February 7, 2018
Olivier Guersent
Director-General, DG FISMA
European Commission
Steven Maijoor
Chairman, ESMARe:MiFID II – Market Practices that are Undermining OTC Derivatives Reforms &Technical Advice to Remedy Identified Deficiencies

The implementation of MiFID II is a landmark achievement for EU financial markets. As asignificant participant in these markets, Citadel LLC 1 is a firm supporter of reforms designed to
improve market transparency, efficiency, and stability. With respect to the OTC derivative markets,
MiFID II implements the G-20 commitments to increase market transparency and to move thetrading of standardized OTC derivatives onto open and competitive trading venues – reforms thatare critical to transforming a previously opaque market that proved a significant source of systemicrisk during the financial crisis.
However, notwithstanding the clear letter and intent of MiFID II and its implementing
measures, certain market practices have emerged in the first month of implementation that threaten
to undermine these essential reforms. We would like to take this opportunity to highlight the
problems we see, and offer technical advice on how to remedy identified deficiencies. We
summarize six specific issues in the following two pages, followed by a detailed issue-by-issue
description in the remainder of this letter. In each case, we believe prompt action from regulatorsand policymakers is warranted to protect the strong foundations of MiFID II.
Providing Meaningful OTC Derivatives Market Transparency
MiFID II aims to increase pre-trade and post-trade transparency for market participants.
Increasing transparency leads to meaningful benefits for end investors by removing information
asymmetries and facilitating more accurate assessments of execution quality. However, we havealready witnessed a number of market practices that are hindering greater transparency in the OTC
derivatives market. These same practices will also likely impair market supervision and oversightby regulators.

1

Citadel 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.

1Issue 1 – Access to Data: APAs and Trading Venues are failing to publish the required OTC
derivatives data free of charge in an accessible and usable manner
MiFID II specifically requires “approved publication arrangements” (“APAs”) and trading
venues to provide transparency data to the public free of charge 15 minutes after publication.
Nevertheless, APAs and trading venues are adopting a variety of practices that are inconsistent withthis requirement, such as publishing data for only seconds before it is then deleted or publishingdata in unusable formats. These practices appear motivated in part by a desire to compel market
participants to subscribe to expensive data packages in order to obtain MiFID II transparency datathat should be provided free of charge.
Issue 2 – Making Sense of the Data: The current ISIN creation process is harming market
transparency for OTC derivatives
Under MiFID II, International Securities Identification Numbers (“ISINs”) were extended to
OTC derivatives. However, due to inadequate controls over certain ISIN fields, it appears that as
many as 5 different ISINs are often being created each day for the identical OTC derivative
instrument. In addition, even though ESMA specifically included a field to specify the term (orlength) of an OTC derivative contract, this field was not included as part of the ISIN. Both of theseissues are undermining market transparency by making it difficult to link a specific OTC derivative
instrument to a single ISIN.
Issue 3 – Scope of the Transparency Regime: The concept of “traded on a trading venue” is being
interpreted too narrowly, undermining transparency for off-venue OTC derivatives
In order for an OTC derivative instrument executed off-venue to be subject to MiFID II
transparency requirements, it must be an instrument that is also considered “traded on a trading
venue” (“ToTV”). However, reference data field inconsistencies and the existence of a one-day lag
when assessing which instruments are ToTV are both significantly reducing the scope of MiFID II
transparency. As a result, only a limited number of off-venue OTC derivatives transactions
executed by systematic internalisers are currently covered by transparency requirements.
Issue 4 – Exceptions from the Transparency Regime: The transparency waivers and deferrals are
miscalibrated for OTC derivatives
Of the OTC derivatives currently subject to the MiFID II transparency regime, it appears frompublicly available data that nearly all transactions are eligible for a waiver from pre-tradetransparency and a deferral from post-trade transparency, even derivatives subject to the trading
obligation. In order to ensure that these waivers and deferrals are calibrated in a more granularmanner when the transitional transparency calculations are next updated in April 2019, it is criticalthat EU regulators have complete and accurate data from APAs and trading venues. However, thisrequires addressing the ToTV issues detailed above and ensuring that trading activity on equivalent
third-country trading venues is not excluded.

2

Transitioning OTC Derivatives Onto Open and Competitive Trading Venues
The MiFID II derivatives trading obligation implements a key G-20 reform that is designed topromote market stability and integrity while improving conditions for investors through increasing
market transparency and competition. However, the success of this reform depends on market
liquidity successfully transitioning onto trading venues that facilitate competition among liquidity
providers. Two issues warrant further attention.
Issue 5 – Material trading volumes in OTC derivatives subject to the trading obligation appear tobe occurring off-venue
Initial observations from publicly available data shows that more than 60% of dealer-tocustomer trading activity in OTC derivatives subject to the trading obligation may still be occurring
off-venue. 2 This suggests that “Category 3” financial counterparties (which are not yet subject tothe trading obligation) account for far more trading activity than previously estimated and,
therefore, that caution should be exercised when proposing permanent exemptions from the clearing
and trading obligations for these entities, as is currently being discussed as part of EMIR Refit.
Issue 6 – Trading Venues are adopting inconsistent approaches with respect to complying withcertain regulatory requirements
Greater consistency should be promoted across EU trading venues with respect to complying
with key regulatory requirements, such as non-discriminatory access and straight-throughprocessing. We have observed practices that are inconsistent with MiFID II requirements and
ESMA guidance.
Respectfully,/s/ Stephen John Berger
Managing Director, Government & Regulatory Policycc:Paulina Dejmek-Hack, Member of Cabinet of President Juncker
Andrea Beltramello, Member of Cabinet of Vice President Dombrovskis
Jan Ceyssens, Member of Cabinet of Vice President Dombrovskis
Marlene Madsen, Deputy Head of Cabinet of Vice President Katainen
Ioana Diaconescu, Member of Cabinet of Commissioner Moscovici
John Berrigan, Deputy Director-General, DG FISMAUgo Bassi, Director, Financial Markets, DG FISMA
Tilman Lueder, Head of Unit, Securities Markets, DG FISMA
Verena Ross, Executive Director, ESMA
Fabrizio Planta, Head of Markets Department, ESMA2

“Tradeweb and Bloomberg MTF Market Share” (Feb. 6, 2018), Clarus Financial Technology, available at:https://www.clarusft.com/tradeweb-and-bloomberg-mtf-market-share/.

3

Annex: Summary of Recommendations
Issue 1 – Transparency Regime: Access to Data
1. Review how APAs and trading venues are publishing the required transparency data, including
whether the required transparency data is being published (a) correctly and (b) free of charge in anaccessible and usable manner.
2. Provide additional guidance to APAs and trading venues where necessary to promote consistency.
3. Longer-term, consider removing the ability of APAs and trading venues to charge for regulatoryrequired transparency data at all.
Issue 2 – Transparency Regime: Making Sense of the Data
1. Engage with ANNA-DSB to standardize how the “Delivery Type” and “Reference Rate” fields arecompleted in order to prevent duplicate ISINs from being created for the identical OTC derivative.
2. Add the “IR term of contract” field to the ISIN so that market participants and regulators are able
to distinguish between spot-starting and forward-starting interest rate swaps.
3. Longer-term, consider removing the “expiry date” field from the ISIN and instead assign a single
ISIN to each OTC derivative based on tenor (e.g. a 10-year interest rate swap).
Issue 3 – Transparency Regime: Scope
1. Standardize the reference data fields used for determining ToTV, including “Instrument Full
Name,” “Delivery Type” and “IR term of contract.” Do not require matching of the ISIN field.
2. Address the issues caused by market participants employing a one-day lag to assess which
instruments are ToTV.
3. Longer-term, assess the amount of trading activity in OTC derivatives (both in terms of daily trade
count and daily volume) that is not considered to be ToTV and consider whether the concept
should be re-interpreted or removed.
Issue 4 – Transparency Regime: Waivers and Deferrals
1. Assess the percentage of trading activity in OTC derivatives (both in terms of daily trade count anddaily volume) that is granted either a transparency waiver or deferral.
2. Ensure EU regulators have complete and accurate data for the next liquidity assessments. This
includes (a) addressing the interpretation of “traded on a trading venue” and (b) considering trading
activity on equivalent third-country trading venues.
3. Longer-term, restrict overly broad waivers and deferrals by (a) taking into account trading activity
data from CCPs, TRs, and ARMs, (b) limiting extended deferrals to instruments that are illiquid,and (c) considering derivatives subject to a clearing obligation to be liquid for transparency
purposes.
Issues 5/6 – Trading Obligation: Counterparty Scope and Trading Venue Compliance
1. Assess the percentage of trading activity in OTC derivatives subject to the trading obligation (bothin terms of daily trade count and daily volume) that is continuing to occur off-venue. This willassist in better quantifying the trading activity of “Category 3” counterparties.
2. Promote consistency across trading venues with respect to compliance with key regulatory
requirements, including non-discriminatory access and STP.

4

Issue 1 – Access to Data: APAs and Trading Venues are failing to publish the required OTC
derivatives data free of charge in an accessible and usable manner
Compelling market participants to pay for MiFID II transparency data that is required to be
published free of charge increases costs for investors and exacerbates existing information
asymmetries.
Ensuring market participants have access to the MiFID II transparency data
In order for MiFID II to successfully increase market transparency as intended, market
participants must be able to access the data that is required to be published by APAs and trading
venues. For this reason, APAs and trading venues are specifically required to publish transparency
data to the public free of charge 15 minutes after publication. 3 While MiFID II permits APAs andtrading venues to charge for real-time data on a “reasonable commercial basis,” these entities areprohibited from charging for MiFID II transparency data once it has been delayed for 15 minutes.
Unfortunately, APAs and trading venues are seeking to circumvent this requirement to provide
the MIFID II transparency data free of charge by adopting a variety of practices designed to impair
access to, and use of, any freely available data. These practices include: 4•

Deleting data shortly after it has been published (sometimes in less than a minute).

•

Publishing data in a format that prevents the data from being used by market participants,
such as by disabling ‘search’ and ‘copy’ functionality or by publishing data as picture files.

•

Failing to publish any data and instead requiring market participants to submit search
queries in order to access limited portions of the data (e.g. ISIN-by-ISIN searches). Given
the number of ISINs being generated daily, requiring manual ISIN-by-ISIN searches makes
it nearly impossible for market participants to access all of the transparency data that should
be available.

These practices are inconsistent with the regulatory obligation to publish data free of charge.
Transparency data should be accessible by market participants for a reasonable period of time (e.g.
for at least a day at the very minimum, though ideally historical data should also be available 5) andshould be published in a format that is usable (e.g. can be downloaded). Otherwise, market
participants will be compelled to subscribe to expensive data packages in order to have access to
3

See Article 13(1) of MiFIR (for trading venues) and Article 64(1) of Directive 2014/65/EU (for APAs). In addition,
under Commission Delegated Regulation (EU) 2017/571, APAs are specifically required to publish data in “machinereadable” format that facilitates the consolidation of the information with similar data from other sources.

4
Also see the article from Clarus, a third-party data analytics firm, “MiFID II Data – Interest Rate Swaps on D2D
Venues” (Jan. 24, 2018), available at: https://www.clarusft.com/mifid-ii-data-interest-rate-swaps-on-d2d-venues/.
5

We note in the U.S., for example, that the DTCC swap data repository real-time dissemination dashboard – which
performs an analogous function in making regulatory required transparency data freely available to the public –publishes minute-by-minute data files throughout a given day, posts cumulative daily data files for the past 30 days,
and provides historical search functionality. See: https://rtdata.dtcc.com/gtr/dashboard.do.

5any usable information, effectively undermining the transparency reforms by increasing costs forinvestors and exacerbating existing information asymmetries.
In addition to the practices above, we have observed certain trading venues failing to publish
the required transparency data at all. Greater oversight is required to ensure that APAs and trading
venues adopt accurate and consistent approaches to applying available waivers and deferrals fromtransparency requirements, including, for transactions that receive a post-trade deferral, publishing
weekly aggregate volumes as well as full trade details after expiration of the deferral, as required.
Please see Exhibit 1 immediately below for a full list of relevant APAs and trading venues for
OTC derivatives and the problematic practices witnessed thus far.
Longer-term considerations
Permitting APAs and trading venues to charge for real-time data prior to the expiration of the
15 minute delay period provides an incentive for them to decrease the quality of the data they later
publish free of charge. Depending on the extent of oversight that is required to ensure that APAs
and trading venues comply with the requirement to publish transparency data to the public free ofcharge on a delayed basis, it may be appropriate to remove their ability to charge for regulatoryrequired transparency data at all. This would be consistent with the approach taken in otherjurisdictions, where transparency data relating to OTC derivatives is required to be immediately
available to market participants free of charge.
Recommendations for EU Regulators/Policymakers:• Review how APAs and trading venues are publishing the required transparency data,
including whether the required transparency data is being published (a) correctly and (b) freeof charge in an accessible and usable manner.
• Provide additional guidance to APAs and trading venues where necessary to promoteconsistency.
• Longer-term, consider removing the ability of APAs and trading venues to charge forregulatory-required transparency data at all.

6

Exhibit 1: Issues encountered with the publication of OTC derivatives transparency data
APA/Trading Venue

Publishing Website and Issues Encountered

APAs
Bloomberg

https://www.bloombergapa.com/•

Tradeweb

Data is deleted after 60 seconds

https://www.apa.tradeweb.com/• Data is provided as an image that is not machine readable, with‘search’ and ‘copy’ capabilities disabled•

Only the last 100 records appear before they are deleted

Trading Venues
Bloomberg MTF

https://data.bloombergmtf.com/transparency• Data is deleted after 60 seconds

Tradeweb Europe Limited MTF

https://www.apa.tradeweb.com/• Data is provided as an image that is not machine readable, with‘search’ and ‘copy’ capabilities disabled• Only the last 100 records appear before they are deleted

Tradeweb OTF

Trad-X MTF
Tradition OTF

iSwap Europe MTF
Tullet Prebon Europe MTF
Tullet Prebon Europe OTF
ICAP Securities OTF
ICAP WCLK MTF

http://apa.abide-financial.com/home/search (Tradition is using NEX
to publish transparency data)• No data is published and instead market participants must
initiate ISIN-by-ISIN searches to determine whether any
information is available• Does not appear to be publishing the required transparency data
under MiFIR Article 11
https://www.tpicapmifidiidata.com/login• No data is published and instead market participants must
initiate ISIN-by-ISIN searches by venue to determine whether
any information is available• Does not appear to be publishing the required transparency data
under MiFIR Article 11

ICAP Global Derivatives
Limited MTF/SEF
BGC Brokers OTF
GFI Brokers Limited OTF

https://regdata.fenicsmd.com/login• Does not appear to be publishing the required transparency data
under MiFIR Article 117

Issue 2 – Making Sense of the Data: The current ISIN creation process is harming market
transparency for OTC derivatives
Current practices are making it difficult to link a single OTC derivative instrument to a single
ISIN, which undermines the utility of the MiFID II transparency data.
Two issues require urgent attention: (a) multiple ISINs are being created each day for theidentical OTC derivative instrument due to inadequate controls over how certain ISIN fields are
populated and (b) the ISIN inexplicably omits a key field that was included in ESMA’s regulatory
technical standards.
Preventing duplicate ISINs from being created each day for the same OTC derivative instrument
It appears that as many as 5 different ISINs are often being created each day for the identical
OTC derivative instrument, based on the current ANNA-DSB process for creating ISINs. The
existence of duplicate ISINs for the same instrument significantly undermines market transparency,
as the transparency regime only applies where a given ISIN is deemed to be “traded on a trading
venue.” Thus, even for an OTC derivative instrument that has traded on-venue and therefore should
be in-scope for transparency, it is possible for market participants to use an ISIN that has not been
deemed “traded on a trading venue” and avoid transparency requirements. In addition, duplicate
ISINs make it extremely difficult to determine aggregate trading activity for any given OTC
derivative instrument.
In Exhibit 2 on the next page, we provide an example showing 5 ISINs that were created for thesame EUR 5Y interest rate swap (“IRS”) traded on January 17th. The number of duplicate ISINs
results from a lack of standardization in the ISIN creation process with respect to the following
fields:•

Delivery Type. Market participants can choose “cash” or “physical” in the ‘delivery type’ field.
However, this field has no economic significance for many instruments, such as fixed-to-float
IRS, since there is no “delivery” in practice. The input for this field should therefore be
standardized to avoid the creation of duplicate ISINs for the same instrument.

•

Reference Rate. Market participants can choose to specify the publisher of an otherwise
identical reference rate in the ‘reference rate’ field, which is an overly granular approach as
there can be multiple publishers of the exact same reference rate. For example, “3-month
Euribor” is a reference rate, but can be sourced from a Reuters webpage or a Telerate webpage.
Allowing separate ISINs to be created based on the reference rate publisher leads to significant
ISIN duplication. The values for the ‘reference rate’ field should be limited to the standard
index name used by the International Organization for Standardization (ISO).

8

Exhibit 2: Duplicate ISINs for the same OTC derivative instrument
Instrument

Fixed-to-Float Interest Rate Swap

Currency

EUR

Tenor

5Y

Reference Rate

Euribor 3M

Trade Date

17/1/2018 (meaning the expiry date is 19/1/2023 since theeffective date is T+2)

ISIN

Delivery Type

Reference Rate

EZVR9G5B91L9

Cash

EUR-EURIBOR-Reuters

EZ6T3B8NH8F6Cash

EUR-EURIBOR-Telerate

EZ1LXZYZHZW2Cash

EUR-EURIBOR-Reference Banks

EZ1BN1NHGPW6

PhysicalEUR-EURIBOR-Reuters

EZ6MP74YGWH8

PhysicalEUR-EURIBOR-Reference Banks

Adding a necessary field to the ISIN – Term of Contract
The ISIN currently contains a field for the “expiry date” of an OTC derivative instrument, butdoes not contain any information regarding either (i) the date on which the contractual obligations
begin (the “effective date”) or (ii) the length of the contract following the effective date (the“tenor”). This means that there is currently no way to differentiate between spot-starting andforward-starting IRS with the same expiry date. For example, a 2-year spot-starting IRS traded
today will have the same expiry date as a 1-year IRS traded today that is forward-starting by 1-year(meaning that it only goes into effect in a year). Using the same ISIN for these two very different
OTC derivative instruments undermines market transparency, and complicates the ability of EU
regulators to monitor market activity and compliance with the regulatory requirements, such as thederivatives trading obligation (since only the 2-year spot-starting IRS is subject to the trading
obligation, not the 1-year forward-starting 1-year IRS).
Interestingly, ESMA specifically included an “IR Term of contract” field as part of the requiredreference data to be submitted for interest rate derivatives. 6 If included as part of the ISIN, thisfield would have provided the necessary information on the tenor of a particular OTC derivative toaddress the issue above. However, despite the ISIN incorporating almost every reference data fieldrequired by ESMA, this particular field was inexplicably excluded. It is imperative that this field
be added to the ISIN so that both market participants and regulators are able to distinguish between
spot-starting and forward-starting IRS.

6

See Field 41 of Table 3 of Commission Delegated Regulation (EU) 2017/585, available at: http://eurlex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32017R0585&from=EN.

9

Longer-term considerations
Addressing the two issues identified above is a critical first step to ensure that, on any given
day, an OTC derivative instrument only has one ISIN. However, it is important to note that as longas the “expiry date” remains a field in the ISIN, a new ISIN will still have to be created each day
for the same interest rate derivative instrument (i.e. a 10-year IRS traded today has a different expiry
date than a 10-year IRS traded tomorrow). This means that the number of ISINs will continue toincrease over time, with negative impacts for overall market transparency and costs for investors. 7
For example, to determine the aggregate trading activity in a standard 10-year IRS over the courseof a month, a market participant or regulator would have to track the new ISIN used each day forthat instrument and then consolidate available data across each such ISIN. This task will only
increase in complexity over time. Separately, in the first month of MiFID II implementation,
ANNA-DSB has already increased user fees by 73%, costs that can be expected to be passed-down
to all market participants. 8 In light of the above, EU regulators and policymakers should consider
removing the “expiry date” field from the ISIN and instead assign a single ISIN to each OTC
derivative based on tenor or term of contract (e.g. a 10-year IRS) that can remain constant day-byday.
Recommendations for EU Regulators/Policymakers:• Engage with ANNA-DSB to standardize how the “Delivery Type” and “Reference Rate”
fields are completed in order to prevent duplicate ISINs from being created each day for theidentical OTC derivative.
• Add the “IR term of contract” field to the ISIN so that market participants and regulators areable to distinguish between spot-starting and forward-starting IRS.
• Longer-term, consider removing the “expiry date” field from the ISIN and instead assign asingle ISIN to each OTC derivative based on tenor (e.g. a 10-year IRS) that can remain
constant day-by-day.

7

See “MiFID II- Why ISINs for OTC Derivatives Are Bad for Transparency” (Jan. 10, 2018), Clarus Financial
Technology, available at: https://www.clarusft.com/mifid-ii-why-isins-for-otc-derivatives-are-bad-for-transparency/.

8“Isin service increases annual fees by 73%”, (Jan. 25, 2018), Risk.net, available at:https://www.risk.net/regulation/5387771/isin-service-increases-annual-fees-by-73.

10Issue 3 – Scope of the Transparency Regime: The concept of “ToTV” is being interpreted
too narrowly, undermining transparency for off-venue OTC derivatives
The MiFID II transparency regime is covering far fewer off-venue OTC derivatives transactions
than intended.
Under MiFID II, an OTC derivative instrument executed off-venue will only be subject totransparency requirements if it is an instrument that is also considered “traded on a trading venue”(“ToTV”). ESMA has interpreted this phrase to mean that an instrument must share the exact samereference data details as an instrument that has been admitted to trading on a venue (i.e. all reference
data fields must “match”). 9 This strict interpretation considerably narrowed the scope of OTC
derivatives subject to transparency requirements under MiFID II. However, following MiFID II
implementation, this scope has been narrowed even further due to (a) inconsistencies with how
certain reference data fields are being populated and (b) market participants employing a one-day
lag to assess which instruments are ToTV. We recommend that EU regulators and policymakers
address these issues as a matter of priority.
Reference data inconsistencies
Requiring the following reference data fields to perfectly “match” is resulting in the exclusionof standardized OTC derivatives that should be subject to transparency requirements:•

Instrument Identification Code (ISIN). As detailed in Issue 2, as many as 5 different ISINs
are often being created each day for the same OTC derivative instrument, leading to otherwise
identical OTC derivative instruments failing to match.

•

Instrument Full Name. There are inadequate controls over how this free text reference data
field is completed, and different names are being used for the exact same instrument. This
results in identical OTC derivative instruments failing to match. The more standardized“financial instrument short name” field should instead be used.

•

Delivery Type. As detailed in Issue 2, for many OTC derivative instruments there is no“delivery” in practice, meaning that this reference data field has no economic significance.
Allowing market participants to nevertheless choose “cash” or “physical” results in identical
OTC derivative instruments failing to match.

•

IR term of contract. As detailed in Issue 2, this field is currently not part of the ISIN but isseparately reported as a reference data field. Based on ESMA’s Financial Instruments
Reference Data System (“FIRDS”), it does not appear that this field is being reported in aconsistent manner. In particular, trading venues appear to be reporting the reset period of thereference rate (i.e. “3 months” for 3-month Euribor) instead of the term, or length, of thecontract. Inconsistent reporting of this reference data field results in identical OTC derivative
instruments failing to match.

These fields should either be standardized or excluded from consideration for purposes ofdetermining ToTV status for OTC derivative instruments. Further, in no event should the ISIN be9

See https://www.esma.europa.eu/press-news/esma-news/esma-clarifies-traded-trading-venue-under-mifid-ii.

11required to match if an ISIN has not yet been assigned to the instrument when the pre-trade ToTV
assessment is conducted. Separately, we note that certain fields appear to be blank in many FIRDS
entries, such as the “expiry date” field, which may also result in failures to match.
The problems with employing a one-day lag to assess which instruments are ToTV
Market participants are currently using the ESMA FIRDS database to determine whether a
specific OTC derivative instrument is ToTV. However, the FIRDS database is only updated on a
T+1 basis, meaning that an ISIN first traded on-venue today will only appear as ToTV in the FIRDS
database tomorrow. Since a new ISIN is created each day for the same interest rate derivative (asits “expiry date” changes each day), this one-day lag in assessing whether an instrument is ToTV
means that interest rate OTC derivatives will be excluded from the MiFID II transparency regime
when executed off-venue by systematic internalisers unless trading venues pre-load ISINs andreference data into the FIRDS database in advance.
We urge EU regulators and policymakers to address this topic to avoid a lack of transparency
for standardized interest rate OTC derivatives executed off-venue by systematic internalisers.
Possible solutions include (i) facilitating a more real-time assessment of ToTV, (ii) requiring
trading venues to pre-load future ISINs and reference data for the standardized interest rate
derivatives listed on their platforms, or (iii) modifying the ToTV assessment criteria so that thedaily change to the expiry date does not result in interest rate OTC derivatives being excluded fromthe transparency regime when executed off-venue.
Longer-term considerations
Given the issues identified above, we urge EU regulators to conduct an assessment regarding
the percentage of trading activity in OTC derivatives (both in terms of daily trade count and dailyvolume) that is not considered to be ToTV and is therefore exempt from MiFID II transparency
requirements. We note that, in other jurisdictions, public transparency requirements apply to all
OTC derivatives, not just those that are considered to be “traded on a trading venue.”
Recommendations for EU Regulators/Policymakers:• Standardize the reference data fields used for determining ToTV, including “Instrument Full
Name,” “Delivery Type” and “IR term of contract.” Do not require matching of the ISIN
field for ToTV purposes.
• Address the issues caused by market participants employing a one-day lag to assess which
instruments are ToTV.
• Longer-term, assess the amount of trading activity in OTC derivatives (both in terms of daily
trade count and daily volume) that is not considered to be ToTV and consider whether theconcept should be re-interpreted or removed.

12Issue 4 – Exceptions from the Transparency Regime: The transparency waivers anddeferrals are miscalibrated for OTC derivatives
In order to ensure that transparency waivers and deferrals are calibrated more accurately when
updated in April 2019, it is critical that EU regulators have complete and accurate data.
Assessing the current regime
Due to the ToTV issues identified in Issues 2 and 3, the current MiFID II transparency regime
covers on-venue, and only a limited number of off-venue, OTC derivative transactions. Of these,
based on initial observations from publicly available data, it appears as though nearly every OTC
derivatives transaction is eligible for a waiver from pre-trade transparency and a deferral from posttrade transparency, even transactions in derivatives subject to the trading obligation. While thisoutcome was expected given that ESMA’s transitional transparency calculations deemed most OTC
derivatives to be illiquid for transparency purposes on an interim basis, we nevertheless urge EU
regulators to conduct an assessment regarding the percentage of trading activity in OTC derivatives(both in terms of daily trade count and daily volume) that is granted either a pre-trade transparency
waiver or a post-trade transparency deferral. This will help to inform future policy decisions
relating to the calibration of the transparency regime.
Improving the calibration of the transparency regime in 2019
Under the MiFID II framework, the current transitional transparency calculations will be
updated and replaced in April 2019. 10 Both market participants and regulators expect that these
updated liquidity assessments will be more accurate and result in a more meaningful transparency
regime for OTC derivative transactions, given the expectation that a broader and more robust data
set will be available. However, it is becoming increasingly clear that unless identified data
deficiencies are remedied, the April 2019 updates to the transparency calculations may not improveconditions. MiFID II contemplates that EU regulators will rely on data provided by APAs andtrading venues for the updated liquidity assessments. 11 Unfortunately, this data will not provide acomplete and accurate representation of the liquidity in a particular OTC derivative instrument
unless the following two issues are addressed.
A. The “traded on a trading venue” issues detailed in Issue 3 must be resolved
For OTC derivatives that are not subject to the derivatives trading obligation, most trading
activity continues to be executed off-venue. However, APAs only have access to data regarding
off-venue transactions in OTC derivatives that are considered to be ToTV. Due to the current
interpretation of ToTV, APAs will only have very limited data regarding this important segment of
the market. It is therefore critical that the issues around ToTV are addressed to provide complete
and accurate data regarding trading activity in OTC derivatives not subject to the trading obligation.
10

See Article 13(17) of Commission Delegated Regulation (EU) 2017/583, available at: http://eurlex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32017R0583&from=EN.
11

See Article 22(1) of MiFIR.

13

B. Trading activity on equivalent third-country trading venues should be considered
It does not appear trading activity on equivalent third-country trading venues is considered aspart of the liquidity assessments. As an example, the equivalence agreement reached between the
EU and U.S. with respect to the derivatives trading obligation allows EU investment firms to tradeon U.S. swap execution facilities (“SEFs”) instead of EU MTFs or OTFs. However, this activity
will not show up in the data that EU regulators receive from EU trading venues and APAs, andtherefore, liquidity may be understated.
This problem is compounded as currently all third-country trading venues, regardless ofjurisdiction, are deemed to be equivalent for post-trade transparency purposes. 12 As theequivalence process for post-trade transparency continues to be considered, the impact on futureliquidity assessments must also be addressed. An accurate liquidity assessment requires taking into
account all of the trading activity of EU investment firms, including trading activity that may occur
on third-country venues.
Longer-term considerations
Addressing the issues above will more accurately calibrate the MiFID II transparency regime.
However, it may be necessary to take additional steps to ensure that overly broad waivers anddeferrals are not granted to liquid OTC derivatives. First, liquidity assessments should take into
account additional sources of data in order to ensure accuracy and completeness, including datafrom CCPs, trade repositories, and ARMs. Second, use of extended deferrals should be limited to
instruments that are determined to be illiquid. Finally, OTC derivatives that have satisfied theliquidity assessment under EMIR in order to be subject to a clearing obligation should be
categorized in a consistent manner under MiFID II. In particular, derivatives subject to a clearing
obligation should be considered liquid for transparency purposes and should not be eligible forextended deferrals of 4 weeks. We note that, in other jurisdictions, all OTC derivatives are reported
in real-time, with a maximum deferral of 15 minutes for large-size transactions.
Recommendations for EU Regulators/Policymakers:• Assess the percentage of trading activity in OTC derivatives (both in terms of daily trade
count and daily volume) that is granted either a transparency waiver or deferral.
• Ensure EU regulators have complete and accurate data for the next liquidity assessments.
This includes (a) addressing the interpretation of “traded on a trading venue” and (b)considering trading activity on equivalent third-country trading venues.
• Longer-term, restrict overly broad waivers and deferrals by (a) taking into account trading
activity data from CCPs, TRs, and ARMs, (b) limiting extended deferrals to instruments thatare illiquid, and (c) considering derivatives subject to a CO to be liquid.

12

ESMA Opinion on “Determining third-country trading venues for the purpose of transparency under MiFID II /MiFIR”, available at: https://www.esma.europa.eu/sites/default/files/library/esma70-154165_smsc_opinion_transparency_third_countries.pdf.

14Issue 5 – Trading Obligation: Material trading volumes in OTC derivatives subject to the
trading obligation appear to be occurring off-venue
This suggests that “Category 3” counterparties account for far more trading activity thanpreviously estimated. It is therefore important that the clearing and trading obligations be fully
implemented as intended.
At the moment, the trading obligation only applies to the largest “Category 1” and “Category
2” financial counterparties. Previous analysis from ESMA predicted that these counterparties
should account for over 97% of total trading activity in cleared interest rate OTC derivatives. 13
However, this analysis occurred prior to the clearing or trading obligations going into effect.
Initial observations from publicly available MiFID II data shows that more than 60% of
dealer-to-customer trading activity in OTC derivatives subject to the trading obligation may
still be occurring off-venue. 14 This suggests that “Category 3” counterparties account for far more
trading activity than previously estimated. We urge EU regulators to conduct an assessment as amatter of priority regarding the percentage of trading activity in OTC derivatives subject to the
trading obligation (both in terms of daily trade count and daily volume) that is continuing to occur
off-venue.
This updated analysis is also critical for purposes of finalizing EMIR Refit, which proposes topermanently exempt certain “Category 3” counterparties from both the clearing obligation andtrading obligation. Any permanent exemptions should be appropriately tailored to not undermine
the G-20 objectives of moving trading activity in standardized OTC derivatives into central clearing
and onto open and competitive trading venues. A better understanding of the magnitude of trading
activity that may be eligible for a permanent exemption will assist in properly calibrating the final
legislation.
Recommendations for EU Regulators/Policymakers:• Assess the percentage of trading activity in OTC derivatives subject to the trading obligation(both in terms of daily trade count and daily volume) that is continuing to occur off-venue.
This will assist in better quantifying the trading activity of “Category 3” counterparties andappropriately calibrating any permanent exemptions from the clearing and trading
obligations.

13
See ESMA Consultation Paper on the Clearing Obligation for Financial Counterparties with a Limited Volume of
Activity (July 13, 2016) at page 19, available at: https://www.esma.europa.eu/press-news/consultations/consultationclearing-obligation-financial-counterparties-limited-volume
14“Tradeweb and Bloomberg MTF Market Share” (Feb. 6, 2018), Clarus Financial Technology, available at:https://www.clarusft.com/tradeweb-and-bloomberg-mtf-market-share/.

15

Issue 6 – Trading Obligation: Trading venues are adopting inconsistent approaches withrespect to complying with certain regulatory requirements
Certain trading venue practices relating to non-discriminatory access and STP appear to beinconsistent with MiFID II requirements and ESMA guidance.
MTFs and OTFs are designed to be open and competitive trading venues. However, it is criticalthat these trading venues adopt consistent approaches for complying with key regulatory
requirements, such as non-discriminatory access and straight-through-processing (“STP”).
Non-discriminatory accessDiscriminatory access barriers limit trading venue membership to select market participants.
These barriers prevent investors from accessing all of the available sources of liquidity for OTC
derivatives traded on-venue and make it extremely difficult for new liquidity providers to enter themarket since they are blocked from accessing necessary pools of liquidity for pricing and hedging
purposes. As a result, MiFID II requires that MTFs and OTFs establish non-discriminatory rules
governing access and ESMA provided specific examples of discriminatory access barriers thatshould no longer be permitted. 15 Unfortunately, several trading venues for cleared OTC derivatives
do not appear to be following this ESMA guidance and instead are attempting to limit membershipto self-clearing members and to maintain “enablement” mechanisms that allow trading venue
members to selectively “turn-off”, or otherwise restrict trading with, certain other members.
Please see Exhibit 3 below for a full list of issues related to non-discriminatory access identified
thus far.
Straight-through-processing
The MiFID II STP requirements for cleared OTC derivatives traded on MTFs and OTFs include(i) pre-trade credit checks against clearing member limits to ensure available capacity, (ii) prompt
submission to, and acceptance or rejection by, the clearinghouse, and (iii) clear rules in the rare
event a trade is rejected by the clearinghouse. These requirements are designed to reduce market
risk, credit risk, and operational risk by ensuring a robust execution-to-clearing workflow. In
addition, they ensure that bilateral counterparty credit risk is not introduced when trading cleared
OTC derivatives, thereby removing the need to negotiate complex and costly bilateral trading andcredit support documentation.
However, several trading venues for cleared OTC derivatives do not appear to be fully
implementing these requirements. Examples include failing to support pre-trade credit checks andfailing to clearly articulate the treatment of cleared OTC derivative transactions not accepted forclearing.

15
ESMA Q&A on MiFID II and MiFIR market structure topics, Section 5.1, Question 3, available at:https://www.esma.europa.eu/sites/default/files/library/esma70-872942901-38_qas_markets_structures_issues.pdf

16Please see Exhibit 4 below for a full list of issues related to STP that have been identified thus
far.
Recommendations for EU Regulators/Policymakers:•

Promote consistency across trading venues with respect to compliance with key regulatory
requirements, including non-discriminatory access and STP.

Exhibit 3: MTF/OTF provisions that are inconsistent with non-discriminatory access requirements
1. Limiting membership/participation to self-clearing members of a CCP.
This is prohibited under MiFID II Article 18(3), as specifically clarified in ESMA Q&A. 16•

i-Swap Europe Limited MTFo•Rule 4.1.6 requires a Participant to be a direct clearing member

BGC Brokers OTFo

BGC has stated that only self-clearing members will be able to access the electronic trading platform
for cleared OTC derivatives that is part of the OTF. This restriction is not specified in the rulebook.

2. Implementing enablement mechanisms for cleared OTC derivatives, whereby a trading venue member
can decide to selectively “turn-off”, or otherwise restrict trading with, certain other members.
This is prohibited under MiFID II Article 18(3), as specifically clarified in ESMA Q&A . 17••

i-Swap Europe Limited MTFoRule 8.4 allows Participants to input credit settings to selectively “turn-off” or refuse to trade withcertain other members in accordance with a “Bilateral Credit Methodology”.

oRule 9.1 requires a Participant to “turn off” trading with another member if bilateral documentation
is not in place (even though bilateral documentation is not required for cleared OTC derivatives).

oMarket Appendix #1, Rule 7.1 and Market Appendix #2, Rules 5.12 and 5.13 establish additional
enablement mechanisms for the Order Book and Targeted Streaming Market.

BGC Brokers OTFo

BGC has stated that participants on the OTF will be able to selectively “turn-off” or refuse to tradewith certain other members, including for cleared OTC derivatives. This functionality is not
specified in the rulebook.

16

See Section 5.1, Question 3(a) at https://www.esma.europa.eu/sites/default/files/library/esma70-87294290138_qas_markets_structures_issues.pdf.
17
See Section 5.1, Question 3(b) at https://www.esma.europa.eu/sites/default/files/library/esma70-87294290138_qas_markets_structures_issues.pdf

17

Exhibit 4: MTF/OTF provisions that are inconsistent with STP requirements
1. Not facilitating the required pre-trade credit checks for cleared OTC derivatives.
Article 2(2) of Commission Delegated Regulation (EU) 2017/582 requires a trading venue to provide
the tools to ensure pre-trade screening on an order-by-order basis against limits set by the relevant
clearing member for its client.
•

i-Swap Europe Limited MTFo•Rule 17.11 assumes each Participant is a CCP self-clearing member and is therefore providing its
own clearing limits. It should be amended to accommodate the screening of limits provided by aclearing member for its client, as required by Commission Delegated Regulation (EU) 2017/582.

BGC Brokers OTFo

BGC has stated that, since each Participant is required to be a CCP self-clearing member to accessthe electronic trading platform for cleared OTC derivatives, pre-trade credit checks will not beprovided. This is alluded to in Rule 5.4(a), which sets forth conditions for clients to trade cleared
OTC derivatives that cannot be satisfied without the existence of pre-trade credit checks.

Additional Notes•

This issue is linked to non-discriminatory access. Since a trading venue for cleared OTC derivatives is
not permitted to limit participation to self-clearing members, it must also facilitate pre-trade credit
checks for client transactions under Commission Delegated Regulation (EU) 2017/582.

•

It should be clarified to trading venues that cleared OTC derivatives are unable to qualify for the
exemption from pre-trade checks in Article 2(1) of Commission Delegated Regulation (EU) 2017/582.
ESMA was clear in the Final Report that this exemption was only intended for exchange-tradedderivatives on Regulated Markets, which already benefit from clearing certainty. 18•

It should also be confirmed that trading venues are applying the pre-trade credit check requirements in
Article 2(2) across all of the trading protocols offered by the venue, including “negotiated” or“processed” trades that are discussed off-venue pursuant to the rules of the venue but then are concluded
on the venue.

18

See page 390 at: https://www.esma.europa.eu/sites/default/files/library/2015/11/2015-esma-1464_-_final_report__draft_rts_and_its_on_mifid_ii_and_mifir.pdf.

18

2. Failing to clearly and accurately designate which cleared derivative transactions are concluded
electronically for straight-through-processing requirements.
The clearing submission timelines in Commission Delegated Regulation (EU) 2017/582 aredetermined by whether the transaction was entered into electronically. For example, Article 3(2) of
Commission Delegated Regulation (EU) 2017/582 requires cleared derivative transactions that areconcluded on a trading venue electronically to be sent to the CCP within 10 seconds from theconclusion of the transaction.
•

Tullet Prebon (Europe) Limited MTFo•

BGC Brokers OTF
o•Section 9 of the Market Segment Appendix for Interest Rate Derivatives provides that all cleared
OTC derivatives are deemed executed on a non-electronic basis. However, Section 6 of the same
Appendix provides that the only trading protocols are electronic. We would expect all transactions
on the MTF are concluded electronically, given the available trading protocols.

BGC has stated that they are considering all cleared OTC derivatives transactions to be deemed
executed on a non-electronic basis. This is even though they have an electronic platform within the
OTF for trading these instruments.

Tullet Prebon (Europe) Limited OTF / ICAP Securities Limited OTF
oSection 10 of the Market Segment Appendices for Interest Rate Derivatives and Credit provides that
all cleared OTC derivative transactions are deemed executed on a non-electronic basis. However,Section 8 of the same Appendices provides that electronic trading protocols are available on the
OTF.

3. Failing to clearly articulate the treatment of cleared OTC derivative transactions not accepted forclearing.
Articles 5(1) and 5(2) of Commission Delegated Regulation (EU) 2017/582 provide that if a cleared
OTC derivative transaction is not accepted by the CCP, (a) the trading venue shall void the contract
if it was concluded electronically, and (b) otherwise, the treatment of the transaction shall begoverned by the rules of the trading venue. It is important from a risk perspective that the rulebook
clearly specifies what would happen in such a scenario as contemplated by Article 5(2).
•Tullet Prebon (Europe) Limited MTF / Tullet Prebon (Europe) Limited OTF / ICAP Securities Limited
OTF
o

•

These rulebooks do not specify what happens if an executed transaction (either electronic or voice)fails to be accepted for clearing.

BGC OTFo

For cleared OTC derivatives that are not executed electronically, Rule 5.4(e) requires Participants
to “identify an alternative mechanism to clear the transaction outside the venue” if it is rejected fromclearing. There is no indication of what that means.

19