With MiFID II/MiFIR up for review, trade association ISDA sees regulators consider rules that could put derivatives on par with equities when it comes to the requirements for transparency across trading platforms. That would be a hazard for derivatives market liquidity, ISDA now states in a six-page paper.

“We note with concern that concepts originally designed for equity markets might be applied to derivatives without adequate consideration of the characteristics of derivatives markets,” writes the International Swaps and Derivatives Association (ISDA), in bold type, in the paper that explains its position on the idea that has been dubbed “regulatory equitisation” of derivatives.

A core difference is in the idea of liquidity. While the pool of a company’s shares is limited, derivatives are normally not limited to such finite pools of liquidity. (Exchange-traded derivatives are an exception.)

“The ‘Equitisation’ of the transparency framework for derivatives, via the suppression of the protections for liquidity providers, is a hazardous exercise for market liquidity,” ISDA writes.

The association observers that MiFID 2/MiFIR “has led to a significant amount of data being made available to the market and to trading counterparties. However, for OTC derivatives, the data does not always provide meaningful transparency or add benefits to end-users that justify the complexity and associated costs”. This is due to pre-trade and post-trade information being fragmented and non-standardised, as well as to difficulty for market participants in accessing the information reported, as standards and their deployment can be unclear in cases such as around reference data taxonomy, ISIN, etc.