EUROPEAN UNION: ESMA Clarifies Traded on a Trading Venue under MIFID II

Monday May 22 2017

On 22^nd May 2017, the European Securities and Markets Authority (ESMA), issued an opinion regarding the implementation of the Markets in Financial Instruments Directive (MiFID II) and Regulation (MiFIR).

The opinion clarifies the concept of “traded on a trading venue” (TOTV), which is relevant for a number of provisions under MIFID II and MiFIR.

The concept of TOTV is particularly relevant for:

• pre-trade and post-trade transparency requirements on market operators and investment firms operating on a trading venue as well as for investment firms (including systematic internalisers) operating over-the-counter (OTC); and
• transaction reporting obligations.

MiFIR significantly broadens the scope of application for the transparency and transaction reporting requirements by requiring not only instruments that are admitted to trading on a regulated market but also instruments that are traded on other trading venues – MTFs or OTFs – to be subject to the transparency and transaction reporting requirements. Articles 20 and 21 as well as recital 18 of MiFIR and recital 116 of MiFID II clarify that the transparency requirements should also apply to investment firms undertaking transactions outside of trading venues as long as the instrument is TOTV.

However, MiFIR does not require that all financial instruments traded OTC, including derivatives, are captured by the transparency and transaction reporting obligation. In particular, financial instruments that are only traded outside of trading venues are not included.

While the concept of TOTV is clear for instruments that are centrally issued and that are fully standardised, such as shares and bonds as well as exchange traded derivatives, it is less clear for OTC derivatives. This is because OTC derivatives that do not have an issuer, are less standardised and often arise from bilateral contracts between two counterparties. ESMA therefore considers it 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.

Regulation (EU) 2017/585, stemming from the empowerment of Article 27(3) of MiFIR, specifies the relevant identifying reference data that needs to be submitted for each financial instrument admitted to trading on regulated markets or traded on MTFs or OTFs. Hence, regarding derivatives, the reference data submitted in accordance with the requirements of Article 27(1) of MiFIR will include the relevant reference data details which identify each derivative admitted to trading on regulated markets or traded on MTFs or OTFs.

Therefore, ESMA is of the view that only OTC derivatives sharing the same reference data details as the derivatives traded on a trading venue should be considered to be TOTV and, hence, subject to the MiFIR transparency requirements and to transaction reporting according to Article 26(2)(a) of MiFIR.

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