EMIR: ETD vs OTC
April 9, 2021
EMIR distinguishes ETD (Exchange Traded Derivatives) vs OTC (Over The Counter) Derivatives based on the place of execution.
An ‘OTC’ is defined as where execution does not take place on a regulated or equivalent market.
An ETD means an execution that takes place on a regulated or equivalent market, which meets the following criteria (EMIR Q&A (ETD Q1));
- contract is subject to rules of a TV (trading venue) and executed with compliance of those OR on a similar Trading venue outside EU:
- contract is processed by the TV after execution and cleared by within 1 day of execution
- clearing is done by a CCP
The above implies that a contract executed on an MTF or OTF (which fall under a TV definition), that meets the conditions defined in points 2 and 3 above, should also be considered an ETD.
|Trading Venue||EMIR RTS 648/2012 Article 2(4)
A system operated by an investment firm or a market operator within the meaning of Article 4(1)(1) (‘investment firm’) and 4(1)(13) (‘market operator’) of Directive 2004/39/EC other than a systematic internaliser within the meaning of Article 4(1)(7) thereof, which brings together buying or selling interests in financial instruments in the system, in a way that results in a contract in accordance with Title II or III of that Directive;
|Article 2(4) EMIR RTS 648/2012|
means a regulated market, an MTF or an OTF.
|Article 4(1)(24) 2014/65/EU (MiFID II)|
|EMIR Q&A ETD Q1
‘trading venue’ definition for the purposes of ETD definition:
trading venue as defined in Article 2(8) of the Commission Regulation (EC) No 1287/2006, but excluding contracts concluded through a systematic internaliser.
|EMIR Q&A ETD1|
|Exchange Traded Derivative (ETD)||EMIR Q&A ETD Q1
(…) meet all of the following criteria:
1.The contract is subject to the rules of a trading venue** and is executed in compliance with those rules or on a similar trading venue outside the EU (note that this similarity point is only to be interpreted for the purpose of deciding which trades are covered by this section of questions and answers and does not imply any status for non-EU trading venues for any other purpose);
2. The rules of the trading venue provide for processing of the concluded contract by the trading venue after the execution and the subsequent clearing by a CCP within one working day of execution; and
3. The trade is cleared by a CCP.**As defined in Article 2(8) of the Commission Regulation (EC) No 1287/2006, but excluding contracts concluded through a systematic internaliser.See also EMIR Q&A OTC Q1 c) and d) (below)
|EMIR Q&A ETD1|
|OTC (Over-the-counter)||Article 2(7) EMIR RTS 648/2012
‘OTC derivative’ or ‘OTC derivative contract’ means a derivative contract the execution of which does not take place on a regulated market within the meaning of Article 4(1)(14) of Directive 2004/39/EC or on a third-country market considered to be equivalent to a regulated market in accordance with Article 2a of this Regulation
|Article 2(7) EMIR RTS 648/2012|
|EMIR Q&A OTC Q1
(a) Derivative contracts traded on MTFs or OTFs are OTC derivatives in the context of EMIR.(b) The definition explicitly refers to the place of execution (“a derivative contract the execution of which does not take place on a regulated market”). The characteristics that these contracts have in common with exchange traded derivatives are therefore not relevant for the purpose of the definition of OTC derivatives.(c) Derivative contracts executed on a third-country market which has been considered to be equivalent to an EU regulated market by the European Commission in accordance with Article 2a of EMIR, are not OTC derivatives under EMIR and do not count for the purpose of the determination of the clearing threshold under Article 10 of EMIR. However, derivative contracts executed on third-country markets which have not been considered to be equivalent to an EU regulated market, will count for the determination of the clearing threshold.(d) Derivatives transactions, such as block trades, which are executed outside the trading platform of the regulated market, but are subject to the rules of the regulated market and are executed in compliance with those rules, including the immediate processing by the regulated market after execution and the clearing by a CCP, should not be regarded as OTC derivatives transactions. Therefore, these transactions should not be considered for the purpose of the clearing obligation and the calculation of the clearing threshold by NFC that only relates to OTC derivatives. Derivatives transactions that do not meet the conditions listed in the first paragraph of this sub-answer (d) should be considered OTC. For example, derivatives contracts that are not executed on a regulated market and are not governed by the rules of an exchange at the point of execution should be considered OTC even if after execution they are exchanged for contracts traded in a regulated market. However, the replacement contract itself may be considered exchange traded if it meets the relevant conditions.
|EMIR Q&A OTC1|
|ESMA EMIR Validation rules
2.15: Venue of execution
Where a contract was concluded OTC and the respective instrument is admitted to trading or traded on a trading venue, MIC code ‘ XOFF’ shall be used.
Where a contract was concluded OTC and the respective instrument is not admitted to trading or traded on a trading venue, MIC code ‘XXXX’ shall be used.
|Table 2.15. ESMA EMIR Validation rules|