Client Newsletter MiFID II & MiFIR: Impact on F&O …Interoperability and market access Key area (7)...

MiFID II & MiFIR, August 2017

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This regulatory briefing has been produced by Freshfields for J.P. Morgan.

Target audience

This briefing is intended for J.P. Morgan’s Global Clearing clients, i.e. clients of J.P. Morgan Securities plc’s F&O Execution and F&O and OTC Clearing businesses (‘clients’).

What is MiFID II and when is it coming into force?

A key objective of the recast Markets in Financial Instruments Directive (MiFID II) and the new accompanying Regulation (MiFIR) is to improve the functioning and transparency of financial markets in the EU. This is to be achieved partly through a series of new or amended obligations in relation to the clearing of derivatives, including requirements in relation to indirect clearing, clearing limits, position and transaction reporting, and market access. All of these are covered in this newsletter and have been grouped into seven key areas.

The ‘go-live’ date for full compliance with MiFID II and MiFIR is 3 January 2018. However, because of operational lead times for J.P. Morgan, central counterparties (CCPs) and clients, clients should be planning for implementation now.

Many of the substantive rules in relation to the impact on clients are contained in Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS), most of which have been published in final or near final form.

Key area (1) – Derivatives clearing obligation

Under MiFIR, all derivatives traded on EU regulated markets must be cleared by a CCP (see RTS 26 made under Article 29 of MiFIR).

What should clients do now?

o Plan for implementation of

new requirements

o Obtain an LEI. Clients will

need this for both MiFID II

and the European Market Infrastructure Regulation

(EMIR)

o Expect and consider regulatory notifications and

enhancements to contractual

terms and conditions

Target audience

What is MiFID II and when is it coming into force?

Key area (1) – Derivatives

clearing obligation

Key area (2) – Electronic trading rules, including direct

electronic access and

algorithmic/high frequency trading

Key area (3) – Rules for

general clearing members, including organisational

requirements and clearing

limits

Key area (4) – Commodities position reporting

Key area (5) – Transaction

reporting (execution)

Key area (6) – Interoperability and market

access

Key area (7) – Indirect clearing

Client Newsletter MiFID II & MiFIR: Impact on F&O and OTC clearing and F&O execution clients


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In addition, EU trading venues, Clearing Members (CMs) and CCPs are required to have systems and procedures in place in relation to ‘cleared derivatives’ to ensure trades are submitted and accepted for clearing as soon as technically practicable using automated systems. In this context, ‘cleared derivatives’ means all derivatives which are to be cleared pursuant to the above mentioned clearing obligation applicable to regulated markets, pursuant to the clearing obligation under EMIR or according to an agreement between the parties.

Except in the case of certain automatically cleared trades (see boxes below), specific timeframes will apply for the transfer of information depending on whether the trade is concluded on a trading venue or on a bilateral basis, with tighter timeframes applying to on-venue trades.

In respect of trades concluded bilaterally, a CM must obtain evidence from its client of the conclusion timeframe of the trade submitted for clearing and ensure that counterparties send the CCP the information prescribed in the CCP’s rules within 30 minutes of the conclusion. Although this obligation applies to the CM, it is not able to control the time at which a client submits the information to the CCP, and so J.P. Morgan will require clients to comply with these timeframes. J.P. Morgan will be following ISDA best practice in this regard, and may provide notices to clients requiring them to provide the relevant evidence and to submit all off-venue trades to specific middleware platforms.

Where a CCP declines to clear the trade, the trading venue will be required to void any on-venue trades. However, where a bilateral trade is declined for clearing, its treatment will be determined according to:

o The rules of the trading venue if the trade is submitted for clearing in accordance with the rules of the trading venue; or

o The agreement between the counterparties in all other cases.

The rules also require pre-trade screening of trades executed on a trading venue against clearing limits set by the CM for its client, except in respect of certain automatically cleared trades (see box).

For this purpose, trading venues will be required to provide tools to ensure pre-trade screening on an

‘Trading venues’

o Regulated markets;

o Multilateral trading facilities (MTFs); and

o Organised trading facilities

(OTFs)

Exemption from timeframes for transfer of

information for bilateral transactions

The timeframes for CCPs to send information to the

CM and to accept/decline clearing, as well as the

timeframe for CMs to accept/reject a transaction,

shall not apply where:

o the rules of the CCP ensure the setting and

maintenance of clearing limits on a regular

basis; and

o the rules of the CCP provide that a trade within

the limits is cleared automatically within 60

seconds of receipt of information from the

counterparties.

Exemption from timeframes for transfer of

information for transactions concluded on a

trading venue and from pre-trade screening

where:

o the rules of the trading venue require each

member which is not a CM of a CCP through

which the trade is cleared to have a contractual

arrangement with a CM of the CCP under which

the CM automatically becomes the counterparty

to the trade;

o the rules of the CCP provide that the trade is

cleared automatically and immediately, with the

CM becoming the counterparty to the CCP; and

o the rules of the trading venue provide that the

member of the trading venue or its client

becomes counterparty to the trade after the

trade is cleared, pursuant to direct or indirect

clearing arrangements with the CM.


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order-by-order basis by the CM. When the order is not within applicable limits, the trading venue must inform the client and the CM that the order cannot be concluded.

There are prescribed time limits for the actions required to conclude trades that are subject to the derivatives clearing obligation. These are summarized in the following table:

Required action

On-venue trades Bilateral trades

Pre-execution validation of orders against limits by trading venue

Trade concluded electronically: within 60 seconds

Trade concluded non-electronically: within 10 minutes

n/a

Notification by trading venue to CM and client for orders failing the limit check

Trade concluded electronically: real-time

Trade concluded non-electronically: within 5 minutes

n/a

Trading venue (for on-venue trades) / counterparty (for bilateral trades) to send information to CCP

Trade concluded electronically: within 10 seconds of trade conclusion

Trade concluded non-electronically: within 10 minutes of trade conclusion

CM to ensure counterparties send information to CCP within 30 minutes of trade conclusion

CCP to send information to CM

n/a Within 60 seconds from receipt of information

CM to accept/reject trade for clearing

n/a Within 60 seconds from receipt of information

CCP to accept/reject trade for clearing

Within 10 seconds of receipt of information

Within 10 seconds of receipt of CM accept/reject

CCP to notify of accept/reject decision

CCP to inform CM and trading venue of any non-acceptance on real-time basis

CCP to inform CM of any non-acceptance on real-time basis

CM/trading venue to notify of CCP reject decision

CM and trading venue to inform counterparty of any non-acceptance as soon as informed by CCP

CM to inform counterparty of any non-acceptance as soon as informed by CCP

Resubmission of rejected trade if due to a technical or clerical issue

Within 60 minutes from previous submission

Within 60 minutes from previous submission


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Key area (2) – Electronic trading rules, including direct electronic

access and algorithmic/high frequency trading

Several new obligations are being introduced in relation to electronic trading, including detailed rules for direct electronic access (DEA) and algorithmic and high-frequency trading (see RTS 6 made under Article 17 of MiFID II).

Direct electronic access

MiFID II introduces an enhanced regime governing direct electronic access to trading venues (see box). These requirements build on existing EU guidelines regarding automated trading.

DEA providers must have in place effective systems and controls which ensure:

o a proper assessment and review of the suitability of DEA clients;

o that clients using the service are prevented from exceeding appropriate pre-set trading and credit thresholds;

o that trading by clients using the service is properly monitored; and

o that appropriate risk controls prevent trading that could create risks for the firm, or that could contribute to a disorderly market or be contrary to the Market Abuse Regulation or the rules of the trading venue.

As a result, DEA clients will be subject to enhanced monitoring of trading and pre-trade checks, due diligence assessments and periodic reviews, as well as clearing limits (see below). Due diligence will cover the governance and ownership structure of the client as well as type of strategies to be undertaken and its operational set-up, systems and pre- and post-trade controls (among other matters).

Periodic reviews will be annual, risk-based assessments of the adequacy of the client’s systems and controls, tailored to the particular client (e.g. they will take into account the scale and complexity of its activities, regulatory status and financial position).

Obligations on clients conducting algorithmic and high frequency trading

Clients applying a high frequency algorithmic trading technique will need to be authorised as investment firms under MiFID II even if they are only dealing on own account. They will also be subject to a number of specific obligations, including to:

o establish and monitor their trading systems and algorithms through clear and formalised governance arrangements, having regard to the nature, scale and complexity of their businesses;

o ensure that their compliance staff have at least a general understanding of how the algorithmic trading systems and trading algorithms of the firm operate; and

o establish clear methodologies to develop and test algorithms and strategies, including through conformance and stress testing.

Orders generated by algorithmic trading, the different algorithms used for the creation of orders and the relevant persons initiating those orders will need to be flagged by members or participants of EU trading venues and, upon request, will be made available to regulators.

DEA

o an arrangement where a member

of a trading venue permits a

person to use its trading code to

transmit orders directly to the

venue

o includes arrangements involving

use by a person of the

infrastructure of a member

(‘direct market access’) and

arrangements where such

infrastructure is not used

(‘sponsored access’)

Several new obligations are being introduced in relation to electronic trading


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Finally, trading venues will be allowed to impose higher fees on those operating a high frequency algorithmic trading technique to reflect the additional burden on system capacity.

Key area (3) – Rules for general clearing members, including

organisational requirements and clearing limits

General clearing member organizational requirements

Certain organizational requirements are imposed on CMs, including in relation to systems and controls, due diligence of prospective clearing clients and disclosure of information about the services provided (see Articles 24, 25 and 27 of RTS 6 made under Article 17 of MiFID II).

Systems used by the CM must be subject to appropriate due diligence assessments, controls and monitoring. Prospective clearing clients must be assessed against a number of criteria, including their credit strength, internal risk control system and intended trading strategy. This assessment is repeated annually and there must be a binding written agreement in place setting out the consequences for clearing clients who do not comply with the criteria.

CMs must also publish the conditions under which they offer clearing services, together with information on the levels of protection, the costs associated with those different levels and any legal effects.

Clearing limits

CMs are required to set clearing limits for all clients (see Article 26 of RTS 6 made under Article 17 of MiFID II). In particular, they are required to:

o set and communicate appropriate trading and position limits to clients, in order to mitigate and manage the CM’s own counterparty, liquidity, operational and other risks;

o monitor their clients’ positions against these limits as close to real-time as possible;

o have appropriate pre-trade and post-trade procedures for managing the risk of breaches of limits, by way of appropriate margining practices and other means; and

o document such procedures in writing and maintain records of compliance.

The clearing limit will be set and applied by J.P. Morgan as follows:

o the limit will be monitored real-time, on a post-trade, post-clear basis by the CM;

o the limit will apply to all activity cleared by the CM for a client, across all execution venues and counterparties; and

o the limit will be set as an initial margin (IM) number, calibrated in line with a client’s historical IM usage, such that it does not disrupt a client’s trading practices.

The limit, and any changes to it, will be communicated to clients via a notice.

Key area (4) – Commodity position limits and reporting

MiFID II imposes a number of specific rules in relation to commodity derivatives. These include narrower exemptions from authorisation requirements for commodity derivatives dealers and a new position limits and reporting regime (see RTS 20 made under Article 2(4) of MiFID II, RTS 21 made under Article 57 of MiFID II and ITS 4 made under Article 58 of MiFID II).


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Narrowed exemptions from authorisation

The exemptions from the requirement to be authorised pursuant to MiFID II for entities trading commodity derivatives are being narrowed as compared with the current regime. However, clients of J.P. Morgan who are commodity derivatives dealers and who deal on own account (excluding those executing client orders) will continue to be exempt, provided that:

o this activity is ancillary to their main business when considered on a group basis;

o their main business is not the provision of investment or banking services or acting as a market maker in commodity derivatives; and

o the dealer does not apply a high frequency algorithmic trading technique.

Clients who wish to benefit from the commodity derivatives dealers exemption must annually notify the regulator that they make use of the exemption and, if requested, provide details of the basis on which the activity is considered to be ancillary. Detailed criteria for establishing when an activity is to be considered ancillary to the main business at a group level are set out in RTS 20 (made under Article 2(4) of MiFID II).

Position limits

EU competent authorities (CAs) will be required to impose position limits on the size of net1 positions persons can hold in commodity derivatives traded on EU trading venues and economically equivalent OTC contracts. The limits will apply on the basis of all positions held by a person and those held on its behalf at an aggregate group level, including by its parent undertaking.

There will be a limit for the spot month period, and an “other months’” position limit applied across all maturities other than the spot month. CAs will set a baseline limit for most contracts, which may then be adjusted up or down. The CAs will take into account various factors, including the liquidity of the contracts, when setting the limits.

The intention is to prevent market abuse through building and exploiting dominant positions and to support orderly pricing and settlement conditions whilst enabling commodity derivatives to continue to support the functioning of commercial activities in the underlying commodity market.

Position limits will not apply to positions held by or on behalf of a non-financial entity that are objectively measurable as reducing risks directly relating to the commercial activity of that non-financial entity. A non-financial entity will need to apply to the relevant CA in order to be granted an exemption and the CA is able to reject the application. A separate exemption will be needed for each commodity derivative.

Position reporting requirement

To support enforcement of the position limits and orderly pricing and settlement through enhanced transparency and oversight, MIFID II introduces a new position reporting requirement.

The position reporting rules applicable to EU trading venues and firms require reporting to CAs of positions of any underlying clients (and any clients of those clients until the end client is reached)2 in commodity derivatives or emission allowances or

1 Long and short positions should be netted off against each other.

2 There is considerable industry discussion around the meaning of ‘end client’.

Key business impacts

o Significant burden on market

participants in managing

compliance with position limits

o Position management controls will

be imposed by operators of trading

venues on which commodity

derivatives are traded

o CAs will have powers to intervene

and sanction breaches of position

limits

EU competent authorities will be required to impose position limits on the size of net positions persons can hold in commodity derivatives


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derivatives thereof traded on EU trading venues and economically equivalent OTC contracts. Reporting of trades done outside a trading venue will be done by firms to CAs directly. Reporting of trades done on an EU trading venue will be done by venue members or participants to the venue itself, which will then report to the relevant CA.

Territorial scope

The position limits apply to commodity derivatives traded on EU trading venues and economically equivalent OTC contracts.

Any client which holds positions in commodity derivatives traded on an EU trading venue or economically equivalent OTC contracts will be in scope of the position limit requirements regardless of where it is based.

Key area (5) – Transaction reporting (execution)

MiFIR extends the scope of current transaction reporting requirements (see RTS 22 made under Article 26 of MiFIR). In particular, it expands the scope of financial instruments to which transaction reporting applies (see box), as well as the details which need to be reported.

Who is impacted by the reporting obligation

Investment firms and credit institutions which execute transactions in certain financial instruments must submit a complete transaction report to their CA as quickly as possible, and no later than the close of the following working day.

The obligation will apply to J.P. Morgan Securities plc and its clients which are investment firms (i.e. persons whose regular occupation or business is the provision of one or more investment services to third parties and/or the performance of one or more investment activities on a professional basis) or credit institutions (i.e. banks).

Importance of LEIs for counterparties and other data required

One of the most significant requirements in relation to transaction reporting is one of the simplest: to obtain an LEI. In order to enable J.P. Morgan Securities plc to comply with its requirements, clients will be required to provide certain information when trading with J.P. Morgan Securities plc. Importantly this includes the need to obtain a legal entity identifier (LEI) in time, failing which the legislation will not permit us to trade with you.

In addition, we will also require other information from you, including whether a commodity derivative is entered into for hedging or speculative purposes.

Key blocks (collections of fields) in the transaction report template include buyer and seller identification, execution venue and trading date and time, as well as trader, algorithms, waivers and indicators. This last category includes a field in which reporting entities must include a code used to identify the person or algorithm within the investment firm or credit institution responsible for the investment decision.

Key area (6) – Interoperability and market access

CCPs may be requested to clear financial instruments on a non-discriminatory and transparent basis regardless of the trading venue on which a transaction is executed, although the CCP may require the trading venue to meet operational and technical

Current reporting applies to

financial instruments admitted to

trading on a regulated markets,

whilst MiFIR extends this to

financial instruments:

o admitted to trading or traded

on a trading venue or for which

a request for admission has

been made;

o with an underlying financial

instrument traded on a trading

venue; or

o with an underlying index or a

basket of financial instruments

traded on a trading venue.

One of the most significant requirements in relation to transaction reporting is one of the simplest: to obtain an LEI


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requirements and can in certain circumstances deny access (see RTS 15 made under Article 35 of MiFIR).

A trading venue request for access must be submitted to the CCP, its CA and the trading venue’s CA. A CA should only grant a trading venue access to a CCP where such access:

o would not require an interoperability arrangement, in the case of derivatives that are not OTC derivatives pursuant to EMIR; or

o would not threaten the smooth and orderly functioning of the markets, in particular due to liquidity fragmentation, or would not adversely affect systemic risk.

However, the need for an interoperability arrangement would not prevent access where the trading venue and all CCPs party to the proposed interoperability arrangement have consented to the arrangement and the risks to which the incumbent CCP is exposed arising from inter-CCP positions are collateralised at a third party.

On the other hand, a trading venue may be required to provide trade feeds to a CCP on a non-discriminatory and transparent basis upon request by a CCP that wishes to clear transactions in financial instruments concluded on that trading venue, although the trading venue can deny access in certain circumstances (see RTS 15 made under Article 36 of MiFIR).

A request for access must be submitted to the trading venue, its CA and the CA of the CCP. Similar to the position for CCP access above, a CA should only grant a CCP access where such access:

o would not require an interoperability arrangement, in the case of derivatives that are not OTC derivatives pursuant to EMIR; or

o would not threaten the smooth and orderly functioning of the markets, in particular due to liquidity fragmentation and the trading venue has put in place adequate mechanisms to prevent such fragmentation, or would not adversely affect systemic risk.

However, the need for an interoperability arrangement would not prevent access if the parties have consented to the arrangements in the same circumstances as those referred to for CCP access above.

Open access is a market infrastructure opportunity which requires trading venues and clearing houses to come to an agreement on offering choice of trading or clearing venues on listed derivatives products. To date we are not aware of any significant interoperability offerings by core clearing houses or trading venues, but we are keeping a close watch on developments in this space. Market demand, cost of service, risk and operational supportability will factor into a decision to support open access products on a commercial basis.

Key area (7) – Indirect clearing

Indirect clearing obligations for exchange traded derivatives (ETDs) are new and will impact CCPs, clearing members, clients of clearing members and their onward clients (indirect clients). In order to know which category applies to them, it is important that clients examine their clearing arrangements to ascertain whether their clearer is itself a direct clearing member of a CCP or accesses a CCP through a direct clearing member.

MiFIR provides that indirect clearing arrangements (see box below) with regard to ETDs are permissible provided that they do not increase counterparty risk and ensure the assets and positions of the counterparty benefit from protection with equivalent effect to that referred to in EMIR with regard to segregation and default management.


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We have set out key obligations and impacts for participants in indirect clearing arrangements below, based on the European Securities and Markets Authority’s (ESMA) draft RTS (made under Article 30 of MiFIR). The draft RTS are awaiting finalisation, although the industry is working on the assumption that there will be no major changes to the draft RTS.

Key obligations and impacts for market participants

CMs: CMs will be required to support new account structures for clients with indirect clients. In particular, they must allow clients the choice between a Net Omnibus Segregated Account (NOSA) or a Gross Omnibus Segregated Account (GOSA).

Both a GOSA and a NOSA will contain the positions and assets of the client held for its indirect clients; however, where the client chooses a GOSA, the CM must ensure that the positions of one indirect client do not offset the positions of another indirect client and that the assets held for the account of one indirect client cannot be used to cover the positions of another. The CM must therefore, on the basis of information it receives from the client on a daily basis, furnish the CCP with all necessary information to identify the positions held for the account of each indirect client. In order to do this, J.P. Morgan may maintain separate position accounts in its books and records for each indirect client.

CMs must also maintain robust default management procedures in order to manage any default of a client providing indirect clearing services. In respect of a NOSA, this will involve prompt liquidation of the assets and positions of indirect clients and the return to the client for the account of the indirect clients of any balance owed from that liquidation. Where a GOSA has been chosen, the process may instead involve the CM taking steps to transfer the assets and positions held by the defaulting client for the account of its indirect clients to another client or to a clearing member (porting). Alternatively, a liquidation of assets and positions may take place, but with the payment of the proceeds being made directly to the indirect clients (where this is possible in accordance with applicable law).

The CM must contractually commit itself to trigger porting to another client or clearing member designated by all the indirect clients whose assets and positions are being transferred on the request of the relevant indirect clients. The consent of the defaulting client will not be required. However, that other client or clearing member will only be required to accept the porting if it has entered into a contractual relationship with the relevant indirect clients committing itself to do so.

In the event that the assets and positions in the GOSA are liquidated and the CM is unable to identify the indirect clients or to complete the payment of the proceeds to them, the CM must return the proceeds to the client for the account of the indirect clients. The draft RTS recognise that one example where the CM would be unable to complete the direct return of proceeds would be where the insolvency regime of a non-EU jurisdiction was involved that does not allow the direct return of liquidation proceeds.

3 Please note that in certain limited circumstances, J.P. Morgan may not be the CM but a client

of the CM, in which case J.P. Morgan’s client would be an “indirect client” of the CM

Indirect clearing arrangements

o A set of contractual relationships

between the CCP, the CM (J. P.

Morgan3), the client and the client of the

client (the “indirect client” of the CM, or

“onward client” of the client) that allows

the client to provide clearing services to

an indirect client

o Applicable rules aim to ensure that

arrangements do not increase

counterparty risk and that the assets and

positions of the indirect client benefit

from protections equivalent to the

enhanced segregation and default

management provisions under EMIR


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Clients: Clients must offer indirect clients a choice of a NOSA or a GOSA and ensure indirect clients are fully aware of the risks associated with these account types. If the onward client does not respond, the client must decide on a default account option, which is likely to be the NOSA.

Where a GOSA is selected, the client will need to provide the CM on a daily basis with all necessary information to identify the positions held for the account of each indirect client. In order to do this, J.P. Morgan may maintain separate position accounts in its books and records for each indirect client.

The client must keep separate records and accounts to distinguish its own assets and positions from those held on behalf of indirect clients. It must also provide the indirect client with sufficient information to identify the CCP and clearing member used to clear its positions.

In the event of a default of the client, arrangements should be in place to ensure information in respect of the indirect clients is made immediately available to the CM. Where a GOSA has been chosen, this should include details allowing the CM to identify the indirect clients so that it can determine which positions are held for the account of each indirect client (see “Anonymity of indirect client” below for more detail on how this will be achieved).

CCPs: CCPs will be required to open and maintain NOSAs and GOSAs at the request of the CM.

Where assets and positions in a GOSA are managed by the CCP in respect of multiple indirect clients, the CCP will need to keep separate records of the positions of each indirect client, calculate the margins in respect of each of them and collect the sum on a gross basis. The CCP will base its determinations on the information received from the CM on a daily basis about the positions held for the account of each indirect client.

Indirect Clients: Indirect clients will be asked by the client to make a selection of a NOSA or a GOSA for their positions. They should consider the disclosures they receive carefully before making their selection.

Indirect clients that choose a GOSA may also wish to consider whether to put back-up arrangements in place to allow for porting in the event of a client default.

Anonymity of indirect client

The RTS preserve the anonymity of the commercial relationship between clients and their onward clients. However, upon a default of a client providing clearing services, information in respect of indirect clients should be made available to the CM to allow the default management procedures to take effect.

J.P. Morgan intends to achieve this by making use of an industry-developed tool where indirect client details are stored in a locked box which only becomes accessible upon the default of the client. J.P. Morgan will seek to ensure that its clients have an obligation to maintain the indirect clients’ details in this tool.

Long chains

ESMA has taken the view in the draft RTS that indirect clearing chains should be restricted to four layers except when two layers are affiliates within the same group and certain conditions are met. In order to meet the objective not to increase counterparty risk, the addition of entities in the permissible indirect clearing chains are only accommodated for indirect clients that have made the informed choice of the least segregation and protection of the account structures offered, i.e. the NOSA.


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Account Structure Diagram

Impacts on agreements and disclosures

Changes will be required to client agreements (between the CM and the client and between the client and the indirect client) and to risk disclosures provided by the CM and the client.

The terms of the agreement between the client and the indirect client must clearly record the scope of the indirect clearing arrangement and be agreed upon after consultation with the CM on the aspects that can impact the CM’s operations. The agreement must require the client to honour all obligations of the indirect client to the CM with regards to transactions arising from the indirect clearing arrangement. In addition, it must contain terms to facilitate the prompt return by the CM of proceeds from a liquidation of positions and assets in the case of a client default.

CMs must publicly disclose the general terms on which they are prepared to facilitate indirect clearing services, including minimum financial resources and operational capacity requirements for clients providing indirect clearing services. As noted above, CMs must also contractually commit themselves to trigger the porting procedures in respect of GOSAs where relevant. For such accounts, they must also commit themselves to trigger procedures for payment of liquidation proceeds directly to indirect clients where appropriate.

CMs will be required to include additional information about the segregation options available to clients providing indirect clearing in respect of ETDs when complying with their current obligation under EMIR to publicly disclose levels of protections and costs associated with different levels of segregation.

Moreover, the client’s disclosure to the indirect clients must include details of the different levels of segregation available and the risks associated with each of these.

Extra-territoriality

The indirect clearing requirements will apply regardless of where the indirect client is based. There are also indications in the RTS that clients of CMs will be caught by the regime even though they may be established in a third country. ESMA has noted that it is mindful of the fact that many indirect clearing arrangements include non-EU entities. The primary example is the potential conflict of law with a third country insolvency regime applying to a client providing clearing services, which the EU legal framework cannot override. This has been addressed by recognising that a CM would

The indirect clearing requirements will apply regardless of where the indirect client is based


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not be required to make a payment of liquidation proceeds directly to indirect clients in the event of a client default where the third country insolvency regime would not permit this.

Whilst EU authorised CCPs are clearly in scope of the indirect clearing requirements, ESMA has noted that when a third country jurisdiction is assessed as having equivalent requirements to EMIR for CCPs, the recognised third country CCPs would not need to comply with the requirements on indirect clearing. Specifically, this means that recognised third country CCPs would not necessarily offer the same segregation options as the ones required under MiFIR.

ESMA has also indicated in industry meetings that non-EU CMs are not exempt from the RTS and that they are therefore in scope of the requirements. In particular, this will be the case if they provide clearing services to an EU entity. However, it is not yet clear whether a clearing chain in which a non-EU CM provides clearing services to another non-EU entity will be caught by the requirements.


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Published by Freshfields for: J.P. Morgan freshfields.com This material is provided by the international law firm Freshfields Bruckhaus Deringer LLP (a limited liability partnership organised under the law of England and Wales) (the UK LLP) and the offices and associated entities of the UK LLP practising under the Freshfields Bruckhaus Deringer name in a number of jurisdictions, and Freshfields Bruckhaus Deringer US LLP, together referred to in the material as ‘Freshfields’. For regulatory information please refer to www.freshfields.com/support/legalnotice. The UK LLP has offices or associated entities in Austria, Bahrain, Belgium, China, England, France, Germany, Hong Kong, Italy, Japan, the Netherlands, Russia, Singapore, Spain, the United Arab Emirates and Vietnam. Freshfields Bruckhaus Deringer US LLP has offices in New York City and Washington DC. This material is for general information only and is not intended to provide legal advice. It is not a substitute for seeking legal advice about specific circumstances and any reliance placed upon it is at the recipient’s own risk. Receipt of this material does not create a lawyer/client relationship with Freshfields. © Freshfields Bruckhaus Deringer LLP, May 2017

Client Newsletter MiFID II & MiFIR: Impact on F&O …Interoperability and market access Key area (7)...

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Transcript of Client Newsletter MiFID II & MiFIR: Impact on F&O …Interoperability and market access Key area (7)...