European exchange group rejects MiFID equity derivatives exemption

FESE warns an exemption for clearing equity derivatives could mean further migration from listed to off-venue trading.

Europe’s securities exchange group has criticised an exemption for OTC equity derivatives from the MiFID II trading and clearing mandate.

The Federation of European Securities Exchanges (FESE) stated in its response to the European Securities and Markets Authority (ESMA) that the exemption could lead to a shift of trading from listed derivatives to off-venue OTC trading.

In its response to the MiFID II trading obligation consultation, FESE stated: “Both ESMA’s decision regarding equity derivatives and the risk of a shift from a regulated market to an OTC trading environment are completely at odds with the objectives set out by the G20”.

The exchange group said a regional/national approach should be adopted in assessing which derivatives contracts should become mandated for clearing.

Under MiFID II, certain interest rate, credit and FX OTC derivatives will be mandated for clearing and trading on either a regulated market (RM), a multi-lateral trading facility (MTF), or an organised trading facility (OTF).

However, with a potential exemption for equity derivatives from the mandates, FESE believes this will cause a shift away from listed derivatives markets to uncleared OTC platforms. It also warned that look-a-like OTC products could be developed in order to help traders avoid clearing.

It has suggested “ESMA should consider an automatic clearing obligation for look-a-like OTC equity derivatives. Failing that, the integrity of some exchange-traded equity derivatives markets may be threatened, especially at regional level, as these markets would be presented with a non-cleared alternative”.