Derivatives Trading Obligation
MiFIR requires investment firms to conclude transactions in some derivatives on regulated markets, multilateral trading facilities, organised trading facilities or third-country trading venues in jurisdictions benefiting from an EU equivalence decision (Derivatives Trading Obligation or DTO). The classes of derivatives subject to the DTO cover certain fixed-to-float interest rate swaps denominated in EUR, USD and GBP and two credit default swap indices.
No Mitigation Measures
In its November statement, EMA stated that there is "no evidence that in case of a no-deal Brexit and in the absence of an equivalence decision by the Commission covering UK trading venues, market participants will not be able to continue meeting their obligations under the DTO".
In support of this view, ESMA notes the establishment of new trading venues in the EU by most UK trading venues who offer in-scope derivatives trading. ESMA acknowledges that, to date, the levels of trading on such venues have been low but considers venues' onboarding of "major liquidity providers" will allow EU investment firms' to use such venues to comply with the DTO after the end of the transition period on 31 December 2020.
In respect of UK branches of EU investment firms, ESMA is aware that, absent an equivalence decision, such firms are likely to be subject to dual DTO obligations in both the EU and the UK however, it considers "this situation is primarily a consequence of the way in which the UK has chosen to implement the DTO". Although ESMA remarks on the challenging situation for UK branches of EU firms it does not propose any compliance-risk mitigation measures and instead notes the necessity for such firms to adapt their "current business practices to ensure compliance with EU law".
ESMA intends to continue monitoring firms' ability to comply with the DTO in 2021 and beyond but no mitigating measures appear forthcoming ahead of the end of the transition period on 31 December.