Regulatory Arbitrage Not an Issue


A month into the MiFID II regulatory regime and one bête noir has yet to raise its head. Over-the-counter derivative market participants have not seen the advent of any regulatory arbitrage between Europe and the US.

The credit index market has shown no signs, according to Sonali Das Theisen, head of market structure and data strategy for global credit markets and global securitized markets at Citi, while participating on a panel at DerivCon 2018 in Midtown Manhattan.

Sonali Das Theisen, Citi

“As a market participant and liquidity providers have not in the first month seen any massive ‘I want these rules to apply to me and not those, so let us trade on this venue rather than that venue,'” she said. “We have not seen any of that yet.”

Das Theisen attributed its absence to a continuing competitive market, which existed before the US Commodity Futures Trading Commission implemented its three-RFQ requirement.

Since MiFID II went into effect, MTF volumes have risen between 10% and 15% compared to the approximate 100% volume growth SEFs witnessed between January 20017 and January 2018, she estimated. “I don’t have an exact number, but somewhere in that framework.”

Some market watchers expected that early trading volume would migrate to the US from Europe on MiFID II’s first day of trading due to the difficulty in creating reference data, noted fellow panelist Alex McDonald, CEO of European Venues and Intermediaries Association.

However, many firms are still working out what regulatory equivalency means to their day-to-day trading practice.

One audience participant sought clarification from panelist Amir Zaidi, director of the Division of Market Oversight at the CFTC, over what is firm could and could not do to remain compliant with both sets of regulations.

The question at hand was whether his firm could make a voice trade for a product that could not be traded on a SEF and send it through an MTF without obtaining the CFTC’s required three RFQs.

“That is the whole point of equivalence,” said Zaidi. “That given that there is an equivalence now, the CFTC is saying that now you can use those MTF and OTF platforms in Europe and follow their protocols. They are equivalent to SEF protocols.”

“It kind of opens a whole new world that we did not have before,” replied the audience member.

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