The Federation of European Securities Exchanges (FESE) has demanded the European Commission drop organised trading facilities (OTFs) from the list of venue categories permitted to trade standardised OTC derivatives.
“We strongly support the implementation of the G20 by requiring to trade derivatives on well-regulated trading venues. However, we believe this objective is not served if the venues for this purpose include venues that are not subjected to the key regulatory requirements of multilateral trading, i.e. the OTF as currently proposed,” said FESE in a dedicated position paper on the MiFID II proposal, published at the end of January.
The OTF classification is a key part of the draft MiFID II directive, which seeks to reform Europe’s securities trading rules. Proposed by the European Commission (EC) last October, the OTF designation captures existing broker crossing networks (BCNs) and encompasses new platforms not covered by the current framework. But the catch-all category has been derided by many industry players for its lack of definition and potential for creating loopholes.
Meanwhile, other provisions included in MiFID II aim to reduce systemic risk in financial markets by shifting as large a proportion of OTC derivatives trading as possible on to exchanges with full clearing. But FESE asserts OTFs are not required to provide non-discriminatory access and execution to clients – which the exchange trade body says would mean price formation and the safety of clearing of these instruments could not be relied upon if they were traded on an OTF.
FESE argues standardised OTC derivatives should only be traded on platforms complying with all the rules which apply to multilateral trading facilities (MTFs) and exchanges, which are held to a different stand in terms of transparency, non-discriminatory access and full market surveillance capabilities.
The federation said it was unnecessary to subject clearing-eligible OTC derivatives to liquidity tests before allowing them to trade on exchanges and MTFs, because to be deemed eligible for clearing, OTC derivatives would have to meet the criteria for multilateral trading anyway – i.e. they would need to be suitably standardised and capable of being valued on a continuous basis.
Redefining the OTF
Under MiFID II, systematic internalisers (SIs) – a category of trading venue defined by the original MiFID and designed to capture broker crossing networks – will be folded into the OTF classification.
However, FESE believes SIs should remain classified as regulated trading venues and not moved into the OTF classification.
“We accept that the SI regime should continue to be calibrated to reflect the risk assumed by the investment firms operating these platforms,” said the FESE document. “However, we believe that OTC should remain an exemption from SI (i.e., bilateral trading should be considered as SI unless it falls into the OTC definition), as is the case in the current MiFID, rather than the reverse proposed in the new text.”
FESE represents 46 exchanges in equities, bonds, derivatives and commodities, through 21 full members from 30 countries, including Deutsche Börse, NYSE Euronext, Nasdaq OMX exchanges, Spain’s Bolsas y Mercados Españoles, SIX Swiss Exchange and the Central and Eastern European Stock Exchange Group led by Vienna.
MiFID II is currently being reviewed by the European Parliament. Once parliament agrees its amendments, the Council of the European Union will conduct its own review of the legislation. The implementation of MiFID II is expected during 2014.