multilateral trading facility (MTF)

Financial Services Trade Associations Urge HM Treasury to Recognize EEA Derivatives Trading Venues in Event of No-deal Brexit

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A number of key UK, EU and international financial services trade associations published a letter (dated April 5) to HM Treasury on the equivalence of European Economic Area (EEA) derivatives trading venues under the EU retained versions of European Market Infrastructure Regulation (EMIR) (648/2012) (UK EMIR) and the Markets in Financial Instruments Regulation (600/2014) (UK MiFIR) if there is a no-deal Brexit.

The trade associations highlight the disruptive impact on UK market participants and European derivatives markets arising from the absence of HM Treasury equivalence determinations:

  • Under Article 28(4) of UK MiFIR with respect to EEA multilateral trading facilities (MTFs) and organized trading facilities (OTFs). This will mean that UK financial counterparties (FCs) and UK non-financial counterparties (NFCs) over the clearing threshold would cease to be able to execute transactions in over-the-counter (OTC) derivatives subject to the trading obligation under UK MiFIR on those venues in a no-deal Brexit.
  • Under Article 2a of UK EMIR with respect to EEA regulated markets. This will mean that EEA exchange-traded derivatives (EEA ETDs) are considered OTC derivatives under UK EMIR in a no-deal Brexit.

The trade associations urge HM Treasury to prepare the necessary measures to recognise the equivalence of EEA derivative trading venues under UK EMIR and UK MiFIR, with a view to those measures taking effect on or very shortly after a no-deal Brexit. They suggest that HM Treasury could make an equivalence direction under the Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019 (SI 2019/541) or, alternatively, the FCA could grant transitional relief for this purpose using its temporary transitional powers under Part 7 of the Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019 (SI 2019/632). They urge HM Treasury and the FCA to indicate the approach that they intend to take as soon as possible.

 

European Commission Responds to ECON Concerns About MiFID II Systematic Internalizers Operating Broker Crossing Networks

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The European and Monetary Affairs Committee (ECON) has published correspondence between the European Parliament’s negotiating team for the Markets in Financial Instruments Directive (“MiFID“) II package of measures and Vice-President Valdis Dombrovskis about concerns relating to the potential establishment of networks of systematic internalizers (“SIs“) and of other liquidity providers that might circumvent certain MiFID II obligations, in particular concerning the trading of shares.

In a letter dated February 24, 2017, the negotiating team refers to the European Securities and Markets Authority’s (“ESMA“) letter from February 1 to Olivier Guersent, Director General, Financial Services and Capital Markets Union. The negotiating team and ESMA share the same concern that certain investment firms may be setting up interconnected SIs to cross third-party buying and selling interests via matched principal trading or other types of back-to-back transactions. The negotiating team has asked the European Commission to examine whether these practices comply with the letter and spirit of the MiFID II framework.

Mr. Dombrovskis responded in a letter dated March 16, 2017, setting out the conclusions of an initial investigation into the issue. He explained that a group of exchange operators are concerned about attempts to establish broker crossing networks in which both SIs and high frequency trading (HFT) firms interact in a manner that market operators describe as multilateral. Market operators are concerned that such networks may not be considered a multilateral trading system by all competent authorities, and so some variants of broker crossing networks may not be required to be authorized as multilateral trading facilities (“MTFs“). On the other hand, investment firms argue that the establishment of electronic links between SIs and other liquidity providers would not amount to the creation of an MTF. Market operators have requested that guidance be issued to the effect that such networks involving the rapid exchange of order information between participating SIs is an MTF and should be authorized as such.

The European Commission proposes to engage in a dialogue with ESMA and competent national regulators to determine the jurisdictions that the alleged broker crossing networks could potentially be established in. The European Commission will then engage with the relevant authorities on how to address the establishment of such networks within the MiFID II rules.

ESMA Publishes Guidelines on the Definitions of Commodity Derivatives Under MIFID

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On May 6, 2015, the European Securities and Markets Authority (ESMA) published guidelines (ESMA/2015/675) on the definitions of commodity derivatives and their classification under C6 and C7 listed in Section C of Annex 1 to the Markets in Financial Instruments Directive (2004/39/EC) (MiFID).

The guidelines will apply to national competent authorities from August 7, 2015 and are intended to apply until the MiFID II Directive comes into force on January 3, 2017. The guidelines will clarify the definitions by specifying, in particular, what is meant by “physically settled” and confirming that forwards traded on a regulated market or multilateral trading facility (MTF) fall within the scope of MiFID.