19 June 2017 | ESMA70-156-166

Reply form for the Consultation Paper on the
trading obligation for derivatives under MiFIR

2

Date: 19 June 2017

Responding to this paper
The European Securities and Markets Authority (ESMA) invites responses to the specific questions listed in
the ESMA Consultation Paper on the trading obligation for derivatives under MiFIR, published on the ESMA
website.

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describe any alternatives that ESMA should consider.

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5

Introduction
Please make your introductory comments below, if any:
<ESMA_COMMENT_MIFID_TO_0>
Citadel LLC1 appreciates the opportunity to provide comments to the European Securities and Markets
Authority (“ESMA”) on the trading obligation for derivatives under MiFIR. The trading obligation is a key
component of the OTC derivatives reforms agreed to by the G20 in 2009, and we commend ESMA for taking into account the feedback received on the Discussion Paper published in September 2016.
I.

Significant Improvements in ESMA’s Methodology

ESMA has proposed several important improvements to the methodology and scope of the trading obligation that increase international harmonization and more accurately reflect market liquidity in standardized
interest rate and credit derivatives. These improvements include:Performing a more holistic liquidity assessment using the criteria in RTS 4, while refraining fromsetting rigid minimum thresholds that may not take into account differences between specific classesof derivatives. Notably, ESMA also recognized the importance of assessing whether streaming prices
are offered by liquidity providers to market participants in the instruments being considered for the
trading obligation, as this is another key indicator of available liquidity.

Expanding the data sources used for purposes of assessing liquidity. In addition to EU trade repository data, ESMA also sought to gather data from certain trading venues. Going forward, we hope that
ESMA will continue to regard MTFs and OTFs trading OTC derivatives as important sources of information and will also consider supplementing its analysis with data from CCPs, given that they have acomplete view of trading activity in cleared OTC derivatives.
Separately, we urge ESMA to review its methodology for analysing trade repository data, as it appears
that ESMA is (i) excluding all derivatives executed on an MTF or OTF by only including records thatare marked with “XXXX” or “XOFF”, and (ii) eliminating too many records for cleared derivatives asmarket participants will often rely on the transaction reporting by the CCP in the first instance and will
not separately report the initial bilateral trade that was submitted to clearing.



Adding tenors in GBP spot-starting IRS and USD IMMs. These instruments are sufficiently liquid
for the trading obligation based on an analysis of criteria such as (i) the availability of streaming prices
from a number of liquidity providers, (ii) trading volumes, (iii) the number and types of market participants, and (iv) whether these instruments are already listed by trading venues today. In addition,these instruments are already subject to the US trading obligation, and market participants have notappeared to experience any difficulty executing them on trading venues.



Determining not to create significant loopholes from the trading obligation for (i) transactions
above the post-trade LIS threshold and (ii) package transactions.
oTransactions above post-trade LIS. Article 32(3) of MiFIR permits ESMA to grant an exemption
from the trading obligation for transactions above the post-trade LIS threshold, but does not require ESMA to do so. ESMA has carefully weighed the costs and benefits of such an exemption
and we agree with ESMA’s proposal not to create a special exemption from the trading obligation
for these transactions. The flexibility provided by the MiFIR framework to trading venues allows
them to design trading protocols for executing transactions above the post-trade LIS threshold on

1

Citadel is a global financial firm built around world-class talent, sound risk management, and innovative market-leading technology.
For more than a quarter of a century, Citadel’s hedge funds and capital markets platforms have delivered 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, Hong Kong, andShanghai.

6venue. This will address any information leakage concerns for larger trades that are related specifically to the trading obligation and increases harmonization with US CFTC rules, which do notcompletely exempt large “block” trades from the trading obligation, but relax the RFQ-to-3 and Order Book trading requirements for these transactions.
We note that under ESMA’s July 2017 transitional transparency calculations, nearly all instruments that are being considered for inclusion in the trading obligation are incorrectly designatedas illiquid.2 This results in a post-trade LIS threshold of EUR 10 million applying to these “illiquid”
fixed-to-float IRS under Table 5.3 in RTS 2.3 To the extent an exemption from the trading obligation was provided for transactions above the post-trade LIS threshold, nearly all trading activity
would be eligible for the exemption and the trading obligation would be completely undermined.
oPackage transactions. We agree with ESMA that MiFIR does not contemplate establishing exemptions from the trading obligation for package transactions. While the Level 1 “Quick Fix” established a tailored pre-trade transparency regime for packages, no such amendments weremade to the legislative framework for implementing the trading obligation. Instead, under Article
28(1) of MiFIR, once a derivative is determined to be subject to the trading obligation, all transactions in such derivative must be concluded on a regulated trading venue. This is the case even if
a market participant chooses to execute other instruments in conjunction with the derivative that is
subject to the trading obligation.
In practice, market participants will then have the choice as to whether to execute other instruments simultaneously on the venue alongside the derivative subject to the trading obligation or to
execute such other instruments separately off-venue. This instrument-level approach is consistent with how the clearing obligation has been implemented under EMIR. For example, if amarket participant chooses to execute a derivative subject to the clearing obligation along with anuncleared derivative, the derivative subject to the clearing obligation must still be cleared eventhough it is being executed in conjunction with other instruments. This instrument-level approach
is what is contemplated under MiFIR and is quite different than suggesting that the trading obligation applies to the package as a whole (or all of its components).
This outcome increases harmonization with the US trading obligation. Data has shown that while
packages represent a significant amount of overall trading activity in interest rate swaps, the vast
majority of that activity occurs in (a) curves, (b) butterflies, and (c) spread over Treasuries (forUSD IRS). 4 Components of all these package types that are independently subject to the US
trading obligation do not have an exemption under US rules or no-action relief. With respect tothe less frequently traded package types that continue to benefit from temporary CFTC no-action
relief, we believe that the greater flexibility provided to trading venues under MiFIR regarding permitted trading protocols will facilitate a broader range of packages trading on EU trading venues.
In contrast with US CFTC rules, EU trading venues can design trading protocols specifically for
packages and we expect them to innovate and compete to attract this trading activity. In doing so,
it is important to note that trading venues are able to list packages (and already do) that include
components that are technically traded on another venue as long as those components can bereported into the other venue post-execution. For example, this is how invoice spread packages
containing a swap (listed by an MTF) and a future (listed by an RM) are traded on MTFs today.5
Finally, we note that other factors should ease the transition of certain packages onto trading venues. First, ESMA appears to be taking a relatively cautious approach with respect to the scope ofthe trading obligation in general, which reduces the number of different package types that are2

See https://www.esma.europa.eu/policy-activities/mifid-ii-and-mifir/mifid-ii-transitional-transparency-calculation.
See http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32017R0583&from=EN.
4
See “Spreadovers: US Treasury Spreads in the Swaps Data,” Clarus Financial Technology (March 23, 2105), available at:https://www.clarusft.com/spreadovers-us-treasury-spreads-in-the-swaps-data/.
5See, e.g., “Trad-X strengthens interest rate swaps market presence with Eurex Clearing partnership” (Feb. 22, 2016), available at:
http://voxia.ch/en/trad-x-strengthens-interest-rate-swaps-market-presence-with-eurex-clearing-partnership/ (highlighting the trading of
invoice spreads).
3

7

relevant. For example, since ESMA continues to focus only on spot starting, benchmark tenor
IRS, invoice spread packages containing a swap and a future would not be relevant even though
they are extremely liquid, as these packages typically only include a forward-starting, non-benchmark tenor swap. Second, the trading obligation will only initially apply to Category 1 and Category 2 counterparties, which provides an opportunity to gradually phase-in the transition.
It is worth noting that all transactions above post-trade LIS and nearly all packages will also be eligible
for waivers and deferrals from transparency requirements based on the transitional transparency calculations. However, this should not be used as a justification for exempting these transactions fromthe trading obligation, which is a separate and distinct rule under the MiFIR framework. In fact, there
are many benefits to applying the trading obligation to a transaction even if it is not subject to pretrade transparency, including:oEnhancing market stability and integrity by transitioning trading activity onto well-regulated trading
venues with monitoring and surveillance capabilities.

oReducing operational risk through the pre-trade credit check and straight-through-processing requirements in RTS 26 that are applicable to transactions concluded on a trading venue. This will
help to ensure that market participants have available clearing capacity before entering into transactions, thereby mitigating the possibility of a subsequent rejection from clearing, which is a particularly undesirable risk when executing a large trade.6

oImproving market liquidity and competition by transitioning trading activity onto trading venues thatare subject to non-discriminatory access requirements, enabling market participants to have access to a greater number of liquidity providers.7

II. Issues that Require Further Attention
In our view, two issues require further attention from ESMA.
1. Additional Benchmark Tenors Are Liquid
EUR IRSESMA has proposed including certain USD IMM contracts (including both par coupon and Market Agreed
Coupon “MAC” contracts), but has not identified any EUR IMM or MAC contracts as sufficiently liquid forthe trading obligation. We urge ESMA to re-assess this conclusion. Market data shows that EUR IMM
and MAC swaps constitute approximately 30% of the EUR interest rate swap market.8 In particular, significant trading activity can be observed in the 2Y, 3Y, 5Y, and 10Y IMM and MAC tenors.
USD IRS
ESMA’s liquidity analysis for USD IRS also incorrectly excludes the following instruments:

The 6Y, 12Y, 15Y, and 20Y tenors in spot-starting swaps are all sufficiently liquid for the trading
obligation.



In addition to the 5Y, 6Y, and 30Y USD IMM and MAC contracts identified by ESMA, other tenors
of IMMs and MACs are sufficiently liquid for the trading obligation. According to an analysis of US

6

Note that “block” trades are still subject to pre-trade credit checks under U.S. CFTC rules. See CFTC No-Action Letter 16-74 (Oct.
7, 2016) at FN 7, available at: http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/16-74.pdf.
7
See ESMA: Questions and Answers on MiFID II and MiFIR market structure topics, Question 3 in Section 5.1, available at:https://www.esma.europa.eu/press-news/esma-news/esma-updates-qa-mifid-ii-implementation-0.
8
See “30% of the Euro swap market is standardized?” Clarus Financial Technology (Aug. 23, 2016), available at: https://www.clarusft.com/30-of-the-euro-swap-market-is-standardized/.

8

SDR data, IMM and MAC swaps together constitute approximately 15% of the USD interest rate
swap market in terms of trade count.9 In particular, significant trading activity can be observed in
the 2Y, 3Y, 7Y, and 10Y IMM and 1Y, 2Y, 3Y, 5Y, 10Y, and 30Y MAC tenors.
All of the EUR and USD interest rate derivatives listed above are standardized, highly liquid, and alreadytraded on trading venues. Streaming prices from a number of liquidity providers are available to market
participants and trading activity is significant. In addition, many of these instruments are already subject tothe US trading obligation, and market participants have not appeared to experience any difficulty executing them on trading venues. We urge ESMA to further investigate these instruments, using data fromtrade repositories, CCPs, and trading venues.
In addition, given the current structure of the OTC derivatives market, it is important to note that the liquidity profile of an instrument does not drastically change based on geographical boundaries. While EU-specific data is an important consideration, both US and EU market participants interact with the same coregroup of liquidity providers, and therefore experience similar pricing and liquidity dynamics. Going forward, this will only be more obvious, as trading venues in the US and EU are expected to gain equivalence, meaning that EU market participants will be able to access liquidity on US venues for satisfying the
trading obligation and vice versa. As a result, we believe that ESMA should only adopt a more narrow approach than the US trading obligation where it is absolutely clear that there is insufficient liquidity in a particular instrument. This will reduce regulatory arbitrage and ensure US and EU market participants are on
a level playing field when transacting in the OTC derivatives market.
2. Clarifying that Pre-Arranged Trading is Not Permitted For Derivatives Subject to the Trading
Obligation
We urge ESMA to clarify in the Final Report that pre-arranged trading (or negotiated off-venue trading) is
not permitted for transactions in derivatives that are subject to the trading obligation. Pre-arranged tradingmeans two parties enter into, negotiate, or “conditionally agree” a transaction bilaterally, away from an
MTF or OTF, and then report that transaction to the trading venue post-execution. In our view, this type ofbilateral off-venue trading is not permitted under MiFIR for derivatives subject to the trading obligation andwould completely undermine its implementation.
For comparison purposes, US CFTC rules currently provide that:

Pre-arranged trading is prohibited for transactions in derivatives subject to the trading obligation,
except for large “block” trades.10
Market participants are still permitted to engage in communications off-venue regarding a potential
trade, including size or price.11 However, they are not permitted to enter into, negotiate, or “conditionally agree” that trade outside of the trading venue. In addition, trading venues operating an order bookare still permitted to allow “cross trades”, whereby a participant enters two customer orders against
each other in the order book in accordance with the trading venue’s rules, which typically provide an
opportunity for other market participants to participate in the transaction before it is executed on the
trading venue.

Large “block” trades are still subject to straight-through-processing requirements, including a
pre-trade credit check that ensures market participants have available clearing capacity before entering into the “block” transaction.12

9

See “30% of the Euro swap market is standardized?” Clarus Financial Technology (Aug. 23, 2016), available at: https://www.clarusft.com/30-of-the-euro-swap-market-is-standardized/.
10
See CFTC Regulation 37.203(a), available at: http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/201312242a.pdf.
11
See CFTC SEF Rules at page 33503, available at: http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/201312242a.pdf.
12
See CFTC No-Action Letter 16-74 (Oct. 7, 2016) at FN 7, available at: http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/16-74.pdf.

9In practice, as a result of these straight-through-processing requirements, market participants voluntarily execute large “block” trades on US SEFs, despite pre-arranged trading being permitted, since
the trading venue is necessary to facilitate the pre-trade credit check. When executing “blocks”, market participants commonly engage in communications off-venue regarding the potential trade, andthen use a trading protocol that allows for private negotiation on the trading venue, such as RFQ-to-1,
to execute the “block” trade on the trading venue.
The analysis for derivatives subject to the trading obligation under MiFIR should be almost identical.
First, pre-arranged trading should be prohibited for transactions in derivatives subject to the trading obligation for the following reasons:This is the clear intent of Article 28(1) of MiFIR, which requires derivatives subject to the trading obligation to be concluded on one of the listed trading venues. While MiFIR provides trading venues withflexibility regarding the trading protocols that they can offer, transactions in derivatives subject to the
trading obligation still must be executed on a trading venue using a trading protocol offered by thatvenue. Allowing transactions to be entered into, negotiated, or “conditionally agreed” completely awayfrom an MTF or OTF would undermine the trading obligation altogether, as bilateral off-venue trading
could continue to occur in the same manner that it does today.



MiFIR specifically includes provisions relating to “negotiated transactions” in equities, but includes nosuch provisions for derivatives subject to the trading obligation.13 This is further evidence that pre-arranged, or negotiated, transactions were not intended to be permitted for derivatives that must be
traded on trading venues.

Prohibiting pre-arranged trading is consistent with prior ESMA statements regarding the implementation of the trading obligation for derivatives. For example, in this Consultation Paper, ESMA stated “itis expected that the TO will change trading behaviour since all derivatives subject to the TO will haveto be executed on a trading venue” and that the trading obligation will impose costs on market participants in terms of removing their “flexibility to negotiate transactions in derivatives according to protocols and execution methods different from those provided by trading venues”.14 Both of these statements clearly imply that implementation of the trading obligation means that bilateral off-venue trading
will no longer be permitted for those specific instruments.



Similar to US CFTC rules, market participants will still be able to engage in some communications offvenue regarding a potential trade as long as this is permitted by a trading venue. However, prohibiting
pre-arranged trading ensures that each trading counterparty, or an agent or broker acting on their behalf, actually negotiates and executes the relevant transaction on a trading venue as required by
MiFIR.

Second, transactions above the post-trade LIS threshold should not be granted an exception fromthe prohibition on pre-arranged trading for the following reasons:

Since these transactions are subject to the trading obligation, they will also be subject to the straightthrough-processing requirements in RTS 26, including the pre-trade credit check. Today, trading venues play a central role in facilitating pre-trade credit checks, and in fact, there currently does not appear to be a way for market participants to perform the pre-trade credit check other than by executing
the transaction on a trading venue. Thus, there is no need to allow market participants to executetransactions above the post-trade LIS threshold off-venue.



Under MiFIR, trading venues have flexibility regarding the trading protocols that they can offer. Therefore, transactions above the post-trade LIS threshold can be entered into using trading protocols that

13
14

See, e.g., Article 4 of MiFIR.
Consultation Paper at page 23.

10allow for private negotiation on the trading venue, such as RFQ-to-1. This should remove any concerns about information leakage which motivated the need for a special exemption for “block” tradesfrom the RFQ-to-3 and Order Book trading requirements under US CFTC rules.
Ensuring that transactions above the post-trade LIS threshold will be traded on trading venues also
incentivizes trading venues to develop and support the appropriate trading protocols for this type of
trading. Experience in the US with trading “blocks” on SEFs shows that trading venues will innovate
and compete to attract additional trading activity. In addition, as discussed above, market participants
will still be able to engage in some communications off-venue regarding a potential trade as long as
this is permitted by a trading venue.
<ESMA_COMMENT_MIFID_TO_0>

11

Do you agree with ESMA’s assessment and proposed way forward for the criteria
assessing the number and types of active market participants? If not, please explain
your position and how you would integrate these elements into the liquidity test.
<ESMA_QUESTION_MIFID_TO_1>
We agree with ESMA’s proposal to refrain from setting a fixed minimum threshold of the number of market
participants that must trade a derivative in order for such derivative to be considered liquid.
This approach is consistent with RTS 4, which contemplates a more holistic liquidity assessment thattakes into account a number of factors. In addition, this approach provides the necessary flexibility to account for differences that may exist between specific classes of derivatives. For example, one class ofderivatives may have a large number of market participants that each trade relatively infrequently, while
another class of derivatives may have a smaller number of market participants that each trade more frequently. Analysing the number and types of market participants active in a specific class of derivatives
side-by-side with the other liquidity criteria, such as overall trading activity, number of liquidity providers,
and the availability of streaming prices, will provide ESMA with a more complete picture of the liquidity
profile of a class of derivatives.
As with the other liquidity criteria included in RTS 4, we encourage ESMA to use as many data sources as
possible when determining the number and types of market participants active in a specific class of derivatives. These data sources include (a) EU trade repository data, (b) CCPs, and (c) trading venues.
<ESMA_QUESTION_MIFID_TO_1>

Do you agree with the revised proposal not to exempt post-trade LIS transactions?
If not, please explain and present your proposal.
<ESMA_QUESTION_MIFID_TO_2>
We agree with ESMA’s proposal not to create a special exemption from the trading obligation for transactions above the post-trade LIS threshold for the following reasons:Transactions above the post-trade LIS threshold will already be eligible for (a) a full waiver from pretrade transparency and (b) an extended deferral of 4 weeks from post-trade transparency requirements. These waivers and deferrals are designed to address information leakage concerns for larger
trades and are relatively generous – for example, US CFTC rules only provide a 15 minute deferral
from post-trade transparency requirements for large “block” trades.15

Since MiFIR does not specify the exact trading protocols that must be offered by trading venues,
transactions above the post-trade LIS threshold can be entered into using trading protocols that allow
for private negotiation on the trading venue, such as RFQ-to-1. This will address any information leakage concerns for larger trades that are related specifically to the trading obligation. This contrasts with
US CFTC rules, where derivatives subject to the trading obligation must be transacted using either
RFQ-to-3 or an Order Book, which created the need for a specific exemption for large “block” tradesfrom these trading protocols.



Under the MiFIR framework, pre-trade transparency requirements and the trading obligation for derivatives are separate and distinct rules, which recognizes that there are benefits to applying the trading
obligation to a transaction even if it is not subject to pre-trade transparency. These benefits of the
trading obligation include:oEnhancing market stability and integrity by transitioning trading activity onto well-regulated trading
venues with monitoring and surveillance capabilities.

15
Real-Time Public Reporting of Swap Transaction Data, 77 Fed. Reg. 1182 (Jan. 9, 2012) at 1217-18, available at:
http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/2011-33173a.pdf.

12oReducing operational risk through the pre-trade credit check and straight-through-processing requirements in RTS 26 that are applicable to transactions concluded on a trading venue. This will
help to ensure that market participants have available clearing capacity before entering into transactions, thereby mitigating the possibility of a subsequent rejection from clearing, which is a particularly undesirable risk when executing a large trade.16

oImproving market liquidity and competition by transitioning trading activity onto trading venues thatare subject to non-discriminatory access requirements, enabling market participants to have access to a greater number of liquidity providers.17

Therefore, it is appropriate to apply the trading obligation to transactions above the post-trade LIS
threshold, even if these transactions are not subject to pre-trade transparency. It is worth noting that,with pre-trade SSTI thresholds initially set at EUR 4 million for nearly all fixed-to-float IRS being considered for the trading obligation (and only approximately EUR 20 million for the four fixed-to-float
benchmark tenors deemed to be “liquid” for transparency purposes),18 nearly every transaction in aninterest rate derivative subject to the trading obligation will be eligible for a waiver from pre-tradetransparency requirements (not just transactions above post-trade LIS). In order to achieve the specific objectives of the trading obligation, it is important to keep it separate and distinct from the pretrade transparency regime, as contemplated by MiFIR. Otherwise, given the breadth of available
waivers from pre-trade transparency, the trading obligation will be undermined in practice.
Finally, we note that under ESMA’s July 2017 transitional transparency calculations, a post-trade LIS
threshold of EUR 10 million will apply to almost all fixed-to-float IRS being considered for the trading obligation pursuant to Table 5.3 in RTS 2.19 To the extent an exemption from the trading obligation was provided for transactions above the post-trade LIS threshold, nearly all trading activity would be eligible forthe exemption and the trading obligation would be undermined.
For the reasons above, we believe ESMA was correct not to create a special exemption from the trading
obligation for transactions above the post-trade LIS threshold. Article 32(3) of MiFIR permits ESMA to
grant such an exemption, but does not require ESMA to do so. As detailed in the Consultation Paper,
ESMA has carefully considered the costs and benefits of this issue.20 Furthermore, the current proposal
increases harmonization with US CFTC rules, which do not completely exempt large “block” trades fromthe trading obligation, but relax the RFQ-to-3 and Order Book trading requirements for these transactions.
Clarifying that Pre-Arranged Trading is Not Permitted For Derivatives Subject to the Trading Obligation
A related issue that we urge ESMA to clarify in the Final Report is that pre-arranged trading (or negotiatedoff-venue trading) is not permitted for transactions in derivatives that are subject to the trading obligation,
including transactions above the post-trade LIS threshold. Pre-arranged trading means two parties enter
into, negotiate, or “conditionally agree” to a transaction bilaterally, away from an MTF or OTF, and thenreport that transaction to the trading venue post-execution. In our view, this type of bilateral off-venue
trading is not permitted under MiFIR for derivatives subject to the trading obligation and would completely
undermine its implementation.
For comparison purposes, US CFTC rules currently provide that:

16
Note that “block” trades are still subject to pre-trade credit checks under U.S. CFTC rules. See CFTC No-Action Letter 16-74 (Oct.
7, 2016) at FN 7, available at: http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/16-74.pdf.
17
See ESMA: Questions and Answers on MiFID II and MiFIR market structure topics, Question 3 in Section 5.1, available at:https://www.esma.europa.eu/press-news/esma-news/esma-updates-qa-mifid-ii-implementation-0.
18
See https://www.esma.europa.eu/policy-activities/mifid-ii-and-mifir/mifid-ii-transitional-transparency-calculation.
19
See http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32017R0583&from=EN.
20
See Consultation Paper at pages 71-72.

13

Pre-arranged trading is prohibited for transactions in derivatives subject to the trading obligation,
except for large “block” trades.21
Market participants are still permitted to engage in communications off-venue regarding a potential
trade, including size or price.22 However, they are not permitted to enter into, negotiate, or “conditionally agree” that trade outside of the trading venue. In addition, trading venues operating an order bookare still permitted to allow “cross trades”, whereby a participant enters two customer orders against
each other in the order book in accordance with the trading venue’s rules, which typically provide an
opportunity for other market participants to participate in the transaction before it is executed on the
trading venue.

Large “block” trades are still subject to straight-through-processing requirements, including a
pre-trade credit check that ensures market participants have available clearing capacity before entering into the “block” transaction.23
In practice, as a result of these straight-through-processing requirements, market participants voluntarily execute large “block” trades on US SEFs, despite pre-arranged trading being permitted, since
the trading venue is necessary to facilitate the pre-trade credit check. When executing “blocks”, market participants commonly engage in communications off-venue regarding the potential trade, andthen use a trading protocol that allows for private negotiation on the trading venue, such as RFQ-to-1,
to execute the “block” trade on the trading venue.

The analysis for derivatives subject to the trading obligation under MiFIR should be almost identical.
First, pre-arranged trading should be prohibited for transactions in derivatives subject to the trading obligation for the following reasons:This is the clear intent of Article 28(1) of MiFIR, which requires derivatives subject to the trading obligation to be concluded on one of the listed trading venues. While MiFIR provides trading venues withflexibility regarding the trading protocols that they can offer, transactions in derivatives subject to the
trading obligation still must be executed on a trading venue using a trading protocol offered by thatvenue. Allowing transactions to be entered into, negotiated, or “conditionally agreed” completely awayfrom an MTF or OTF would undermine the trading obligation altogether, as bilateral off-venue trading
could continue to occur in the same manner that it does today.



MiFIR specifically includes provisions relating to “negotiated transactions” in equities, but includes nosuch provisions for derivatives subject to the trading obligation.24 This is further evidence that pre-arranged, or negotiated, transactions were not intended to be permitted for derivatives that must be
traded on trading venues.

Prohibiting pre-arranged trading is consistent with prior ESMA statements regarding the implementation of the trading obligation for derivatives. For example, in this Consultation Paper, ESMA stated “itis expected that the TO will change trading behaviour since all derivatives subject to the TO will haveto be executed on a trading venue” and that the trading obligation will impose costs on market participants in terms of removing their “flexibility to negotiate transactions in derivatives according to protocols and execution methods different from those provided by trading venues”.25 Both of these statements clearly imply that implementation of the trading obligation means that bilateral off-venue trading
will no longer be permitted for those specific instruments.

21

See CFTC Regulation 37.203(a), available at: http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/201312242a.pdf.
22
See CFTC SEF Rules at page 33503, available at: http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/201312242a.pdf.
23
See CFTC No-Action Letter 16-74 (Oct. 7, 2016) at FN 7, available at: http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/16-74.pdf.
24
See, e.g., Article 4 of MiFIR.
25
Consultation Paper at page 23.

14

Similar to US CFTC rules, market participants will still be able to engage in some communications offvenue regarding a potential trade as long as this is permitted by a trading venue. However, prohibiting
pre-arranged trading ensures that each trading counterparty, or an agent or broker acting on their behalf, actually negotiates and executes the relevant transaction on a trading venue as required by
MiFIR.

Second, transactions above the post-trade LIS threshold should not be granted an exception fromthe prohibition on pre-arranged trading for the following reasons:

Since these transactions are subject to the trading obligation, they will also be subject to the straightthrough-processing requirements in RTS 26, including the pre-trade credit check. Today, trading venues play a central role in facilitating pre-trade credit checks, and in fact, there currently does not appear to be a way for market participants to perform the pre-trade credit check other than by executing
the transaction on a trading venue. Thus, there is no need to allow market participants to executetransactions above the post-trade LIS threshold off-venue.



Under MiFIR, trading venues have flexibility regarding the trading protocols that they can offer. Therefore, transactions above the post-trade LIS threshold can be entered into using trading protocols thatallow for private negotiation on the trading venue, such as RFQ-to-1. This should remove any concerns about information leakage which motivated the need for a special exemption for “block” tradesfrom the RFQ-to-3 and Order Book trading protocols under US CFTC rules.
Ensuring that transactions above the post-trade LIS threshold will be traded on trading venues also
incentivizes trading venues to develop and support the appropriate trading protocols for this type of
trading. Experience in the US with trading “blocks” on SEFs shows that trading venues will innovate
and compete to attract additional trading activity. In addition, as discussed above, market participants
will still be able to engage in some communications off-venue regarding a potential trade as long as
this is permitted by a trading venue.

Pursuant to ESMA’s July 2017 transitional transparency calculations, a post-trade LIS threshold of
EUR 10 million will apply to almost all fixed-to-float IRS being considered for the trading obligation.26
To the extent an exception was provided for transactions above the post-trade LIS threshold, nearly all
trading activity would be eligible for this exception.
<ESMA_QUESTION_MIFID_TO_2>

Do you agree with this proposal? If not, please explain why and provide an alternative proposal for ESMA to populate and maintain the register.
<ESMA_QUESTION_MIFID_TO_3>
We agree that it is useful for ESMA to publish and maintain a public register for the trading obligation forderivatives that lists the derivatives subject to the trading obligation and the dates on which the obligation
takes effect. The list of derivatives subject to the trading obligation should match the tables provided in
the final RTS.
We note that it may be more challenging for ESMA to maintain, for each derivative subject to the trading
obligation, a list of venues on which that specific derivative is admitted to trading. This type of list may become out-of-date quite quickly given changes to the various trading venue offerings, particularly when it is
only being updated on a best efforts basis. Market participants would likely find more useful a single list of
trading venues that have admitted to trading derivatives subject to the trading obligation, along with a linkto their rulebooks. This will ensure market participants are aware of the available trading venues, and canfollow-up directly with these venues regarding the current scope of their offering.
<ESMA_QUESTION_MIFID_TO_3>

26

See http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32017R0583&from=EN.

15

Do you agree with this proposal? Would you add other parameters e.g. day countconvention of the floating leg, notional type (constant vs. variable), fixed rate type
(MAC vs. MAC)? If yes, please explain why and provide the parameters.
<ESMA_QUESTION_MIFID_TO_4>
In our view, ESMA has done a good job of identifying the relevant specifications to define which derivatives are subject to the trading obligation. Including specifications such as holiday calendar and business
day convention are unnecessary since they are not material to the economics of the transaction and, as aresult, can be easily modified for purposes of evading the regulatory requirement. To the extent thesetypes of commercially immaterial specifications are included, we urge ESMA to include all of the possiblecombinations in order to prevent evasion.
We also agree with ESMA’s approach of including benchmark tenors +/- 5 days. In addition to preventing
evasion of the trading obligation, this approach helps ensure ESMA is including all of the relevant trading
activity in an instrument when performing its liquidity assessment, despite the recognized data quality issues in current EU trade repository data.
<ESMA_QUESTION_MIFID_TO_4>

For each Case, specify if you agree with the proposal of qualifying the sub-classes
as liquid for the purpose of the trading obligation and if not, please explain why andprovide an alternative proposal<ESMA_QUESTION_MIFID_TO_5>
Yes, we agree that all of these derivatives are highly liquid and are appropriate to be subject to the trading
obligation, including the 15Y, 20Y, and 30Y tenors. This is based on our experience as a participant in thederivatives market, and an assessment of relevant liquidity criteria, such as (i) the availability of streaming
prices from a number of liquidity providers, (ii) trading volumes, (iii) the number and types of market participants, and (iv) whether these instruments are already listed by trading venues today.
In addition, all of these instruments are already subject to the US trading obligation, and market participants have not appeared to experience any difficulty executing them on trading venues.
<ESMA_QUESTION_MIFID_TO_5>

Would you also consider any of these possible sub-classes as liquid? Which othercombinations of fixed leg payment frequency and floating leg reset frequency specifically would you consider to be sufficiently liquid?
<ESMA_QUESTION_MIFID_TO_6>
ESMA has identified the most commonly traded combinations of fixed leg payment frequency and floating
leg reset frequency for EUR IRS.
However, we note that ESMA has only proposed to include the 8Y, 9Y, and 12Y tenors for EUR swaps
referencing 6M Euribor, and has not proposed to include these tenors for EUR swaps referencing 3M Euribor. These tenors are sufficiently liquid for swaps referencing both floating rates across all of the combinations identified by ESMA, based on an assessment of relevant liquidity criteria, such as (i) the availability of streaming prices from a number of liquidity providers, (ii) trading volumes, (iii) the number and typesof market participants, and (iv) whether these instruments are already listed by trading venues today. In
addition, applying the trading obligation to these tenors for only one reference rate (and not the other) will
introduce unnecessary complexity for market participants.
In addition, ESMA has not identified any EUR IMM or MAC contracts as sufficiently liquid for the trading
obligation. We urge ESMA to re-assess this conclusion. Market data shows that EUR IMM and MAC

16swaps constitute approximately 30% of the EUR interest rate swap market.27 In particular, significant trading activity can be observed in the 2Y, 3Y, 5Y, and 10Y IMM and MAC tenors. Data from trade repositories, CCPs, and trading venues should be able to assist in this analysis.
<ESMA_QUESTION_MIFID_TO_6>

For each Case, specify if you agree with the proposal of qualifying the sub-classes
as liquid for the purpose of the trading obligation and if not, please explain why andprovide an alternative proposal.
<ESMA_QUESTION_MIFID_TO_7>
Yes, we agree that all of these derivatives are highly liquid and are appropriate to be subject to the trading
obligation, including both spot-starting and IMM swaps. This is based on our experience as a participant
in the derivatives market, and an assessment of relevant liquidity criteria, such as (i) the availability ofstreaming prices from a number of liquidity providers, (ii) trading volumes, (iii) the number and types ofmarket participants, and (iv) whether these instruments are already listed by trading venues today.
In addition, all of these instruments are already subject to the US trading obligation, and market participants have not appeared to experience any difficulty executing them on trading venues.
We note that ESMA should clarify that the “IMM” category covers both par coupon and MAC swaps, bothof which are highly liquid.
<ESMA_QUESTION_MIFID_TO_7>

Would you also consider any of these possible sub-classes as liquid? Which othercombinations of fixed leg payment frequency and floating leg reset frequency specifically would you consider to be sufficiently liquid?
<ESMA_QUESTION_MIFID_TO_8>
ESMA has identified the most commonly traded combinations of fixed leg payment frequency and floating
leg reset frequency for USD IRS, although we note that there is trading activity in 6M Libor as well. We
note that 6M Libor is already subject to the US trading obligation.
In our view ESMA’s liquidity analysis for USD IRS also incorrectly excludes the following instruments:

The 6Y, 12Y, 15Y, and 20Y tenors in spot-starting swaps are all sufficiently liquid for the trading
obligation.

Additional IMMs and MACs are sufficiently liquid for the trading obligation. According to an analysis of US SDR data, IMM and MAC swaps together constitute approximately 15% of the USD interest rate swap market in terms of trade count.28 In particular, significant trading activity can beobserved in the 2Y, 3Y, 7Y, and 10Y IMM and 1Y, 2Y, 3Y, 5Y, 10Y, and 30Y MAC tenors.

All of the derivatives listed above are standardized, highly liquid, and already traded on trading venues.
Streaming prices from a number of liquidity providers are available and trading activity is significant. In
addition, all of these instruments are already subject to the US trading obligation, and market participants
have not appeared to experience any difficulty executing them on trading venues. We urge ESMA to further investigate these instruments, using data from trade repositories, CCPs, and trading venues.

27

See “30% of the Euro swap market is standardized?” Clarus Financial Technology (Aug. 23, 2016), available at: https://www.clarusft.com/30-of-the-euro-swap-market-is-standardized/.
28
See “30% of the Euro swap market is standardized?” Clarus Financial Technology (Aug. 23, 2016), available at: https://www.clarusft.com/30-of-the-euro-swap-market-is-standardized/.

17In addition, given the current structure of the OTC derivatives market, it is important to note that the liquidity profile of an instrument does not drastically change based on geographical boundaries. While EU-specific data is an important consideration, both US and EU market participants interact with the same coregroup of liquidity providers, and therefore experience similar pricing and liquidity dynamics. Going forward, this will only be more obvious, as trading venues in the US and EU are expected to gain equivalence, meaning that EU market participants will be able to access liquidity on US venues for satisfying the
trading obligation and vice versa. As a result, we believe that ESMA should only adopt a more narrow approach than the US trading obligation where it is absolutely clear that there is insufficient liquidity in a particular instrument. This will reduce regulatory arbitrage and ensure US and EU market participants are on
a level playing field when transacting in the OTC derivatives market.
<ESMA_QUESTION_MIFID_TO_8>

For each case, specify if you agree with the proposal of qualifying the sub-classes
as liquid for the purpose of the trading obligation and if not, please explain why andprovide an alternative proposal.
<ESMA_QUESTION_MIFID_TO_9>
Yes, we agree that all of these derivatives are highly liquid and are appropriate to be subject to the trading
obligation, including the additional tenors of spot-starting swaps and the 3M Libor reference rate. It is important to note that new issuances in the bond markets price against 3M Libor, which drives demand andliquidity in this rate. All of the instruments identified by ESMA satisfy the relevant liquidity criteria, such as(i) the availability of streaming prices from a number of liquidity providers, (ii) trading volumes, (iii) the
number and types of market participants, and (iv) whether these instruments are already listed by trading
venues today.
In addition, all of these instruments are already subject to the US trading obligation, and market participants have not appeared to experience any difficulty executing them on trading venues.
<ESMA_QUESTION_MIFID_TO_9>

Would you also consider the possible sub-classes here below as liquid? Whichother combinations of fixed leg payment frequency and floating leg reset frequency
specifically would you consider to be sufficiently liquid?
<ESMA_QUESTION_MIFID_TO_10>
GBP 3M Libor swaps also trade with semi-annual fixed leg payment frequency, in addition to quarterly.
We note that both payment frequencies are already subject to the US trading obligation.
<ESMA_QUESTION_MIFID_TO_10>

Do you agree with this proposal? If not, please explain why and provide an alternative proposal.
<ESMA_QUESTION_MIFID_TO_11>
Yes, we believe it is reasonable for ESMA to adopt a more cautious approach, at least initially, with respect to interest rate derivatives denominated in other currencies, such as JPY.
<ESMA_QUESTION_MIFID_TO_11>

Do you agree with this proposal? If not, please explain why and provide an alternative proposal

18

<ESMA_QUESTION_MIFID_TO_12>
Yes, we agree with ESMA’s proposal to include the most recent off-the-run series for purposes of the trading obligation. A significant amount of trading in both the on-the-run series and the most recent off-the-run
series occurs in the days following the creation of the new index as market participants “roll” their position
by offsetting a transaction in the older series and entering into a new transaction in the current series.
However, for the entire length of time that a series is the most recent off-the-run, and not just for the first
30 working days, there is sufficient liquidity for it to be subject to the trading obligation. This is based on
our experience as a participant in the derivatives market, and an assessment of relevant liquidity criteria,such as (i) the availability of streaming prices from a number of liquidity providers, (ii) trading volumes, (iii)the number and types of market participants, and (iv) whether these instruments are already listed by trading venues today.
In addition, the most recent off-the-run series is already subject to the US trading obligation, and market
participants have not appeared to experience any difficulty executing these instruments on trading venues.
<ESMA_QUESTION_MIFID_TO_12>

Do you agree to the proposed timeline? If not, please explain why and present yourproposal.
<ESMA_QUESTION_MIFID_TO_13>
Yes, we agree with the proposed application dates. It is important that the trading obligation apply to categories of counterparties already subject to mandatory clearing as soon as possible following the implementation of MiFID II in order to start to transition trading activity in the most standardized and liquid derivatives onto open, competitive, and well-regulated trading venues. As the largest financial counterparties,
Category 1 and Category 2 counterparties are relatively limited in number and are well-placed to be readyto comply with the trading obligation in the beginning of 2018.
<ESMA_QUESTION_MIFID_TO_13>

CBA QUESTIONSThis first question aims at identifying the category of firm/entity you belong to.
Please provide the total notional amount traded in derivatives (trading venues +OTC) in 2016 in thousands euros and the related total number of trades in the relevant boxes<ESMA_QUESTION_MIFID_TO_14>
Category
Number of employees
EMIR Category 1

Total Notional traded2016 (in thousands
euros)TYPE YOUR TEXTHERE

TYPE YOUR TEXT
HERE

[51-250]

TYPE YOUR TEXTHERE

TYPE YOUR TEXT
HERE

[251-1000]

TYPE YOUR TEXTHERE

TYPE YOUR TEXT
HERE

>1000

TYPE YOUR TEXTHERE

TYPE YOUR TEXT
HERE

[1-50]

Total number of
trades 2016

19

EMIR Category 2

EMIR Category 3

EMIR Category 4

Trading Venue[1-50]TYPE YOUR TEXTHERE

TYPE YOUR TEXT
HERE

[51-250]

TYPE YOUR TEXTHERE

TYPE YOUR TEXT
HERE

[251-1000]

TYPE YOUR TEXTHERE

TYPE YOUR TEXT
HERE

>1000

TYPE YOUR TEXTHERE

TYPE YOUR TEXT
HERE

[1-50]TYPE YOUR TEXTHERE

TYPE YOUR TEXT
HERE

[51-250]

TYPE YOUR TEXTHERE

TYPE YOUR TEXT
HERE

[251-1000]

TYPE YOUR TEXTHERE

TYPE YOUR TEXTHERE

TYPE YOUR TEXTHERE

TYPE YOUR TEXT
HERE

[1-50]TYPE YOUR TEXTHERE

TYPE YOUR TEXT
HERE

[51-250]

TYPE YOUR TEXTHERE

TYPE YOUR TEXT
HERE

[251-1000]

TYPE YOUR TEXTHERE

TYPE YOUR TEXT
HERE

>1000

TYPE YOUR TEXTHERE

TYPE YOUR TEXT
HERE

[1-50]TYPE YOUR TEXTHERE

TYPE YOUR TEXT
HERE

[51-250]

TYPE YOUR TEXTHERE

TYPE YOUR TEXT
HERE

[251-1000]

TYPE YOUR TEXTHERE

TYPE YOUR TEXT
HERE

>1000

TYPE YOUR TEXTHERE

TYPE YOUR TEXTHERE<ESMA_QUESTION_MIFID_TO_14>

Based on the draft RTS, which percentage of your derivative trading (notionalamount and number of trades) do you expect to be captured by the TO? Please provide the data for derivatives globally, and then for interest rate derivatives and for
credit default swaps, using 2016 trading data?
20

<ESMA_QUESTION_MIFID_TO_15>% of trading captured by the TO

Year 2016% of total notional amount traded in derivatives captured by the TO

TYPE YOUR TEXT
HERE

% of total number of transaction in derivatives captured by the TO

TYPE YOUR TEXT
HERE

% of total notional amount traded in interest rate derivatives captured by
the TOTYPE YOUR TEXT
HERE

% of total number of transactions in interest rate derivatives captured by
the TOTYPE YOUR TEXT
HERE

% of total notional amount traded in credit default swaps captured by theTO

TYPE YOUR TEXT
HERE

% of total number of transactions in credit default swaps captured by theTO

TYPE YOUR TEXTHERE<ESMA_QUESTION_MIFID_TO_15>

CBA Questions 16 and 17 are to be answered by investment firms and significant non-financial counterparties

Out of the trading activity expected to be captured by the TO, as identified under Q2,
which % is already traded on an EU regulated market, an EU Multilateral Trading
Facility (MTF), a US Swap Execution Facility (SEF) or another third-country trading
venue?
<ESMA_QUESTION_MIFID_TO_16>
Trading activity expected to be capturedby the TO

Traded ona regulated
marketTraded on
an EU MTF

Tradedon a USSEF% of total trading volume captured by
the TO already traded on an EU trading
venue, a US SEF or another third-country venue

TYPE
YOUR
TEXT
HERE

TYPE
YOUR
TEXT
HERE

TYPE
YOUR
TEXT
HERE

Traded on
another
3rd country venue
TYPE
YOUR
TEXT
HERE

% of total number of transactions captured by the TO already traded on an EU
trading venue, a US SEF or anotherthird-country venue

TYPE
YOUR
TEXT
HERE

TYPE
YOUR
TEXT
HERE

TYPE
YOUR
TEXT
HERE

TYPE
YOUR
TEXT
HERE

<ESMA_QUESTION_MIFID_TO_16>

Compliance with the TO may require some further trading arrangements. Which of
the following statement would you consider relevant regarding the steps you might
be taking to that end? Please add any comment as appropriate.
21

<ESMA_QUESTION_MIFID_TO_17>
Arrangements contemplated to comply with the TO

Yes

No

Comments

1. Current membership/Direct Electronic Access(DEA) arrangements are sufficient to comply with
the TO

TYPE
YOUR
TEXT
HERE

TYPE
YOUR
TEXT
HERE

TYPE YOUR TEXT
HERE

2. I intend to become a member/ participant/clientof one (or multiple) EU trading venues for the first
time

TYPE
YOUR
TEXT
HERE

TYPE
YOUR
TEXT
HERE

TYPE YOUR TEXT
HERE

3. I intend to become a member/participant/client ofadditional EU trading venues

TYPE
YOUR
TEXT
HERE

TYPE
YOUR
TEXT
HERE

TYPE YOUR TEXT
HERE

4. I intend to seek access to EU trading venues
through Direct Electronic Access (DEA)

TYPE
YOUR
TEXT
HERE

TYPE
YOUR
TEXT
HERE

TYPE YOUR TEXT
HERE

5. I intend to combine membership (2.or 3) with
DEA (4.)

TYPE
YOUR
TEXT
HERE

TYPE
YOUR
TEXT
HERE

TYPE YOUR TEXT
HERE

6. I am considering other arrangements;
Please explain those arrangements in the Comments section

TYPE
YOUR
TEXT
HERE

TYPE
YOUR
TEXT
HERE

TYPE YOUR TEXTHERE<ESMA_QUESTION_MIFID_TO_17>
CBA Question 18 is to be answered by trading venues

Question 5: Which of the derivatives subject to the TO, based on the draft RTS, arecurrently available for trading on your trading venue? Do you consider extending
trading on your venue to other derivatives subject to the TO?
<ESMA_QUESTION_MIFID_TO_18>
Derivatives potentially subject to the TO currently available for trading on your venue
TYPE YOUR TEXT HERE

Derivatives potentially subject to the TO
that may become available for trading on
your venue
TYPE YOUR TEXT HERE

<ESMA_QUESTION_MIFID_TO_18>

22

CBA Questions 19 to 22 are to be answered by all respondents

Based on the draft RTS, which impacts do you expect from the TO in the short andmedium term? Please elaborate as appropriate under Positive or Negative impact.
<ESMA_QUESTION_MIFID_TO_19>
TO Impact
Positive Impact
Impact on your business
TYPE YOUR TEXT HERE
model/ organisation/ client relationship

Negative impact
TYPE YOUR TEXT HERE

Impact on your revenues

TYPE YOUR TEXT HERE

TYPE YOUR TEXT HERE

Impact on market structure(e.g. principal vs. agency trading etc).

TYPE YOUR TEXT HERE

TYPE YOUR TEXT HERE

Impact on market liquidity and
TYPE YOUR TEXT HERE
execution costs.
Other impacts. Please elaboTYPE YOUR TEXT HERE
rate
<ESMA_QUESTION_MIFID_TO_19>

TYPE YOUR TEXT HERE
TYPE YOUR TEXT HEREIs there any specific provision in the draft RTS that you would expect to be a sourceof significant cost? If so, please elaborate.
<ESMA_QUESTION_MIFID_TO_20>
TYPE YOUR TEXT HERE
<ESMA_QUESTION_MIFID_TO_20>

Please provide an indication, even a rough one, of compliance costs (in thousandsof euros).
<ESMA_QUESTION_MIFID_TO_21>
Draft RTS
a. IT costs b. Training
on the TO
costs

c. Staffcosts

One-off
costs

TYPE
YOUR
TEXT
HERE

TYPE
YOUR
TEXT
HERE

TYPE
YOUR
TEXT
HERE

d. Othercosts(pleaseidentify)
TYPE
YOUR
TEXT
HERE

Recurringcosts (on anannual basis}

TYPE
YOUR
TEXT
HERE

TYPE
YOUR
TEXT
HERE

TYPE
YOUR
TEXT
HERE

TYPE
YOUR
TEXT
HERE

Total costs ( if a.,b, c or d. are notavailable separately
TYPE YOUR TEXTHERE

TYPE YOUR TEXTHERE<ESMA_QUESTION_MIFID_TO_21>

23

Taking into account the size of your firm, would you qualify overall compliance costswith the draft RTS as low, medium or high?
<ESMA_QUESTION_MIFID_TO_22>
Please enter here “Low”, “Medium” or “High”
TYPE YOUR TEXT HERE
<ESMA_QUESTION_MIFID_TO_22>24