ESMA has published an opinion on the treatment of packaged trades under MiFIR’s Article 32 trading obligation. Article 28 mandates that derivatives subject to the trading obligation (TO) are traded regulated markets, OTFs, MTFs or third country equivalents. There has been widespread concern with regard to packaged trades, the elements of which are best traded simultaneously with a single counterparty i.e. as a package. Defined in points (49) and (50) Article 2(1) MifIR, packages include two or more financial instruments, where each component bears meaningful economic or financial risk to all the other components and the execution of each component is simultaneous and contingent upon on the execution of all the other components. Questions arose over the inevitability that one or more legs of the package e.g. an IRS may be subject to the trading obligation while other legs e.g. a bond transaction would not be subject to the obligation or even available to trade at the specified venues. The disparity of regulatory treatment would force participants to disinter the package, trading components on multiple venues with attendant execution risks and consequent costs.
ESMA’s September 2017 final report draft RTS stated that its mandate did not empower it to provide for a “tailored regime” for packaged transactions. Instead the opinion suggest a “tailored approach”, package components subject to the TO need only comply with the mandate if such compliance does not create undue operational or execution risk for the package as a whole. The opinion clarifies that the approach only applies to the following package hierarchy:
- All components of the package are subject to the TO;
- At least one component is subject to the TO and all other components are subject to the clearing obligation for derivatives (CO);
- At least one component is an IRS subject to the TO and all other components are government bonds denominated in the same currency (‘spread overs’)
ESMA reserves the right to revise the above list should other package categories look likely to be executed in a “smooth manner and without increasing operational and execution risks”.
Although somewhat late in the day and only in opinion form, this is welcome clarification from ESMA, effectively confining the trading obligation to those transactions already offered as packages by the trading venues. Meanwhile the US “made available to trade” equivalent still languishes in no-action letter limbo, the seventh no-action letter on package transactions expiring on 15 November 2020.