Citadel added: “ESMA has
eliminated all swaps that have
been executed on a regulated
trading venue… from the data
set being used to assess the
liquidity of instruments for the
These are some of the most
used platforms for executing
OTC derivatives, including ICAP,
BGC, Bloomberg and Tradeweb.
“It is our understanding that
significant volumes of OTC
derivatives already trade on
these platforms, and therefore
ESMA must ensure this volume
is included when assessing the
overall liquidity of an instrument,” Citadel stated.
As a result of these specific
flaws in its data analysis, there is
confusion among trading platforms and swaps dealers over
which products fall under the
trading obligation mandate.
“There is still some lack
of clarity around what products are mandated for trading
platforms, and if ‘Traded on a
Trading Venue’ means whether
they are capable of being traded
Market participants and regulators are at
odds as to how derivatives will
be traded following the onset of
For the first time, Europe
will have a trading obligation
mandate introduced for derivatives from 2018. Following in
the footsteps of the US with
their swap execution facility (SEF) regime, market participants will be required to
execute over-the-counter (OTC)
derivatives on a trading venue.
The trading obligation is one
area where MiFID II and the
European Market Infrastructure
Regulation (EMIR) are bound
to each other. For a derivative
to come under the trading obligation mandate, it must first be
part of the clearing mandate.
These products will have to be
executed either on a multilateral
trading facility (MTF), organised trading facility (OTF), or a
systematic internaliser (SI).
The European Securities and
Markets Authority (ESMA) has
outlined two factors to deter-
mine whether or not a class of
derivatives should also come
under the trading obligation: the
venue test and the liquidity test.
While that sounds simple,
this is a prime example of a rule
which has been finalised with
Firstly, the data ESMA has
compiled in its determinations
of which products are liquid,
and therefore are subject to the
trading obligation, are flawed.
This is because ESMA has
mainly used data gathered by
trade repositories (TRs), which
were first introduced with
EMIR in 2013.
This data has been criticised
as under EMIR it has created
scenarios where there are duplicate reports of OTC derivatives
trades. ESMA has sought to
remove these duplicate trade
reports, but has in turn proposed eliminating all transactions where one of the counterparties is a clearing house or a
According to a response from
Citadel on ESMA’s trade obligation consultation, “this eliminated nearly 70% of the transactions in the data set, which we
believe is far too high”.
With Europe’s first ever trading mandate fast approaching,
market participants are scrambling to understand how the
rules will affect trading, writes Joe Parsons.