MiFID II Targets Derivatives

Terry Flanagan

Like Dodd-Frank, the regulation will require vanilla OTC swaps to be traded on exchanges.

The European Commission’s proposals on Markets in Financial Instruments Directive (MiFID II) extend the original MiFID’s scope far beyond equities to require that OTC derivatives be traded on central exchanges.

They also define a new category of organized trading facility (OTF), broadly defined to capture all types of organized execution and arranging of trading—such as broker-operated dark pools and crossing networks–that don’t correspond to the functions of existing venues.

The proposals will be formally unveiled on Oct. 21, with adoption of new rules expected in 2013.

“MiFID II is far broader than the first equities-focused 2007 directive,, as it covers fixed income, derivatives, commodities as well as share trading,” Hirander Misra, a strategic advisor for PLUS Trading Group, told Markets Media.

MiFID II, along with European Market Infrastructure Regulation (EMIR), “will mandate new platforms for derivatives that are currently traded over-the-counter and via broker-crossing networks, much like Dodd-Frank created teh SEF [swap execution facility] in the United States,” Misra said.

MiFID II will require that CCPs provide non-discriminatory access to clearing of financial instruments. Regardless of the trading venue on which a transaction is executed.

Concomitantly, it will require trading venues to provide trade feeds on a non-discriminatory basis upon request to any CCP that wishes to clear financial transactions executed on that venue.

Full interoperability among the major CCPs means that customers will be able to choose which CCP clears their trades, and consolidate clearing with their respective CCP of choice if they wish to do so.

CCPs favor interoperability, provided that trading venues furnish the interoperating CCPs with their trade feeds.

European Multilateral Clearing Facility (EMCF), Europe’s largest cash equities clearing company and one of the top two CCPs in Europe, “has consistently supported interoperability, provided that a level playing field through access to transaction feeds from other exchanges and MTFs is within range,” the company said.

One repercussion of MiFID II is a demand from market participants such as investment banks, brokers and trading venues to segregate or set-up matching systems.

“The new regulations will mandate firms to segregate the operation of their matching systems, and reflects the increasingly tough approach being taken by watchdogs over the operation of trading venues,” said Misra.

In response, PLUS Markets Group, operator of PLUS Stock Exchange (PLUS-SX) and PLUS Derivatives Exchange (PLUS-DX, has launched PLUS Trading Solutions (PLUS-TS), a trading platform technology enabling investment banks, brokers and trading venues to establish outsourced matching systems/.

PLUS-TS offers customers a fully managed order-matching and surveillance system, essentially an ‘exchange-in-a-box’ solution, said Misra.

PLUS Markets Group had previously announced its intention to launch a new lit book in 2011 subject to new funding from potential users through the creation of a Special Purpose Vehicle (SPV), Misra said.

During the last 12 months, however, the company’s marketplace has continued to evolve rapidly. “Volume-driven equity trading platforms have seen their business models come under pressure, while the regulatory environment has continued to develop in expectation of the next iteration of MiFID,” said Misra.

The company confirmed in July 2011 that PLUS-DX had achieved operational readiness to trade its proprietary Swap Index Contracts (SICs). Activity over recent weeks has focused on signing up new members to PLUS-DX to allow trading to commence.

The SIC responds to MiFID II and EMIR by bringing OTC trading closer to exchanges and centrally cleared, the company said.

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