Irish presidency proposes clearing interoperability threshold

The Irish presidency of the Council of the European Union has put forward a MiFID II proposal that could force Europe's largest exchanges to offer multiple clearers for equities and derivatives trades.

The Irish presidency of the Council of the European Union has put forward a MiFID II proposal that could force Europe’s largest exchanges to offer multiple clearers for equities and derivatives trades.

The latest Council version of MiFID II draft seen by, and circulated to members of the Council for discussion at a 25 March meeting, states that venues trading over €100 billion in annual turnover for securities and money market instruments and €500 billion for exchange-traded derivatives will have to grant clearing houses access to their trade feeds.

Markets that fall below the threshold can opt out of the open access requirements but will not be able to ask an interoperating central counterparty to clear for its market.

The proposal has been designed to give smaller markets more time before they are subjected to full competition, while ensuring the region’s largest markets – likely to include derivatives giants Eurex, NYSE Liffe, Nasdaq OMX, IntercontinentalExchange and the London Stock Exchange Group – offer a choice of clearers.

In terms of derivatives, the proposal covers all instruments that are subject to MiFID II’s trading mandate, which includes OTC derivatives that will be migrated onto exchange-like platforms under swaps reform.

According to sources close to the Council’s discussions, the Irish proposal was designed to test the resolve of a coalition of European member states – led by Germany and believed to include Poland, Hungary and Luxembourg – which circulated plans to delete MiFID II’s open access provisions for listed derivatives.

Under the presidency’s proposals, Poland would fall below the threshold and wouldn’t be compelled to offer open access to its market.

But market participants have argued the threshold proposal does not adequately address the risks associated with interoperability for derivatives. For example, unlike equities, derivatives are created by the exchange that lists them and are subject to proprietary margin requirements that may not be easily adopted by another CCP.

“Under the Irish presidency’s access proposal, derivatives trading activity will concentrated among the first largest exchange groups without any proper evaluation, opening them up to potential risk,” added a source close to the Council’s MiFID II discussions. “Moreover, it would not give markets that fall below the threshold an incentive to grow their business.”

Dark pool cap

The Council meeting also debated reforms to dark pool trading, and in particular the threshold applied to non-displayed venues that use the reference price waiver (RPW).

The RPW allows dark pools to forego the publication of pre-trade quotes, as long as quotes are sourced from a reliable reference market.

The Council has proposed that any trading venue using the RPW can only account for 8% of the total value traded in any equity. Once the threshold – calculated on a 12 month rolling basis – is breached, the trading venue would have to suspend trading in that stock for two months.

“The presidency is seeking to address the immediate imperative of balancing member states’ positions and considers that its proposal provides the genesis of a functional volume cap system which is underpinned by clear and broadly shared objectives,” read the explanatory note.

The next meeting of representatives from the Council of the European Union will take place on 10 April. While some industry participants have noted the Council could reach an agreement in May – thereby starting the trialogue process by which the Council, European Parliament and European Commission agree a final text – but others are less optimistic. The European Parliament finalised its version of MiFID II in October last year.