Download CDS Trading under MiFID II FAQ

Incoming global regulation is changing the way credit default swaps (CDS) are
traded. Below we have attempted to answer some of the most frequently asked
questions in relation to how MiFID II/MiFIR is likely to impact e-trading of OTC
products.
1. What is MiFID II and how will it impact electronic trading?
MiFID II is the review of the Markets in Financial Instruments Directive, which seeks to create a
single and competitive market in financial services across all EU member states. The European
Commission regards the revision of MiFID as a major part of the continuing structural reforms it
considers are needed following the global financial crisis.
MiFID II includes requirements for ‘best execution’ which relate to the content and format of
data, as well as frequency of data publication, and as such would encourage more widespread
use of electronic trading venues across a broad range of products. MiFID II contains a trading
obligation for derivatives that are subject to the clearing obligation, and for certain equities. The
trading obligation will require instruments to be traded on regulated trading venues, which is
expected to increase the proportion of instruments traded electronically. In addition, MiFID II
establishes a consolidated trade tape for Europe, in a variety of asset classes, which will bring
additional transparency to the markets.
2. What is the timetable for MiFID II?
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On October 11, 2013, The European Commission (EC) presented proposals amending
MiFID, which were assessed by the European Parliament and EU Member States over a
two and a half year period.
On 15 April 2014, the package was voted through in the plenary of the European
Parliament.
The European Securities and Markets Authority (ESMA) will now be responsible for
developing technical standards on a number of key issues. The consultation on the
standards is scheduled to be published in late May.
The new rules will come into effect at different times depending on whether they were
contained in the directive, MiFID or the regulation, MiFIR. Those included in the directive will
apply from mid-2016 while those included in the regulation will apply from early 2017.
3. What steps has MarketAxess taken to prepare for implementation of MiFID II?
MarketAxess has been actively engaged in the ongoing regulatory reform agenda with
European policy makers. We have hosted roundtables with policy makers and submitted our
thoughts and feedback on the proposals, sharing our extensive experience of electronic trading
in the OTC markets.
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4. What is an OTF?
MiFID II introduces a new regulatory category of trading venue – “organized trading facilities”
(OTFs) – in order to capture any facility or system that brings together buying and selling
interests that was not caught by one of MiFID’s existing venue classifications. The OTF is only
open to non-equity instruments and the same pre-and-post trade transparency requirements
apply to an OTF as to other regulated trading venues.
OTFs would include both bilateral and multilateral systems, capturing all types of organized
execution and trading arrangements not covered by regulated markets or MTFs (multilateral
trading facilities). This includes broker crossing systems and electronic platforms for the trading
of OTC derivatives.
OTF operators under MiFID II should be neutral and may not execute any transactions against
their own capital except in specific and pre-defined circumstances. They will have discretion
over how a transaction will be executed and may restrict access to clients with which they do
not want to trade. An OTF operator will not be allowed to trade with their own capital unless it is
to support trading of illiquid sovereign debt instruments, and matched principle trading will be
permitted for illiquid corporate bonds. Under this definition, OTFs could include single-dealer
platforms. In this respect OTFs differ from Swap Execution Facilities (SEFs) under Dodd-Frank,
as SEF rules do not permit single dealer platforms.
The final requirements for the OTF category will only be known once the legislative process is
completed.
5. What is an MTF?
A Multilateral Trading Facility (MTF) is a type of trading venue that is operated by an investment
firm or market operator, bringing together multiple third-party buying and selling interests in
financial instruments in a non-discriminatory way. An MTF may not reject particular members or
participants.
MarketAxess Europe Ltd. is registered as an MTF.
6. Is there likely to be a consolidated trade tape in Europe as a result of these
regulations?
The European Commission considers that transparency of market data is crucial and MiFID II
contains measures regarding the scope of transaction reporting, the content of transaction
reports and the mechanisms for making transaction reports.
MiFID II proposes that multiple providers of consolidated trade tapes will operate and compete
across the EU. Technical measures on the implementation of the consolidated tape will now
need be developed by the European Securities and Markets Authority (ESMA).
7. What percentage of the market do you believe will trade electronically?
As mentioned in question 3, MarketAxess has been following and engaging in the ongoing
regulatory reform agenda both in Europe with MiFID II and in U.S. where MarketAxess has been
operating as a ‘Swap Execution Facility’ (SEF) since October 2nd, 2013, following the CFTC’s
mandatory compliance requirements.
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In anticipation of the mandatory CDS SEF trading in U.S., which started on February 26, 2014,
MarketAxess conducted research, published in our blog: ‘The MAT Date for CDS is Fast
Approaching: What will be the Real Impact?’ to understand exactly what portion of the market
would be required to trade electronically.
In this research, MarketAxess analyzed certain CDS contracts that are subject to the trade
execution mandate, also called ‘Made Available to Trade’ (MAT) products, within the context of
the overall CDS index market using DTCC data from September 20, 2013 through January 24,
2014. We found that all MAT products represent over 80% of overall volume in CDS index
market and believe that a significant portion of these transactions will end up trading
electronically.
The MiFID II trading obligation requires that derivative contracts that have been centrally
cleared under the European Market Infrastructure Regulation are traded on a MiFID compliant
trading venue. While voice trading will still be permitted on these venues, a significant portion of
CDS trading is anticipated to migrate onto electronic platforms.
8. Is any of the CDS market likely to migrate to exchange trading?
Liquidity in CDS can be thin and discontinuous for a number of structural reasons. Although we
expect the most actively traded index products to be fairly liquid in the context of the market,
most of the single-name CDS and many of the less actively traded indices will be substantially
less so.
As a pioneer in credit e-trading, MarketAxess has tailored and enhanced its CDS functionality to
meet the needs of credit market participants, offer diversified liquidity opportunities, and comply
with regulatory requirements. We believe the efficient trading protocols available on our SEF
platform, including an Order Book, Request-for-Quote (RFQ), and Click-to-Trade (CTT) are well
suited for CDS index trading and offer our U.S. and Non-U.S. clients* flexible trading execution
to match any strategy. Bringing further innovation to the CDS market, MarketAxess offers
‘MATCH’ the first independent all-to-all central limit order book (CLOB) for CDS single-names
with Barclays acting as the primary market maker.
*Non-US persons need to have signed the MarketAxess European Client Activation Form (CAF) to trade
on MarketAxess SEF.
9. What will be your relationship with the clearing organizations?
As an independently-owned MTF, we anticipate connecting to available clearing organizations,
so as to deliver trades executed on our platform to the clearing organization of the
counterparty’s choice. Our SEF currently has connectivity with both ICE and CME.
10. What are MarketAxess’ capabilities in CDS?
As the only electronic trading platform focused on credit, MarketAxess offers market participants
comprehensive functionality and streaming executable markets using fully-electronic trading
protocols for U.S. indices (CDX), European indices (iTraxx) and CDS single-names, using a
broad range of trading protocols and functionality designed specifically for the credit markets.
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Request for Market (RFM): A fully disclosed auction-style protocol by which a market
participant requests BOTH sides – Bid and Offer – from other market participants;
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Streaming Markets/Click-to-Trade (CTT): Over 8 dealers are today streaming live,
executable CDS markets on MarketAxess, providing much greater pre-trade price
transparency;
Central Limit Order Book (CLOB): In 2013 MarketAxess launched the first, independent
client-to-dealer central limit order book for CDS single-names in conjunction with a major
dealer;
List Trading: Fully disclosed auction-style protocol – clients can trade baskets of CDS
single-names using our patented list trading protocol;
Roll and switch trading: Available alongside cash credit trading on MarketAxess, with
basis trading support to come.
Our straight-through processing, post-trade feeds and reporting capabilities can deliver
significant operational efficiencies to CDS market participants.
In compliance with the Dodd-Frank Act, MarketAxess has been operating as a Swap Execution
Facility (SEF) since October 2, 2013 and offers U.S. and Non-U.S. market participants who
signed the MarketAxess’ User License Agreement the option to trade on our SEF platform using
the following functionality:
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Order Book
RFQ going to a minimum of 2 market participants (increases to 3 in October 2014)
CTT from SEF Actives Page, a request-for-stream based protocol requiring 2 or more
requests to other market participants to be made
Non-U.S. persons who signed the MarketAxess European Client Activation Form (CAF) have
the ability to trade on our non-SEF platform using MarketAxess’ broad trading functionality
(including Quick Orders, Limit Orders, etc.) and the following protocols:
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Actives Page with current CTT flow where dealers are providing liquidity and current
enablement process
RFQ with no minimum requirement (approvals between counterparties still required)
In December 2013, MarketAxess launched MATCH, the first independent central limit order
book for CDS single names, allowing all market participants to post resting bids and offers in a
broad range of single name products.
MarketAxess has also enhanced its web-based data platform, BondTickerTM, with live, intraday
data for CDS indices and options, as reported to the DTCC’s swap data repository (SDR). The
intuitive BondTicker interface offers global market participants a summary of intraday market
volumes by gross notional and trade count for both Index and Index Options. Trade data is then
broken down by Index Family and Series with indicators for trades reported later than execution
date.
For more information or questions, contact Grigorios Reppas, CDS Product Manager, at + 1 212
813 6342 or [email protected], or your MarketAxess sales representative.
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