16.11.2017 | KPMG Law Insights

Derivatives – Insights – Derivatives | Edition No. 4/2017

Dear readers,

With the go-live of the revised Markets in Financial Instruments Directive and Regulation (MiFID II / MiFIR) drawing closer, the European regulators are still busy filling the remaining gaps and addressing remaining uncertainties. Among other things, the European Securities and Markets Authority (ESMA) published its final draft Regulatory Technical Standards (RTS) on the trading obligation for derivatives and launched its Financial Instrument Reference Data System (FIRDS).

Regarding the European Market Infrastructure Regulation (EMIR), the revised reporting rules entered into force on November 1, 2017 and the EMIR-review process is still ongoing. Apart from that, the European regulators now seem to put their focus, in particular, to managing the possible impacts of the UK’s withdrawal from the Union (Brexit) and certain third-country issues.

To read more about these and other regulatory developments affecting the derivatives and / or securities markets, please see the news items below.

Sincerely yours,

Andres Prescher


Final draft RTS on the trading obligation for derivatives

On 29 September 2017, the European Securities and Markets Authority (ESMA) published its final draft Regulatory Technical Standard (RTS) on the trading obligation for derivatives under the Markets in Financial Instruments Regulation (MiFIR).

In addition, ESMA published the responses received during the consultation of the draft RTS.

The trading obligation aims at moving over-the-counter (OTC) trading in liquid derivatives onto trading venues and, thus, increasing transparency. The final draft RTS now specifies which classes of derivatives should be traded on-venue and the date from which the trading obligation should apply.

ESMA decided to make the following fixed-to-float interest rate swaps (IRS) and credit default swaps (CDS) indices subject to the trading obligation:

  • Fixed-to-float IRS denominated in EUR;
  • Fixed-to-float IRS denominated in USD;
  • Fixed-to-float IRS denominated in GBP; and
  • Index CDS – iTraxx Europe Main and iTraxx Europe Crossover.

Regarding the start date, ESMA proposed a phase-in in line with the clearing obligation under the European Market Infrastructure Regulation (EMIR), i.e. the trading obligation should take effect:

  • for counterparties of category 1 and 2 from the date when the RTS applies (currently expected for early 2018);
  • for counterparties of category 3 from 21 June 2019; and
  • for counterparties of category 4 from 21 December 2018 (IRS) or 9 May 2019 (CDS).

As a next step, the draft RTS needs to be endorsed by the European Commission (EC). According to ESMA, the EC already indicated support of the draft RTS. Therefore, ESMA continues to envisage 3 January 2018 as date of application.

ESMA’s final report and draft RTS

Responses to the consultation paper


Post trade transparency – BaFin intends to authorise deferred publication

The Markets in Financial Instruments Regulation (MiFIR) introduces new rules on post trade transparency for transactions in certain financial instruments, including derivatives. Under these rules, investment firms are generally required to publish information on their over-the-counter (OTC) transactions in financial instruments as close to real time as possible.

Subject to certain requirements, national competent authorities are, however, able to authorise deferred trade-publication. The German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) intends to make full use of this empowerment and intends to issue a general order (Allgemeinverfügung) in this regard. A respective draft was published by BaFin on 17 October 2017.

According to the draft, BaFin intends, inter alia, to authorise deferred publication of the following transactions:

  • Transactions that are large in scale in comparison to the normal market size;
  • Transactions in financial instruments that are deemed illiquid (e.g. FX derivatives);
  • Certain transactions that are above a size specific to the instrument; and
  • Package transactions.

The draft general order was open for consultation until 14 November 2017.

BaFin consultation (only available in German)


ESMA published data on several financial instruments

A number of provisions under the revised Markets in Financial Instruments Directive (MiFID II) and the Markets in Financial Instruments Regulation (MiFIR) require data and / or calculations on markets or products (e.g. the rules on transparency for non-equity instruments or the systematic internaliser regime). In this context, the European Securities and Markets Authority (ESMA) recently issued several publications. In particular:


ESMA confirmed MiFID II position limits proposed by FCA

The revised Markets in Financial Instruments Directive (MiFID II) introduces position limits, which determine the maximum net position a person can hold in commodity derivatives. While the methodology for calculating those limits is defined at European level, the specific position limits have to be set by each national competent authority.

On 24 October 2017, the European Securities and Markets Authority (ESMA) published nine opinions on position limits regarding commodity derivatives. The opinions confirm position limits proposed by the UK national competent authority (Financial Conduct Authority, FCA) and concern contracts on:

  • London cocoa;
  • Robusta coffee;
  • White sugar;
  • Aluminum;
  • Copper;
  • Lead;
  • Nickel;
  • Tin; and
  • Zinc.

In addition, ESMA published a list of liquid contracts that will receive a bespoke position limit.

ESMA’s opinions


Updated Q&As on MiFID II / MiFIR

The European Securities and Markets Authority (ESMA) issued a new Questions & Answers document (Q&A) on post trading topics and updated its Q&A on

Investor protection;

Transparency topics;

Commodity derivatives topics;

Data reporting; and

Market structure topics.


Brexit’s impact on derivatives markets

Currently, London is the global center for euro clearing (i.e. the clearing of derivatives denominated in euros). However, this might change against the background of the UK’s withdrawal from the EU (Brexit). In this context, the European Commission (EC) issued a proposal aiming at forcing London-based CCPs to move into the EU in the course of the Brexit (for details please refer to our previous edition).

On 22 September 2017, the German Federal Council (Bundesrat) issued a statement, expressing its consent to the EC’s proposal and asking the German Government (Bundesregierung) to advocate for the said proposal.

Furthermore, market participants are also looking into ways to address the Brexit. At the moment, the majority of derivatives contracts is governed by either English or New York law, with English law being the choice for counterparties seeking to have their contracts governed by the law of an EU member state and subject to the jurisdiction of EU courts. In the light of the upcoming Brexit, the International Swaps and Derivatives Association (ISDA) is now assessing whether there is an interest in French- and Irish-law governed Master Agreements as additional governing law options, along with French and Irish court jurisdiction clauses.

Federal Council’s statement


Developments on third-country issues

Considering the global nature of derivatives markets, dealing with counterparties in non-EU countries and different regulatory regimes are recurring issues. In this context, the European regulators recently published several statements, in particular:

  • Equivalence decision – US risk mitigation techniquesOn 14 October 2017, the European Commission (EC) published its implementing decision on the recognition of the legal, supervisory and enforcement arrangements of the United States of America for derivatives transactions supervised by the Commodity Futures Trading Commission (CFTC) as equivalent to certain requirements of Article 11 of the European Market Infrastructure Regulation (EMIR). Thereby, the EC declared certain risk mitigation techniques under the US regime for non-centrally cleared OTC derivatives to be equivalent to those under EMIR. The decision will ease the regulatory burden for EU and US companies as it will allow market participants to comply with only one set of rules and avoid duplicative or conflicting rules;
  • On 9 October 2017, the European Securities and Markets Authority (ESMA) updated its list of third-country central counterparties (CCPs) recognized to offer services and activities in the Union. The update concerns Indian Clearing Corporation Limited, National Securities Clearing Corporation Limited and MCX-SX Clearing Corporation;
  • ESMA to cooperate with Indian regulators on CCPs: ESMA entered into a memorandum of understanding with the Securities and Exchange Board of India (SEBI). The memorandum outlines cooperation arrangements, including the exchange of information, regarding CCPs which are established and authorized or recognized in India, and which have applied for EU recognition under EMIR. The first effects of this cooperation can already be seen in ESMA’s updated list of third-country CCPs (see news item above).

EC’s equivalence decision

List of third-country CCPs

ESMA’s memorandum of understanding with SEBI


Other EMIR topics

Furthermore, the following relevant publications have been issued by the European Commission (EC) or the European Securities and Markets Authority (ESMA) respectively:

  • EMIR Q&A: On 2 October 2017, ESMA updated its Questions & Answers on the implementation of the European Market Infrastructure Regulation (EMIR Q&A). The update concerns clarifications on the definition of OTC derivatives with regard to derivative contracts traded on Multilateral Trading Facilities (MTFs), Organised Trading Facilities (OTFs) and third-country markets as well as the ongoing monitoring of collateral requirements by central counterparties (CCPs);
  • The Delegated Regulation (EU) No 151/2013 was amended by the Commission Delegated Regulation (EU) 2017/1800. The amendment aims at further specifying and improving the operational standards required to aggregate and compare data across trade repositories;
  • On 24 August 2017, ESMA published its final report on Guidelines on data transfer between trade repositories (TRs). There are currently seven authorized TRs operating in the EU and data portability is essential for data quality, competition between TRs and for risk monitoring by authorities. The guidelines aim at establishing a consistent and harmonised framework for the transfer of data between TRs in order to allow the transfer of records from one TR to another, e.g. when a TR participant changes the TR or in case of the withdrawal of registration of a TR.


Delegated Regulation (EU) 2017/1800

Final report on guidelines on data transfer between TRs


Harmonization of the UPI

The G20 Leaders agreed in 2009 that all over-the-counter (OTC) derivatives contracts should be reported to trade repositories (TRs) in order to improve market transparency. To enable authorities to obtain a comprehensive view of OTC derivatives markets and activity, it is necessary to aggregate data reported to different TRs in different jurisdictions. In this context, the clear identification of OTC derivative products is of paramount importance. Therefore, the Unique Product Identifier (UPI) was introduced as a uniform global way to identify each OTC product involved in a transaction.

On 28 September 2017, the Committee on Payments and Market Infrastructure (CPMI) and the International Organization of Securities Commissions (IOSCO) published a joint report on the harmonization of the UPI. The report envisages a UPI system in which a unique UPI code would be assigned to each distinct OTC derivative product, with each UPI code mapping to a set of data comprised of reference data elements with specific values that together describe the OTC derivative product.

This guidance is complementary to the Technical Guidance on Harmonisation of the Unique Transaction Identifier (UTI) published in February 2017 (for details please refer to our previous edition).

CPMI / IOSCO report


Consultation on UPI governance

The Financial Stability Board (FSB) published a consultation on the governance arrangements and the implementation of the Unique Product Identifier (UPI). The document identifies key criteria and functions for the UPI governance arrangements for consultation and also seeks specific feedback on certain issues relating to UPI service providers, cost recovery and fee models, and the reference data library that will underlie the UPI system. Responses to the consultation can be sent to the FSB until 13 November 2017.

The consultation complements the CPMI / IOSCO report on the harmonisation of the UPI (see news item above).

Consultation document


Q&A on the Benchmarks Regulation

On 29 September 2017, ESMA published an updated version of its Questions and Answers (Q&A) on the Benchmarks Regulation (BMR). The update addresses (i) the scope of the BMR with regard to the application of BMR to EU and third-country central banks and the exemption on single reference price, and (ii) the definition of the terms “family of benchmarks” and “use of a benchmark”.

Q&A on Benchmarks Regulation


Consultation on guidelines for non-significant benchmarks

On 29 September 2017, the European Securities and Markets Authority (ESMA) published a consultation paper on draft guidelines for non-significant benchmarks. The guidelines specify the obligations applying to non-significant benchmarks under the Benchmarks Regulation (BMR).

In its consultation paper, ESMA proposes less strict requirements for non-significant benchmarks, their administrators and their supervised contributors in relation to the following areas:

  • Procedures, characteristics and positioning of oversight function;
  • Appropriateness and verifiability of input data;
  • Transparency of methodology; and
  • Governance and control requirements for supervised contributors.

The consultation is open until 30 November 2017.

ESMA’s consultation paper


Circular on derivative financial instruments and structured products

On 30 August 2017, the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) published a circular on derivative financial instruments and structured products. The circular provides guidance on the use of derivative financial instruments and on the investment in structured products by small primary insurance companies as well as by domestic pension schemes and pension funds.

BaFin circular 08/2017 (VA) (only available in German)


2018 work program

On 5 October 2017, the European Securities and Markets Authority (ESMA) published its work program, setting out its priorities and areas of focus for 2018. ESMA intends to set its priorities on supervisory convergence and risk assessment. In particular, the key focus areas in 2018 will be:

  • Providing guidance and promoting the consistent application of the revised Markets in Financial Instruments Directive (MiFID II) and Markets in Financial Instruments Regulation (MiFIR);
  • Ensuring the quality, integration, usability and transparency of the data that ESMA collects;
  • Contributing to the development of Level 2 measures in relation to the revised Prospectus regime; and
  • Enhancing the effectiveness and lasting impact of supervisory activities at individual credit rating agencies (CRA) and trade repositories (TR) level.

ESMA’s work program 2018

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