article 10(1)(b) [of EMIR]”), which (following EMIR Refit) is no longer the correct provision and, therefore, does not take into account that an NFC+ may be subject to the clearing obligation only in respect of certain asset classes (rather than all asset classes, under pre-Refit EMIR).

In practice, this means that (i) FC-s and (ii) NFC+s in respect of asset classes in which they do not exceed the relevant clearing threshold, are not subject to the clearing obligation, but are still subject to the DTO. As such, in theory FC-s and NFC+s (in respect of those asset classes in which they do not exceed the relevant clearing threshold) might have to trade an OTC derivative on exchange but not clear it. In practice, that may not be operationally possible.

To address the situation, ESMA published, on 12 July 2019, a statement advising national competent authorities not to prioritise their supervisory actions in relation to the DTO towards counterparties exempted from the clearing obligation following the entry into force of EMIR Refit.

ESMA’s report

In light of the close interconnections between the EMIR clearing obligation and the MiFIR DTO, ESMA has assessed whether the DTO under MiFIR should be aligned with changes to the clearing obligation introduced by EMIR Refit.

In the report, ESMA ultimately recommends to the European Commission that:

  1. the scope of the clearing obligation for FCs and NFCs under EMIR should be replicated in respect of the DTO under MiFIR; and
  2. MiFIR should be amended to include a suspension mechanism in respect of the DTO.

Next steps

ESMA submits the final report to the European Commission. On the basis of ESMA’s input, the European Commission’s report is due to be submitted to the European Parliament and to the Council by 18 December 2020.