The Irish Presidency of the Council of the European Union has put forward new compromises for MiFID II and its attendant regulation (MiFIR) to resolve differences between member states on permitting interoperability between derivatives trading venues and clearing venues.
In the latest slew of proposals, the Irish Presidency has inserted text that requires the European Securities and Markets Authority (ESMA) to define 'liquidity fragmentation' in a regulatory technical standard that could be used to determine whether providing central counterparties (CCPs) with access to trading venues and their data feeds would increase fragmentation and threaten orderly markets.
The proposal asks ESMA to make this definition based on the principle that liquidity fragmentation occurs "in a trading venue are unable to conclude a transaction with one or more other participants in that venue because of the absence of clearing arrangements to which all participants have access or a clearing member or its clients would be forced to hold their positions in a financial instrument in more than one CCP which would limit the potential for the netting of financial exposures".
The document, released on Tuesday, also states that where interoperability arrangements are in place between CCPs, the provisions of access should not increase the overall risk of the affected CCPs.
Some exchanges have voiced concern that proposed open access provisions could undermine key tenets of market structure that proved resilient in the wake of Lehman Brothers' 2008 collapse.
"The open access provisions in MiFIR have not been subject to the proper analysis other elements of the regulation have undergone and the type of model the regulation would bring in does not function in any other parts of the world - it would essentially be a live market experiment," a senior executive at a European exchange operator, speaking anonymously, warned.
"Market participants across Europe see little benefit in the open access provisions but the systemic risk issues and costs associated with greater risk for exchange-traded derivatives in particular pose a threat to market stability," he said.
The open access provisions within MiFIR have dominated Council debate alongside transparency requirements (i.e. rules governing dark pools) as it prepares a final position on the regulation.
The Irish Presidency document also included a new proposal on use of proprietary benchmark indices as the basis for derivatives contracts. Existing draft rules for "proportionate, fair and reasonable, non-discriminatory access" for trading venues and CCPs to be granted licences to use benchmarks allowed rights holders to reject licence applications for three years from its initial use for clearing or trading.
The amended text allows a three-year period from MiFID II's effective implementation during which an application to use an existing benchmark may be rejected by the rights holder. But, after the regulation comes into force, the rights holder to any new benchmark can reject a licence application for three years from the benchmark's launch, if "there are objective reasons for delaying access in terms of observing the market for this new benchmark and assessing reasonable commercial terms".
In 2011, the derivatives arm of pan-European multilateral trading facility Turquoise was refused a licence to offer products based on the EURO STOXX index, owned by Eurex - a derivatives exchange owned by Deutsche Börse and SIX Swiss Exchange. This type of refusal would come under greater scrutiny with the new rules.
The Council will meet again in June and is expected to produce a final position on MiFID II and MiFIR, which would open the door to the trialogue stage - where the Council and European Parliament negotiate a final text with input from the European Commission.