ICAP is lobbying for an amendment to the MiFID II trading obligation rule which in its present form would force the markets operator to radically rethink the operations of four of its key post-trade risk reduction services.
The group’s TriOptima and Reset services for OTC derivatives are post-trade risk management tools allowing firms to reduce second order risks in their portfolio.
The services cater to institutions aiming at reducing second order risks in existing portfolios, a practice promoted by new regulations in Europe and the US, such as rules requiring firms to analyse their OTC swap portfolios for compression opportunities.
Under the Mifid II trading obligation though, all derivatives trades deemed sufficiently liquid are required to be placed on a trading venue, a rule which would also stretch to transactions resulting from post-trade risk reduction services.
ICAP argues that these services take place in a non-continuous market, without price discovery and in the absence of live prices, and that transactions therefore cannot be subject to the trading obligation.
“It is simply that we cannot deliver these services if they have to comply with the trading obligation, because suddenly we would have to provide pre-trade transparency, they would have to be on an organised trading facility and all of that won’t work,” said Mireille Dyrberg, chief operating officer at TriOptima.
“If you consider what these services have done over the last 10 to 15 years and how much risk we have eliminated from the system, if we can’t do that anymore it contravenes the tenor of the G20 accord that set out to reduce risk in the system.”
The services set to be affected include portfolio compression service TriReduce and the proposed TriBalance, a new solution which aims to reduce counterparty credit exposure, thus relocating capital and collateral.
Reset reduces basis risk within portfolios from fixings in the interest rate markets, while ReMATCH addresses the problems derived from the build-up of illiquid, calendar spread and net open positions in CDS portfolios.
“In the context of MiFID II it is crucial that post-trade risk reduction services, which exist for the sole purpose of reducing risk in existing portfolios and which may in this context result in amended or replacement transactions, are clearly distinguished from other trading activities,” said Ben Pott, head of European affairs, ICAP.
“The trading obligation therefore should not apply to transactions resulting from these services.”
Pott added that ICAP believed the process should be regulated under a dedicated regulatory framework, and not inadvertently be caught up in Mifid II trading obligation rules, which determine certain trades should take place on a regulated market.
These markets will be either a multilateral trading facility or organised trading facility, once Mifid II comes into force around 2017.