This paper has been produced by the International Swaps and Derivatives Association to describe the nature of trading structure and liquidity formation in OTC derivatives markets and the implications for framing pre-trade transparency obligations under MIFID2/MIFIR.
The paper makes the following points:
Different trading models exist for different instruments.
Pre-trade transparency differs according to the nature of a given trading model.
Pre-trade transparency should be calibrated by trading model and should adequately accommodate Request for Quote trading systems.
And regarding systematic internalisation:
The systematic internalisation regime is inconsistent in respect of different asset classes.
The systematic internalisation regime could undermine liquidity provision.
Effective price formation can be supported through better targeted measures, specifically a requirement that firms establish quoting policies.
Redraft or replace Article 7 of MiFIR to accommodate trading systems other than order book systems without relying on the waiver process.
Remove the quote-sharing obligation from Article 17 and put in place measures that support competitive pricing.
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