Mandatory exchange trading 

in the EU

Edwin Schooling Latter

Head of Markets Policy, FCA

15 July 2015

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Scope: which derivatives will it cover?

• The trading obligation applies to any derivative or class of derivatives which

is:

a) subject to a clearing obligation under EMIR;

b) made available to trade by at least one EU trading venue; and

c) determined by specific ESMA Regulatory Technical Standard(1) to be

sufficiently liquid(2).

• The liquidity test: a class of derivatives is considered sufficiently liquid on

the basis of the following criteria:

– average frequency and size of trades;

– the number and type of active market participants;

– the average size of spreads.

In establishing the trading mandate ESMA shall have regard to the anticipated impact that the

trading obligation might have on the liquidity of the derivatives and the commercial activities

of end users which are not financial entities. 

• The trading mandate excludes intragroup transactions and transactions

covered by transitional provisions (ie current exemption for pension funds).

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(1) Subject to public consultation and to be endorsed by the European Commission.

(2) There is the potential to mandate only for transactions below a certain size, but larger transactions can anyway benefit from pretrade transparency exemptions and post-trade transparency deferral periods),
Scope: which counterparties does it apply to?

The EU trading obligation applies to transactions executed

by:

Financial counterparties:

– investment firms (including credit institutions, dealers);

– insurance, assurance and reinsurance undertakings;

– “UCITS”;

– pension funds (if not exempt from clearing obligation);

– Alternative Investment Funds;

&

Non-Financial Counterparties (NFCs):

– Any non-financial counterparty which takes positions(1) in OTC

derivatives contracts exceeding certain asset-class specific

thresholds during a specified period. 

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(1) Excluding those resulting from hedging activities of their commercial or treasury activities.
Scope: is there extraterritorial reach?

The trading obligation applies to selected non-EU counterparties:

• Third-country financial entities or non-financial entities which

would be subject to the clearing obligation if established in the

EU for transactions with EU counterparties (financial

counterparties and NFC+s) in derivatives subject to the trading

mandate.

• Other third-country firms which would be subject to the

clearing obligation if they were established in the EU where the

contract has a direct, substantial and foreseeable effect within

the EU or where the obligation is necessary or appropriate to

prevent the evasion of any relevant provision.

Contracts with direct, substantial and foreseeable effect within the EU (to be specified

through RTS): certain entities which benefit from a (material) guarantee from an EU

financial institution and EU branches of non-EU financial counterparties. 

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Timing: when will it take effect?

MiFIR requires ESMA to develop draft regulatory technical

standards to specify which class of derivative is subject to

the trading mandate: 

• Within six months after the adoption of the regulatory

technical standards for the purpose of the clearing

obligation;

• The draft regulatory technical standards must specify the

date or dates from which the trading obligation takes

effect, including any phase-in and the categories of

counterparties to which the obligation applies. 

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Timing: trading obligation timetable

The European Commission endorses draft RTS under EMIR (clearing 

obligation)

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The European Parliament and Council have 1 month to object if 

the European Commission adopts the ESMA draft (extendable 

to 2 more months)

If no objection the RTS are published in the “Official Journal” 

and apply 21 days after publication

ESMA must submit draft RTS (trading obligation) under MiFIR to the 

European Commission within 6 months of the adoption of the RTS 

(clearing obligation)

If endorsed by the European Commission and subject to the same 

“non-objection” by the European Parliament and Council the trading 

obligation applies from the date specified in the RTS. 

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Which venues will be eligible?

A derivative or class of derivatives subject to the trading

mandate can only be traded on:

• Regulated Markets

• MTFs;

• OTFs; or

• Third-country trading venues provided that:

1. the European Commission has adopted an equivalence decision;

and

2. the third-country provides for an effective equivalent system of

recognition for EU trading venues. 

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Equivalence decision

• The European Commission adopts an equivalence provision

in accordance with an examination procedure(1)

• The legal and supervisory framework of a third-country is

considered equivalent where:

a) Trading venues in that country are subject to authorisation and

effective supervision and enforcement;

b) Trading venues have clear and transparent rules seeking to ensure that

financial instruments are capable of being traded in a fair, orderly and

efficient manner, and are freely negotiable;

c) Market transparency and integrity is ensured via rules addressing

market abuse.

 

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(1) The European Commission may take an equivalence decision subject to a positive opinion by a committee 

composed by representatives of Member States.
Thank you

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Additional slides
A new market structure for non-equities

liquid non-equities

traded on TVs 

(pre- and post-trade)

Transparency

Trading 

Venues

FC/NFC+ 

Trade 

Obligation

CO + liquid

derivatives

RM MTF OTF 3rd

Country

illiquid non-equities 

traded on TVs

(post-trade only)

SI

Non-discretionary discretionary

Trading 

Protocols

• order book

• quote driven

• periodic auction

• RFQ (waiver for larger orders)

• Voice (waiver for larger orders)

• hybrid
MTF v. OTF (I)

MTF OTF

Instruments All MiFID financial 

instruments 

(including equities)

Bonds, structured finance

products, emissions allowances, 

derivatives (no equities)

Trading methodology Must be nondiscretionaryMust involve operator discretion

Trade transparency Same requirements

Access Transparent, non-discriminatory and objective access 

requirements 

Use of proprietary 

capital 

No Not for trades in G20 derivatives

Client-facing 

responsibilities

Carve-out from 

conduct rules for 

interaction between 

members on MTF 

(but not between 

members and their 

clients)

The OTF operator is subject to 

conduct rules, including best 

execution, in their dealings with 

users of their system 
Clearing thresholds

Article 11

(Article 10(4)(b) of Regulation (EU) No 648/2012)

Clearing thresholds(*)

The clearing thresholds values for the purpose of the clearing 

obligation shall be: 

a) EUR 1 billion in gross notional value for OTC credit derivative 

contracts; 

b) EUR 1 billion in gross notional value for OTC equity derivative 

contracts; 

c) EUR 3 billion in gross notional value for OTC interest rate 

derivative contracts;

d) EUR 3 billion in gross notional value for OTC foreign exchange 

derivative contracts;

e) EUR 3 billion in gross notional value for OTC commodity 

derivative contracts and other OTC derivative contracts not 

provided for under points (a) to (d).

(*) Excluding hedging and intragroup transactions

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