The International Swaps and Derivatives Association (ISDA) has welcomed the publication by the European Commission (EC) of legislative proposals relating to its review of the Markets in Financial Instruments Directive (MiFID), but has voiced its concern that the EC’s stance on organised trading of over-the-counter (OTC) derivatives goes well beyond the spirit of the September 2009 G20 commitment that OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate.
In particular, the EC proposes certain restrictions on organised trading facilities that will hurt end user choice and market liquidity. These restrictions would, in essence, limit the types of trades that can be transacted on single dealer platforms and would adversely affect the ability of firms to effectively manage their risks.
Conrad Voldstad, ISDA chief executive officer (CEO), said: “OTC derivatives trade infrequently. For example, only 3,600 interest rate swaps are traded each day globally and only half of these are sufficiently standardised to be cleared. In all, we think less than 1,000 interest rate swaps will be traded in Europe on organised trading facilities. Half of these may be interdealer trades and the balance will be divided across hundreds of infrequently traded contracts with different maturities.
“These trades depend on the ability of dealer firms to make markets, particularly given the large trade size of most interest rate swaps. If you want to protect end users’ ability to access these markets, then you need a suitable range of venues on which to trade; limiting what you class as an eligible trading platform for OTC derivatives is not a good move.”
By way of comparison, around 1 million orders are executed every day on the London Stock Exchange (LSE). ISDA has stated that it will continue to engage with the EC, as well as other as policymakers within the European Parliament and Council of Ministers over the coming months on the topic of MiFID, in support of a legislative framework that advances ISDA’s commitment to safe, efficient markets.
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