All equity derivatives are liquid except for equity swaps, according to the European Securities and Markets Authority (ESMA). After publishing its final report on the derivatives consolidated tape in December, ESMA has now launched a tender process.
To determine the liquidity of equity derivatives, ESMA proposed three options. The first would see all equity ETDs as liquid excluding swaps and portfolio swaps, and the second marked all equity ETDs as illiquid excluding stock index futures, stock futures, volatility index futures, stock index option and stock options.
The third option added time to maturity as a factor, with stock index futures with time to maturity up to 3 months, single stock futures with time to maturity up to 6 months, volatility index futures with time to maturity up to 3 months, stock index options with time to maturity up to 6 months and single stock options with time to maturity up to 3 years marked as liquid and remaining equity derivatives illiquid.
Market participants generally favoured the third option, but there was disagreement in how liquidity should be defined. Many noted that average daily notional amount (ADNA) should also be factored in, while others warned that liquidity should not be confused with volume.
Despite industry feedback ESMA’s revised proposal has adopted the first option, stating that it bears the most similarity to the current regime’s transparency requirements.
For post-trade deferrals of equity derivatives, industry responses broadly favoured the reintroduction of ADNA ranges, arguing that this would provide sufficient granularity for various equity derivatives instruments. Some argued that ESMA’s proposed systems were overly complex.
ESMA has, as a result, proposed that the ADNA be reintroduced, with medium-size thresholds set at the existing post-trade SSTI (size specific to the instrument) threshold, and both large-size and very large size thresholds set at twice their existing thresholds.
Under the proposals, calculations would be made every two years at a trading venue level, rather than by ESMA. They could be published at any point in the year, at the discretion of venues, and results would be published before they were applied.
Equity swaps are categorised as illiquid under ESMA’s proposals. Activity in these instruments was elevated across US banks in 2024, despite concerns that they may increase systemic risk.
READ MORE: Equity, FX swaps at US banks surged to record high in Q3
There are also worries that such instruments are being used for front-running under the guide of pre-hedging.
READ MORE: ‘Front-running’ still allowed under IOSCO pre-hedging recommendations, buyside says
Requests to participate in the tape must be submitted by 11 February, with ESMA expecting to adopt a “reasoned decision” on the successful applicant by early July.
Etrading Software has announced its intention to bid through newly-created not-for-profit organisation Transparent Markets Europe.
Sassan Danesh, CEO, commented, “This is a space ETS has been actively preparing for, and we expect to update the market shortly.
“The ESMA tender reflects the EU’s ambition to bring greater transparency to OTC derivatives, an area where data has historically been fragmented and difficult to access. A consolidated tape could materially improve how market participants understand pricing and liquidity for this important asset class.”
Etrading Software was awarded the bond CTP in the UK last year.
READ MORE: ETS confirms CTP go-live as Ediphy’s legal battle drags on
Technical standards on OTC derivatives transparency and the tape were finalised in December. Transparency requirements will be introduced on 1 March 2027, before the tape goes live.
In the UK, an updated regime for transparency in bonds and derivatives was introduced on 1 December 2025.
