The impact of regulation on the structure of European over-the-counter derivative markets 

OTC derivative markets face unprecedented regulatory reform. Regulators and policymakers are seeking more transparent and liquid markets that are subject to robust and effective risk management processes. The EU will primarily introduce these changes through the Review of the Markets and Financial Instruments Directive (MiFID)¹ and the European Markets Infrastructure Regulation (EMIR)². Firms will also need to take into account changes to the Capital Requirements Directive (CRD IV)³.

In aggregate these reforms will change fundamentally the way OTC derivatives are traded and the resulting risks managed. There is broad agreement on several outcomes: significantly less business will be transacted bilaterally; new trading venues will enter the market; and much more information will be available to market participants. But there is less clarity on the likely impact for end-users and market liquidity. This note sets out our view on how the structure of OTC derivatives markets will change as a result of these historic reforms.

^{1 This will include the review of the existing Directive as well as introducing a new Regulation. This package is collectively known as MiFID II}

^{2 Proposal for a Regulation of the European Parliament and of the Council on OTC derivative transactions, central counterparties and trade repositories (EMIR)}

^{3 Changes to the capital regime include amendments to the existing Directive and the introduction of a new Regulation. This is collectively known as CRD IV}