Introduction

Please make your introductory comments below, if any:

The Securities Industry and Financial Markets Association’s Asset Management Group (“SIFMA AMG”) appreciates the opportunity to respond to ESMA’s consultation paper on the trading obligation for derivatives under MiFIR. SIFMA AMG’s members represent U.S. and multinational asset management firms whose combined global assets under management exceed $34 trillion. The clients of SIFMA AMG member firms include, among others, tens of millions of individual investors, registered investment companies, endowments, public and private pension funds, UCITS and private funds such as hedge funds and private equity funds.

We would like to make the following general comments on the consultation paper, before responding to a number of the specific questions on which ESMA has sought feedback:

Provision for package transactions

We are concerned by ESMA’s conclusion that it lacks a mandate to make special provision for derivatives in a class that it has determined should be subject to the trading obligation under MiFIR, where the derivative is part of a package. Asset managers and their funds and accounts use packages for a variety of reasons, including to manage (and minimise) execution costs and risks and to diversify their portfolio of investments or to achieve a better hedge for their exposures (compared to executing components of packages on a standalone basis). ESMA’s position on packages appears to have the result that, if a single component of a package is a derivative in a class that has been declared to be subject to the trading obligation, all components of the package must be concluded on a trading venue, in order for the components to be transacted as a package. Our members are concerned that, even considering the flexibility of execution methods allowed under Articles 28 and 32 of MiFIR, it is not clear that, for all forms of packages, the combinations of instruments transacted as packages will be offered for trading by trading venues, at least, not by the time the MiFIR trading obligation is intended to apply. Whilst it may be possible to trade certain standard, liquid packages on trading venues, on-venue trading of the package as a whole is unlikely to be possible in the case of more bespoke forms of package. We would also like to point out that it is not certain that the swaps that currently benefit from the relief for certain types of packages granted by the U.S. Commodity Futures Trading Commission (CFTC) under the “made available for trade” (MAT) swap execution regime will be brought back into scope of the trade execution requirements in the U.S. when the relief expires. The markets and regulators in the U.S. are still seeking to resolve the problems that arise when a package involves instruments such as bonds or futures which are not traded on a “swap execution facility” (SEF), or derivatives which are outside the jurisdiction of the CFTC. In any event, the fact that the series of no-action letters was needed is an indication of the difficulties that can arise from universally imposing the trading obligation on derivatives that are part of a package. If the MiFIR trading obligation is imposed on package components, without allowing the venues and markets the time needed to develop the infrastructure and protocols to support transacting on-venue all the components as a package, market participants will be restricted. Asset managers may be forced to transact the components of the package separately, leading to increased risks and costs of execution and ultimately to package users paying more to hedge their risks.

Progress towards equivalency determinations of non-EU venues

At this point in time (less than six months before the date from when it is intended that the trading obligation will apply), no equivalence determinations have been made in respect of non-EU venues under Article 28 of MiFIR. Moreover, it is unclear whether progress has been made towards establishing the mutual recognition arrangements required by Article 28(1)(d) of MiFIR with regulators in important jurisdictions such as the United States and countries in the Asia Pacific region. Consequently, even at this late stage, our members are unable to judge the impact that the EU trading obligation for derivatives will have on their trading activities. If a derivative is in a class declared to be subject to the trading obligation in the EU and, at the same time, is also in scope of the CFTC’s MAT swaps determinations, in the absence of any mutual recognition by EU and U.S. regulators of EU venues or SEFs, it will be impossible for crossborder dealings in derivatives of that class to continue, unless the venue is of a type which benefits from dual-registration. Market fragmentation was narrowly averted, when CCPs in the key non-EU jurisdictions were finally granted recognition under EMIR, just at the point when the EU clearing obligation for OTC derivatives was coming into effect. If equivalence determinations are not in place well in advance of the application date of the MiFIR trading obligation, our members may be forced to commit time and resources to ensure they have access to qualifying EU trading venues, when ultimately that access may not be needed, or may be needed only for a short period of time.

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