Back in November 2021, the EC unveiled its proposal to introduce targeted adjustments to the current MiFIR regime. One long-awaited measure was a Derivatives Trading Obligation (DTO) stand-alone suspension mechanism, to allow EU banks to once again trade most liquid derivatives on UK trading venues, with clients from outside the EU.
This measure is now fully supported by all legislators and a political agreement has been formally reached, which will bring benefits to those trading the instruments, as well as EU capital markets overall.
What you need to know
MiFIR
Following the global financial crisis in 2008, G20 leaders pledged to reform the over-the-counter derivatives market. In the EU, one flagship measure from these global reforms was the introduction of a Derivatives Trading Obligation (DTO) for most liquid derivatives.
The DTO consists of a requirement to execute in-scope trades on either an EU Trading Venue (TV) or a third country TV that has been assessed as equivalent by the European Commission (EC). This new requirement has been in force since January 2018, and was implemented as part of the Markets in Financial Instruments Regulation (MiFIR).
Brexit
From an EU perspective, UK trading venues have been considered third country since the end of the transition period, on December 31st 2020. These have not been recognised as equivalent by the EC, to comply with the EU DTO. Without a decision on equivalence, EU investment firms are still unable to transact DTO instruments on UK TVs.
MiFIR Review
As part of a broader push to revitalise the EU’s Capital Markets Union (CMU) initiative, European lawmakers have reached a political agreement on their MiFIR review that will be enforced once published in the EU official journal. This review includes a mechanism to suspend the DTO, under certain conditions, when trading with non-EU clients on UK TVs.
Market participants will benefit not only from access to the increased liquidity, but at the same time from an improved service offering from their market makers, who will also be operating in a larger liquidity pool.
Simon Laforet, Senior Officer in Public and Regulatory Affairs, BNP Paribas Global Markets
A deeper liquidity pool for market makers, and their clients
Following implementation of the mechanism, institutional investors and corporates based outside of the EU will face a less fragmented landscape for liquidity, being able to access again liquidity from EU banks on UK trading venues when transacting DTO instruments, for the first time since Brexit. “BNP Paribas Global Markets supports the DTO stand-alone suspension mechanism included in the MiFIR Review which is fundamental to ensure that EU capital markets across asset classes are more integrated and competitive globally,” notes Simon Laforet, Senior Officer in Public and Regulatory Affairs at BNP Paribas Global Markets, “Market participants will benefit not only from access to the increased liquidity, but at the same time from an improved service offering from their market makers, who will also be operating in a larger liquidity pool.”
European lawmakers enter the MiFIR review endgame
“This measure will facilitate for EU banks trading on UK TVs with non-EU clients. At the same time, EU banks will support the building of strong EU market infrastructure when servicing their EEA client base. We believe that this measure is not inconsistent with the objectives of the DTO, which is ultimately to protect EU-based clients and ensure the integrity of EU markets,” comments Arnaud Eard, Director, European and International Affairs at AMAFI.
Following more than a year’s worth of debate, the final negotiations of the MiFIR review package ended on June 29th, when the legislators reached a political agreement. The legislative process is expected to last for at least a few more months until the publication in the EU official journal. Only then can its implementation start. So despite being fully agreed, the DTO suspension mechanism will only be available once the suspension formally becomes law.
This measure will facilitate for EU banks trading on UK TVs with non-EU clients. At the same time, EU banks will support the building of strong EU market infrastructure when servicing their EEA client base. We believe that this measure is not inconsistent with the objectives of the DTO, which is ultimately to protect EU-based clients and ensure the integrity of EU markets.
Arnaud Eard, Director, European and International Affairs, AMAFI
As the legislative process approaches the finish line, market makers in the EU are welcoming the possibility to leverage the new environment to better serve clients.
