Standardisation

CESR believes that a higher level of legal, operational and product standardisation (including increased use of electronic confirmation systems) can be achieved and would be beneficial for operational efficiency and the reduction of systemic risk. This should be achieved through the development of carefully defined industry targets, with arrangements to monitor the achievement of the targets, according to the scope and processes described below.

Legal, process and product standardisation

CESR agrees that market participants should develop further legal and product standardisation and more automated processes and does not recommend at this stage mandating the use of electronic confirmation systems, understood as 100% electronically confirmed contracts, but ambitious targets should be set for an increased and high level of standardisation and electronic confirmations in order to achieve a higher level of straight-through processing. CESR is also of the view that European regulators, with appropriate involvement by ESMA, should be strongly involved in international fora where such issues are discussed to ensure consistency of approaches and level playing field.

Calibration and monitoring of industry targets

It is proposed to launch a process to set targets by asset class for increased legal, process and product standardisation, and to make arrangements to monitor the achievement of the targets.

Measurement and Further Action

The core principles of the objectives pursued and the approach taken by regulators to promote standardisation of OTC derivatives should be set in regulatory measures. In case the targets were not met, appropriate mandatory regulatory intervention should be adopted by ESMA (in conjunction with EEA national regulators) to lead to their achievement by the industry.

Trading on organised platforms

In relation to trading on venues offering an organised trading environment (referred to in the consultation paper as “exchange trading” and in this advice as “organised trading venues”) CESR understands that current situation is unsatisfactory and believes that trading of standardised derivative products on organised trading venues is to be incentivised by regulators, even though not mandated at this stage.

Nature of Proposed Regulatory Action

It is proposed that this action takes the form of carefully defined industry targets, with arrangements to monitor their achievement by the industry. In case the targets were not met, appropriate mandatory regulatory action should be adopted by ESMA (in conjunction with EEA national regulators) to ensure their achievement by the industry.

The minimum characteristics necessary for a platform to qualify as an Organised Trading Venue

CESR considers that further work is necessary in order to define the term “organised trading venue” in this context and determine the range of characteristics that a derivatives venue should possess, so as to qualify as an organised trading venue and meet the objectives set forth by the G20. CESR recommends that such work be initiated as soon as possible and stands ready to assist the Commission in this regard.
In CESR’s view, it is clear that the characteristics of market transparency and operational efficiency are, as a minimum, necessary to meet the G20 objectives. In addition, CESR considers that it may be necessary to incorporate further functional characteristics into the definition of an organised trading venue, based on a fuller assessment of their role in furthering the G20 objectives. Such characteristics may include some or all of the following:
• easy and non-discriminatory market access;
• non-discretionary and transparent rules;
• objective criteria for the efficient execution of orders;
• multi-laterality;
• authorisation/regulation and monitoring by competent authorities;
• operational resilience; and
• surveillance of compliance with the organised trading venue’s rules.

As an initial conclusion, it is clear that trading platforms regulated as Regulated Markets and MTFs meet the full range of functional characteristics described above and, accordingly, unequivocally meet the objectives of the G20.
In legislative terms, the key objective of CESR’s further work should be to determine whether other trading platforms, in addition to RMs and MTFs, meeting all or part of the criteria set out above, may qualify as organised trading venues. If a concept beyond the RM and MTF definitions was necessary, it is clear in CESR’s view that the equities focused regimes for systematic internalisers and broker crossing systems would not be appropriate as currently formulated.

Eligibility of products for Organised Trading Venues

It is proposed that, in order for a derivative product to be deemed eligible for trading on an organised trading venue, a number of pre-conditions must be satisfied. These are:
a) The derivative contract is standardised from the product, legal and process point of view; and
b) The market for the derivative contract is sufficiently liquid.

A derivative product which meets these pre-conditions is referred to as an “Eligible Derivative”. A derivative product already traded on a RM or an MTF should be presumed to be an Eligible Derivative (a minimum period of trading on a RM could be considered), unless in ESMA’s judgement specific circumstances, such as a lack of liquidity in a RM/MTF-traded product, make this inappropriate. Regarding bespoke contracts for non-financial-institutions with specific hedging needs, these are not covered by the “standardised derivatives” scope of CESR’s present work.

The calibration and monitoring of industry targets

In order to effectively design, implement and oversee a system of targets, CESR proposes that ESMA be appointed to fulfil these functions. ESMA’s responsibilities would include:
(a) The determination of the Eligible Derivatives covered by the targets; and
(b) The determination of the targets and in particular the proportion of business in Eligible Derivatives that should take place on organised trading venues over a specified period of time (expressed as a percentage of total business by relevant participants in Eligible Derivatives over the same period of time).
When calibrating those targets, the following general principles should be applied:
• The targets should be set at a sufficiently ambitious premium to these existing levels in order to effectively encourage increased platform trading;
• The targets should allow market participants to trade in Eligible Products on an OTC basis in specific circumstances such as non-addressable liquidity and non price-forming transactions;
• The targets should be drawn up in consultation with the industry; and
• Where appropriate, the targets should be differentiated by asset class.
(c) The publication of the targets on the basis of determined objective criteria. ESMA should also have discretion to publish a general statement, at an appropriate juncture, regarding the compliance or non-compliance of the industry with the targets.

Measurement and further action

The core principles of the objectives pursued and the approach taken by regulators to incentivise trading of standardised OTC derivatives on organised venues should be set in regulatory measures. In case the targets were not met, appropriate mandatory regulatory intervention should be adopted by ESMA (in conjunction with EEA national regulators) to lead to their achievement by the industry.

Full statement