Once in force, the Markets in Financial Instruments Regulation (MiFIR) and related Markets in Financial Instruments Directive (MiFID II) will significantly broaden the scope of these requirements, to apply not only to financial instruments that are admitted to trading on regulated markets but also to those traded on multilateral trading facilities (MTFs) and organised trading facilities (OTFs).
The transparency requirements will also apply to investment firms carrying on transactions outside of trading venues if the instrument is 'traded on a trading venue' (TOTV).
A new opinion published by ESMA now clarifies exactly what is meant by TOTV in the case of OTC derivatives (3-page / 136KB PDF), addressing concerns about interpretations of the new requirements by different national regulators.
Whether an instrument is TOTV, and therefore subject to the new rules, will be clear in many cases; particularly for shares, bonds and exchange-traded derivatives that are centrally issued and fully standardised, according to ESMA. However, it will not always be clear whether an OTC derivative is TOTV when it does not have an issuer, is less standardised and often arises out of bilateral contracts between two counterparties, it said.
"ESMA considers it therefore important to delineate the OTC derivatives that are within the scope of the transparency and transaction reporting requirements from those OTC derivatives that are not considered TOTV and, hence, are outside the scope of the transparency and transaction reporting requirements," it said.
The opinion states that only those OTC derivatives "sharing the same reference data details" as derivatives traded on a trading venue should be considered to be TOTV. The Commission's delegated regulation on financial instrument reference data supplementing MiFIR specifies the relevant identifying reference data that needs to be submitted for each financial instrument admitted to trading on a regulated market or traded on an OTF or MTF.
ESMA has further clarified that 'sharing the same reference data details' should mean that the OTC derivative instruments "share the same values as the ones reported in accordance with the fields of [the delegated regulation] for derivatives admitted to trading or traded on a trading venue, except fields 5 to 12 (the trading venue and issuer-related fields)".
"Since the trading venue and issuer related fields are only applicable to trading venues when submitting reference data for derivatives but are not applicable for trading those contracts bilaterally outside of trading venues, ESMA considers it appropriate not to take into account these fields when determining whether an OTC derivative traded outside of a trading venue is to be considered TOTV," it said in its opinion.
MiFIR and MiFID II apply from 3 January 2018. They update the existing MiFID rules applicable to investment services across the European Economic Area (EEA), taking into account developments in the trading environment since the original directive came into force as well as aiming to strengthen investor protection and increase market resilience. The revised regime will also apply to a broader range of financial instruments, trading venues and techniques, including the use of algorithmic high-frequency trading.
ESMA intends to review its opinion once the new regime is fully up and running, to ensure that its view of the "same" reference data details remains appropriate as markets evolve. It will do so by monitoring how the concept of TOTV is applied in practice and, in particular, the ratio of derivatives that are considered TOTV compared to overall OTC derivatives trading, it said.
"ESMA intends to ensure that such evolution does not undermine market transparency and efficiency, does not result in information asymmetries between market participants and does not create incentives to move trading to the OTC space as this would run counter to the legislative goals expressed in MiFID II/MiFIR," it said.