Certain classes of interest rate swaps and credit default swaps transacted by specified parties must be traded on a trading venue from 3 January 2018, under MiFIR1 (the “MiFIR Trading Obligation”).
This follows the publication of Commission Delegated Regulation 2017/2417 in the EU’s Official Journal on 22 December 2017 (the “Trading Obligation Regulation” (here)) which applies the MiFIR Trading Obligation to the following classes of derivatives:
- specified maturities of fixed-to-float interest rate swaps (“IRS”) denominated in euro, pounds sterling or US dollars;
- the on-the run series and latest off-the-run series of five year iTraxx Europe Main and iTraxx Europe Crossover index Credit Default Swaps (“CDS”),
(the “Trading Obligation Derivatives”), on a phased basis from 3 January 2018 by reference to the classification of the parties for the purposes of the EMIR2 clearing obligation.
As set out in our previous briefing (here), Article 28 of MiFIR requires certain classes of derivatives transactions to be traded on a regulated market, multilateral trading facility, organised trading facility or third country (ie, non-EU) trading venue that is subject to a European Commission equivalence decision.
For the MiFIR Trading Obligation to apply:
- a derivative must be part of a class of derivatives that has been declared subject to the EMIR clearing obligation;
- the relevant category of counterparties must be subject to the clearing obligation in respect of the relevant class of derivatives; and
- the European Commission must have adopted a delegated regulation stating that the MiFIR Trading Obligation applies to the relevant class of derivatives, on the basis of regulatory technical standards submitted by the European Securities and Markets Authority.
The following regulations apply the clearing obligation to specified classes of derivatives (collectively, the “Clearing Delegated Regulations”):
- European Commission Delegated Regulation (EU) 2015/2205 - certain interest rate OTC derivatives denominated in the G4 currencies (EURO, USD, GBP, and Japanese Yen);
- European Commission Delegated Regulation (EU) 2016/592 - certain OTC index CDS; and
- European Commission Delegated Regulation 2016/1178 - certain OTC interest rate derivatives denominated in Norwegian Krone, Polish Zloty and Swedish Krona.
The Clearing Delegated Regulations apply the clearing obligation to in scope derivatives on a phased-in basis, depending on the relevant categories of counterparties. In this respect, they distinguish between four categories of counterparties as follows:
- Category 1: clearing members of a recognised or authorised central counterparty (“CCP”) for at least one of the classes of derivatives covered by the Delegated Regulation;
- Category 2: financial counterparties as defined in EMIR (“FCs”), and alternative investment funds as defined in the Alternative Investment Fund Managers Directive (“AIFs”), that are non-financial counterparties as defined in EMIR (“NFCs”), which belong to a group whose aggregate month-end average of outstanding gross notional amount of non-centrally cleared derivatives is above EUR 8 billion for January, February and March;
- Category 3: FCs and AIFs not falling within categories 1 or 2; and
- Category 4: NFCs not falling within another category.
Commission Delegated Regulation 2017/751 amends each of the phase-in periods for Category 3 counterparties set out in the Clearing Delegated Regulations. See our related briefing here. In addition, on 4 May 2017, the European Commission published a legislative proposal for a Regulation amending EMIR which will impact on the application of the EMIR clearing obligation in a number of respects. See our related briefing here. This proposal is currently being considered by the Council and the European Parliament and the Council published its most recent update on its compromise proposal on 11 December 2017 (here).
Trading Obligation Delegated Regulation
The Trading Obligation Delegated Regulation applies the MiFIR Trading Obligation to Trading Obligation Derivatives (being a sub-category of those derivatives that are subject to the EMIR clearing obligation) on the later of the following dates:
- 3 January 2018;
- the date referred to in Article 3 of Delegated Regulation 2015/2055 or Article 3 of Delegated Regulation 2016/592 for that category of counterparties.
If, therefore, at the time of trading a Trading Obligation Derivative:
- both parties are subject to the EMIR clearing obligation; or
- one party is subject to the EMIR clearing obligation and its counterparty is a non-EU entity that would be subject to it, if it were based in the EU,
the transaction by a party subject to the EMIR clearing obligation of that Trading Obligation Derivative is subject to the MiFIR Trading Obligation. Currently, the dates with effect from which the various categories of counterparty to a Trading Obligation Derivative are, or will be, subject to the EMIR clearing obligation and, therefore, the MiFIR Trading Obligation, are as follows: