The European Securities and Markets Authority (ESMA) has been urged to review its approach to large-in-scale derivatives transactions after it U-turned on whether they should be subject to the trading obligation.
Responses to ESMA’s latest consultation on derivatives rules under MiFIR – published today – reveal firms are concerned the regulator is too optimistic about the ability to negotiate large trades via trading protocols.
Originally, ESMA had proposed exempting large-in-scale derivatives trades from the trading obligation (TO). However, some respondents to its first consultation said the TO should extend to all trade sizes. The TO requires derivatives contacts deemed sufficiently liquid and cleared via a central counterparty to be traded on regulated markets, MTFs, OTFs or equivalent third-country venues.
Firms that objected include Amundi, which said: “We….do not understand why ESMA has drastically changed its mind on this issue when only a minority of respondents to the previous consultation did not share ESMA’s proposal to exempt larger trades from TO.”
It further criticises ESMA’s statement that “trading venues can offer trading protocols that allow for the private negotiation of large trades, thereby removing any concerns about information leakage.”
But Amundi believes ESMA is moving “too fast” in its belief that trading protocols enabling complex negotiation can be developed in the near future.
It adds: “A more profound assessment of these trading facilities should have been conducted with a proper public consultation instead of relying on some comments that do not reflect our view of the current efficiency of the market.”
Barclays was also concerned about the impact of the TO on negotiations for larger trades, though did not call for them to be entirely exempted from the obligation, provided some compromises are made.
“Simply because MIFIR allows request for quote (and indeed Voice) as a trading system does not in our view preclude the need for such bilateral engagement between a market maker and its client in the case of very large trades,” Barclays said in its response.
It said existing on-venue request for quote systems are not well designed to use as a negotiation process and called on ESMA to review this.
“We can support the extension of the trading obligation to all transaction sizes only if ESMA recognises the permissibility in such cases for an appropriate degree of dialogue / negotiation between the parties. As in the case of the US SEF rule, assuming the mandate applies, the trade must then procedurally be executed on the venue at the previously negotiated price,” Barclays added.