EUROPE – The International Swaps and Derivatives Association (ISDA) has welcomed the European Parliament's recent vote on high-frequency trading rules within MiFID, but it also warned that the proposals could have an impact on the OTC market.

The ISDA said the fact that Parliament had required certain derivatives contracts – such as those that are  cleared through a central counterparty and deemed sufficiently liquid – to trade on a trading venue was "vital".

"Helpfully," it said, "the Parliament has recognised the need to develop further this liquidity test. It acknowledges that large-in-scale transactions – block trades – are less likely to be liquid, and it has made sure that trading venues will be obliged to provide pre-trade price data only for liquid contracts.

"These changes are vital for OTC derivatives, which are not mass-produced for secondary-market turnover, which can be customised, and which typically trade infrequently."

However, the ISDA voiced concerns over proposals to impose limitations on when derivatives could be executed on an Organised Trading Facility.

The association argued that such proposals would push transactions towards other, more exchange-like categories of venue, reducing the diversity of available platforms.

This, in turn, could limit investor choice on how to negotiate OTC contracts.

"Maintaining an appropriate degree of investor choice over how and where trades are executed – and allowing dealers to serve their customers by making markets – is vital to ensuring safe and efficient OTC derivatives markets," the association said.

"Policymakers should proceed with caution to ensure the ambitions of the MiFID project are not undermined by the promotion of the equities exchange trading model, which is not a suitable template for reform of OTC derivatives markets."

Earlier this year, the European Federation for Retirement Provision also warned that some MiFID proposals could decrease flexibility for pension funds in the execution of large and illiquid orders.

It argued that pension funds, being long-term institutional investors, handled "block orders" and should therefore benefit from greater flexibility.

"We would like to see the MiFID II and MiFIR proposals take this into account," it said.

"A degree of flexibility in the execution of large and illiquid orders is necessary to ensure appropriate risk management and minimisation of costs, from which pension fund members will benefit."

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