November 6, 2018
Steven Maijoor
Chairman, ESMARe:ESMA Statistical Report on EU Derivatives Markets (October 2018)

Citadel1 commends ESMA on the recent publication of its first annual statistical report on EU
derivatives markets (the “Report”). 2 This type of in-depth data-driven research and analysis isessential to understand market developments, evaluate the impact of policy decisions, and detect
potential risks to market stability. For the OTC derivatives markets, the ability to leverage available
EU Trade Repository data is particularly significant given the overall lack of transparency thatexisted prior to the implementation of EMIR and MiFID II.
We appreciate the comprehensive analysis that ESMA conducted to produce the Report, and its
quality is a testament to the diligent work of ESMA staff. Nevertheless, as ESMA noted that it
would welcome feedback in order to continue to improve the data and metrics presented, we would
like to take the opportunity to provide several recommendations for enhancing how ESMA
measures clearing rates for OTC derivatives in the EU. We believe clearing rates are a particularly
important metric for measuring progress in implementing the EMIR clearing obligation.
Specifically, to enhance the measurement of clearing rates, we recommend that ESMA:Include OTC derivatives trading activity that is conducted on MTFs or OTFs.
ESMA’s current methodology excludes all of this trading activity, which leads to aninaccurate clearing rate, particularly as more trading activity transitions onto MTFs andOTFs under MiFID II (including pursuant to the derivatives trading obligation). The factthat certain interest rate swaps and credit default swaps are now cleared and may also be
executed on an MTF or OTF should not result in these contracts (heretofore all classified as
OTC derivatives) suddenly being reclassified as exchange-traded derivatives (or ETDs).
The OTC derivatives market, whether cleared or uncleared, and whether executedbilaterally or on an MTF or OTF, remains distinct from the ETD market.

Include the trading activity of all uncleared OTC derivatives. ESMA’s current
methodology only includes the trading activity of uncleared OTC derivatives that areconsidered to be “eligible for clearing.” This overstates clearing rates and is inconsistent
with the methodology used in other jurisdictions.

1Citadel is a global financial firm built around world-class talent, sound risk management, and innovative marketleading technology. For more than a quarter of a century, Citadel’s hedge funds and capital markets platforms havedelivered meaningful and measurable results to top-tier investors and clients around the world. Citadel operates in all
major asset classes and financial markets, with offices in the world’s leading financial centers, including Chicago,New York, San Francisco, Boston, London, Dublin, Hong Kong, and Shanghai.
2See https://www.esma.europa.eu/press-news/esma-news/esma-data-analysis-values-eu-derivatives-market%E2%82%AC660-trillion-central-clearing (the “Report”).

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Introduce a clearing rate measure that is based on transaction-by-transaction “flow”
data. ESMA’s current methodology only uses “stock” data that reflects outstanding
notional amounts at a given point in time. This leads to an inaccurate clearing rate giventhat such “stock” data does not measure the percentage of newly executed trades that arebeing cleared, includes legacy positions, and does not accurately account for the relative
impact of compression activities in both the cleared and uncleared markets.

We close the letter by suggesting several additional metrics that would be helpful for ESMA tomonitor in relation to EU derivatives markets, particularly in light of the recent implementation ofMiFID II.
I. Enhancing ESMA’s Methodology For Calculating Clearing Rates
A. Include OTC Derivatives Executed on a Trading Venue
ESMA’s current methodology excludes OTC derivatives executed on an MTF or OTF whencalculating the clearing rate.3 This yields an inaccurate clearing rate given that significant trading
volumes in both cleared and uncleared OTC derivatives occur on MTFs and OTFs. Further, thisvolume will only increase over time following the recent introduction of the MiFID II derivatives
trading obligation.
Throughout the Report, ESMA appears to suggest that only exchange-traded derivatives(“ETDs”) can be executed on an MTF or OTF. 4 This is incorrect, clearly demonstrated by the factthat the MiFID II derivatives trading obligation requires certain cleared OTC derivatives to be
traded on MTFs and OTFs. The fact that an OTC derivative contract is now cleared and may also
be executed on an MTF or OTF does not turn it into an ETD.
For example, consider a 10Y EUR interest rate swap. This OTC derivative is subject to boththe EMIR clearing obligation and the MiFID II derivatives trading obligation. As a result, trading
activity in this OTC derivative:
may be cleared (if both parties are subject to the clearing obligation or voluntarilychoose to clear) or uncleared (if one or both parties are not subject to the clearingobligation and choose not to voluntarily clear); andmay be traded on an MTF or OTF (if both parties are subject to the trading obligationor voluntarily choose to transact on a trading venue) or can occur off-venue (if one orboth parties are not subject to the trading obligation and choose to trade off-venue).

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Report at page 29 (“only records with ‘Venue of execution’ “XXXX” or “XOFF” (respectively the MIC codes for
OTC and off-exchange transactions for listed instruments) have been retained”).
4See, e.g., Report at pages 9 and 22. We note that in other areas of the Report, ESMA correctly differentiates
between futures (ETDs) and swaps/FRAs (see Report at page 35, ASRD-S.16). Calculating clearing rates by contract
type could be one potential way of addressing the misclassification issue identified herein.

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As shown, trading activity in OTC derivatives can be grouped into four buckets: (1) executed
on-venue and cleared, (2) executed on-venue and uncleared, (3) executed off-venue and cleared,and (4) executed off-venue and uncleared. All of this trading activity in OTC derivatives must be
taken into account when calculating statistics such as clearing rates. There is no basis for excluding
OTC derivatives trading activity that occurs on MTFs and OTFs.
Finally, ESMA’s current methodology also would appear to result in off-venue trading activity
conducted with a systematic internaliser (“SI”) being incorrectly classified as on-venue trading,since SIs are assigned MIC codes much like trading venues. This is significant as nearly all of theoff-venue trading activity in OTC derivatives should now be executed with an SI following theimplementation of MiFID II. 5 Going forward, ESMA’s methodology should ensure that OTC
derivatives trading activity with SIs is not classified as on-venue trading.
B. Include All Trading Activity in Uncleared OTC Derivatives
ESMA’s current methodology for calculating the clearing rate only takes into account thetrading activity of uncleared OTC derivatives that are considered to be “eligible for clearing”. 6 Thismethodology overstates the clearing rate, since a significant amount of trading activity in uncleared
OTC derivatives is excluded from the denominator in the calculation. 7 We recommend instead thatESMA calculate the clearing rate by taking into account all OTC derivatives trading activity in aparticular asset class, consistent with established calculations in other jurisdictions. 8 This will
ensure that all trading activity in OTC derivatives is analyzed and will provide a more accurate
clearing rate that can be tracked over time as more market participants and instruments graduallytransition into central clearing.
This revision to ESMA’s current methodology will solve two additional challenges as well:First, in order to accurately define the universe of uncleared OTC derivatives that are“eligible for clearing”, ESMA would be required to maintain an up-to-date list of each typeof OTC derivative that can be cleared at any EEA or non-EEA CCP accessible to EU market
participants and then apply that list in a granular manner to the EMIR data set used tocalculate clearing rates. We note that ESMA’s “Public Register for the Clearing Obligation
under EMIR” is not sufficient for these purposes, as ESMA itself has noted that the current

5Indeed, the current MIC list referenced in the Report includes over 200 systematic internalisers (See Report atfootnote 35; https://www.iso20022.org/10383/iso-10383-market-identifier-codes).
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Report at page 28.

7For example, in 2017, nearly 78% of the outstanding notional of uncleared interest rate derivatives was in products
other than fixed-to-floating swaps, basis swaps, FRAs, or OIS. See “Actual Cleared Volumes vs. Mandated Cleared
Volumes: Analyzing the US Derivatives Market,” ISDA (July 2018) at Chart 12 on page 13, available at:https://www.isda.org/a/6yYEE/Actual-Cleared-Volumes-vs-Mandated-Cleared-Volumes.pdf (the “ISDA Study”).
8See, e.g., BIS Statistical release: OTC derivatives statistics at end-December 2017 (3 May 2018) at page 4, available
at: https://www.bis.org/publ/otc_hy1805.pdf; and ISDA Study at Table 1 on page 3.

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notification procedures result in an incomplete public register. 9 The breadth of such a
potential list (which will include many more instruments than are covered by the EMIR
clearing obligation), and ensuring such a list remains up-to-date, present significant
challenges.
Second, the current methodology will impair analysis of clearing trends over time, as theabove list of OTC derivatives “eligible for clearing” continually evolves, yielding a different
subset of in-scope uncleared trading activity for the clearing rate calculation at each pointin time.

C. Introduce a Clearing Rate Based on “Flow” Data
The Report calculates clearing rates solely based on “stock” measures of outstanding notionalamounts on a given date.10 As acknowledged in the Report, “stock” measures suffer from several
drawbacks, as these figures (i) include legacy positions entered into before the EMIR clearing
obligation went into effect, and (ii) do not take into account the ongoing compression activities forboth cleared and uncleared derivatives that significantly reduce outstanding notional amounts. 11
These limitations make it difficult to use a “stock”-based clearing rate to fully evaluate theimplementation of the EMIR clearing obligation, as changes over time could simply reflectterminations of, or amendments to, legacy positions or compression activities, all of which areunrelated to the EMIR clearing obligation.
Clearing rates are therefore typically measured using “flow” data on new trading activity overa defined period of time.12 In fact, the term “clearing rate” is commonly understood to mean theflow-based measure of the percentage of new derivatives transactions that are centrally cleared,
while the term “clearing level” is instead commonly used for the stock-based measure of thepercentage of outstanding notional amount that is centrally cleared. 13 We recommend that ESMA
conform to this market convention by referring to the measure currently included in the Report as
the “clearing level” and by introducing a flow-based “clearing rate” measurement.
The use of “flow” data would enable ESMA to calculate the percentage of new OTC derivatives
transactions that are centrally cleared and to better track trends over time. A recent ESRB working
9See EMIR Review Report no.4, “ESMA input as part of the Commission consultation on the EMIR Review,” (13August 2015) at Section 4.3, available at: https://www.esma.europa.eu/sites/default/files/library/2015/11/esma-20151254_-_emir_review_report_no.4_on_other_issues.pdf.
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Report at page 14.

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Report at pages 10 and 14. We note that while the Report specifically mentions multilateral compression at CCPs,
multilateral compression also takes place for uncleared derivatives, significantly reducing uncleared outstanding
notional amounts. For example, see https://www.trioptima.com/media/filer_public/31/f1/31f14682-5137-4ef1-80afe8bb09835dce/trireduce_general_factsheet.pdf.
12See, e.g., ISDA Study.

13See, e.g., Incentives to centrally clear over-the-counter (OTC) derivatives: A post-implementation evaluation of theeffects of the G20 financial regulatory reforms (7 Aug 2018) at page 17, available at: http://www.fsb.org/wpcontent/uploads/P070818.pdf; and BIS Statistical release: OTC derivatives statistics at end-December 2017 (3 May2018) at page 7, available at: https://www.bis.org/publ/otc_hy1805.pdf.

4paper took this approach, finding that less than 50% of new interest rate derivatives andapproximately 20% of new credit derivatives entered into in the EU are being centrally cleared. 14
We urge ESMA to validate these ESRB findings and track this measure over time.
II. Additional Recommended Metrics for Monitoring
We recommend that ESMA monitor the following additional metrics in light of the recent
implementation of MiFID II:
Derivatives Trading Obligationo For each asset class, what percentage of total trading volume occurs on a trading venue?
o For those OTC derivatives subject to the derivatives trading obligation, what percentage
of total trading volume is transacted on an MTF or OTF?

Derivatives Transparency
o For each asset class, what percentage of total trading volume is subject to pre-tradetransparency requirements (i.e. does not receive a waiver)?
o For each asset class, what percentage of total trading volume receives a deferral frompost-trade transparency requirements?
o What percentage of total trading volume is completely outside of the MiFID IItransparency regime due to not being considered “traded on a trading venue”?
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We appreciate the opportunity to provide feedback to ESMA. Please feel free to call theundersigned at (646) 403-8235 with any questions regarding these comments.
Respectfully,/s/ Stephen John Berger
Managing Director, Government & Regulatory Policycc:

Verena Ross, Executive Director, ESMA
Steffen Kern, Head of Risk Analysis and Economics Department, ESMA14“Clearinghouse-Five: determinants of voluntary clearing in European derivatives markets,” Pawel Fiedor (March2018) at Figures 1 and 2 on pages 11-12 and accompanying text, available at:https://www.esrb.europa.eu/pub/pdf/wp/esrb.wp72.en.pdf?87d519a1fd278d359b6d5a33499d0e26.

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