On June 13, 2016, the European Commission adopted a Commission Delegated Regulation supplementing MiFIR. Under MiFIR, a new trading obligation is introduced for shares and other sufficiently liquid instruments. Such instruments must be traded on EU regulated exchanges or trading platforms or third country recognized exchanges and trading platforms. The trading obligation applies generally to third country entities that would be subject to the clearing obligation under EMIR if they were established in the Union. The trading obligation will apply to derivatives transactions pertaining to a class of derivatives that has been declared subject to the trading obligation, provided that the contract has a direct, substantial and foreseeable effect within the Union or where such obligation is necessary or appropriate to prevent the evasion of any provision of this Regulation. The adopted Regulation sets out the RTS on the direct, substantial and foreseeable effect of derivative contracts within the European Union and the prevention of the evasion of rules and obligations, and therefore establishes when third country counterparties would be subject to the trading obligation mandated by MiFIR.

The adopted RTS provides that an OTC derivatives contract will be considered as having a direct, substantial and foreseeable effect within the European Union when at least one third country entity benefits from a guarantee provided by a financial counterparty established in the European Union which covers all parts of its liability resulting from that OTC derivative contract, to the extent that the guarantee meets two conditions. Firstly, the guarantee must (i) cover the entire liability of a third country entity resulting from one or more OTC derivative contracts for an aggregated notional amount of at least EUR 8 billion or the equivalent in the relevant currency, or (ii) cover only a part of the liability of a third country entity resulting from one or more OTC derivative contracts for an aggregated notional amount of at least EUR 8 billion or the equivalent amount in the relevant foreign currency divided by percentage of the liability covered. Secondly, the guarantee must be at least equal to 5 per cent of the sum of current exposures (as defined in the CRR) in OTC derivative contracts of the financial counterparty established in the European Union issuing the guarantee. These requirements are very similar to those established under EMIR for the clearing obligation.

The adopted RTS also outlines the cases where the trading obligation is necessary and appropriate to prevent avoidance of the provisions in MiFIR. For example, it provides that an OTC derivative contract shall be deemed to have been designed to circumvent the application of any provision of MiFIR if the way in which that contract has been concluded is considered to have as its primary purpose avoidance of the application of any provision of that Regulation when viewed as a whole and having regard to all circumstances.

The adopted RTS must still be approved by the European Parliament and the Council of the European Union and be published in the Official Journal before they can enter into force.

The adopted RTS is available at: http://ec.europa.eu/transparency/regdoc/rep/3/2016/EN/3-2016-3544-EN-F1-1.PDF